Japan’s initial public offering market is booming, with the number of IPOs in the first half of this year topping 70 and expected to exceed the 120 of last year.
Many of the IPOs fetched prices higher than their prelisting prices in their first day of trading, with some opening at more than twice their premarket prices.
Individual investors’ interest in IPOs is rising, but market watchers warn of an overheated market.
Companies going public on the Japan Association of Securities Dealers Automated Quotations market or the Tokyo Stock Exchange’s Mothers market are mostly up-and-coming venture companies.
One of the factors behind the popularity of IPO markets is investor expectations that young companies can raise funds for business expansion by going public and that this in turn will lead to higher stock prices.
However, market watchers caution against expectations that are too great.
Five years ago, Internet companies went public riding the crest of an IT boom. But then their stock prices sank.
“Though they have growth potential, they leave much to be desired with regard to information disclosure and business planning,” said Yasuo Kanie, deputy head of the underwriting division at Nomura Securities Co.
“Since they are a jumble of good and bad, it is necessary to ascertain the viability of their business plans,” he said.
In order for a company to go public, it has to meet listing requirements.
After passing this screening procedure, a company can proceed to the final preparations for listing, including deciding a public offering price.
An IPO price is generally determined under the book-building formula, a process to determine investor appetite for a share at a particular price.
The process begins with canvassing institutional investors, such as life insurance companies, in order to determine a price band for the issue, or indicated price.
Investors are informed of the price band and they then bid at a price they think is appropriate.