How Investor Decisions Affects Stock Prices

Investors make decisions to buy. A stock when its market price

is below their valuation, which means they believe the stock is
undervalued.

They may sell their holdings of a stock when the market price
is above their valuation, which means they believe that the
stock is overvalued.

Investors' revision of expectations of a firms performance can

affect stock prices
Investor Reliance on Information
Investors respond to the release of new information that
affects their opinions about a firm's future performance

In general, favorable news about a firm's performance will

make investors believe that the stock is undervalued at its
prevailing price.

New information about macroeconomic conditions commonly

causes for many firms to be revised at the same direction and
therefore causes stock prices to move in the same direction.
INITIAL PUBLIC OFFERINGS

A first time offering of shares by a specific

firm to the public.
Process of Going Public

Developing a Prospectus

Pricing

Allocation of IPO Shares

Transaction Costs
 Underwriter Efforts to Ensure Price
Stability

Underwriters may attempt to stabilize the stock’s price by

purchasing
shares that are for sale in the secondary market shortly after
the IPO. If most stocks
placed by a particular underwriter perform poorly after the
IPO, institutional investors
may no longer want to purchase shares sold by that
underwriter.
 Lockup

The lead underwriter attempts to ensure stability in

the stock’s price after the
offering by requiring a lockup provision, which
prevents the original owners of the firm
and the VC firms from selling their shares for a
specified period (usually six months
from the date of the IPO).
 Timing of IPOs

Initial public offerings tend to occur

more frequently during bullish stock
markets, when
potential investors are more interested
in purchasing new stocks.
 Inital Returns of IPOs

The initial (first-day) return of IPOs in the

United States has averaged about 20
percent
over the last 30 years. Such a return is
unusual for a single day and exceeds the
typical
return earned on stocks over an entire
year.
 Flipping Shares

Some investors who know about the

unusually high initial returns on IPOs
attempt to
purchase the stock at its offer price and sell
the stock shortly afterward. This strategy is
referred to as flipping.
 Google's IPO

On August 18, 2004, Google

engaged in an IPO that attracted
massive media attention
because of the firm’s name
recognition.
 Estimating the Stock's
Value

Investors attempt to determine

the value of the
stock that is to be issued so that
they can decide whether to invest
in the IPO.
 The Auction Process

Google’s IPO was unique in that it used a

Dutch auction
process instead of relying almost
exclusively on institutional investors.
 Results og Google's
Dutch Auction

Google’s auction resulted in a price of $85

per
share, meaning that all investors whose
bids were accepted paid $85 per share.
Google was
able to sell all of its 19.6 million shares at
this price, which generated proceeds of
$1.67 billion.
 Trading after the
Auction

Any transactions that occured after the auction

was completed took place in the secondary
market, meaning that investors were buying
shares that were previously purchased by other
investors.