Water or Oil in the Fire? : Impact of Diversification on the Underpricing Phenomenon in IPOs & SEOs

Background: Acquiring capital is one of the most fundamental necessities for an enterprise. The discussed ways of doing so by this thesis, are the so called Initial Public Offerings (IPOs) and Seasoned Equity Offerings (SEOs). Although engaging in an IPO is a desire for most of the newly started firms, the process of introduction to the global market and the results of it are far from smooth and problem free. One of the main unknowns that issuers face is underpricing. Theory suggests that mechanisms for undervaluing the new stock have been devised, so that certain parties can benefit by allocation on the market. Purpose: The purpose of the study is to investigate any possible relationship between the level of industrial diversification and the level of short-run underpricing of the two most common asset issuances - Initial Public Offerings and Seasoned Equity Offerings. Further on, it is of use to compare the severity of diversification’s effect on underpricing of IPOs and SEOs. Method: This research is basically solely quantitative. A database for levels of diversification and industrial underpricing for the companies that conducted IPOs and SEOs in the given time period was compiled. Statistical calculations were conducted to examine possible relationships between the variables. Conclusion: The paper could not see any relevant relationship between the degree of industrial diversification and the amount of “money left on the table”. The conclusion can be drawn that investors apparently do not consider the degree of industrial diversification when assessing the value of a company