24
year’s
performance,
using
their own calculative
formula.
This price
could
generate
an
initial
return
in the
initial
market-trading
day.
An
empirical
study
in
India
has
proved
that
there
were
trends
where
the
fixed price method yields a positive initial return (Gopalaswamy
et al,
2008).
With
the
fixed
price
method
of
valuation,
not
included
in
it is the
valuation
of
potential
investors.
Since
the
firm’s
underwriters
have
to
take
serious
considerations
before
release,
if
the
price
of
the
offering
is too high, there is a chance
that there might
not
be enough
investors
interested
in
purchasing
the
shares
(Benveniste
&
Busaba,
1997).
So
if
they
do
decide
to
undervalue
the
offering,
the
amount
of
investors
that
will
be interested
in the
IPO
should
increase.
The
primary
disadvantage
of
this
devaluation
of
the
share
is
that
during
the
initial
trading
day,
the
value
of
the stock
could
increase
significantly,
compared
to
its
fixed
offering
price.
This
in
turn
is
a
huge
disadvantage
to the
company,
who
could
have
received
much
more
capital
if the
valuation
of
the
stock
was
higher.
The
fixed
price
marketing
method offers a potential to exploit the market structure.
By
selling the
shares at
a
low
price (underpriced),
it
will
create a
very
strong
interest
amongst
uninformed
investors.
This
strong
interest
in
low
IPO
prices
would
create
a
selling
frenzy,
resulting
in
a
winner’s
curse
as
mentioned
before.
Underpricing
is needed
in fixed
price
offerings, since
they
need
to
compensate the
uninformed
investor’s
for
the
winner’s
curse
(Busaba
&
Chang,
2002).
Having
underpriced
the
stock
it
will
leave
money
on
the
table,
meaning that
the
issuer
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