Home  Journals  Finance and Credit  11(443) - 2011 March

Empirical study of factors related to the IPO underpricing: evidence from the London Stock Exchange

Available online: 15 March 2011

Subject Heading: Securities market

JEL Classification: 

The primary objective of this research is to examine the underpricing of IPOs in the context of foreign and domestic IPOs. In a comparative analysis of 132 foreign companies and 774 domestic companies went public in the AIM market between 1995 and 2008, the study finds that for a matched sample, foreign IPOs are significantly more underpriced. In an additional analysis, the paper examines the relationship between underpricing and widely used proxies for information asymmetry such as age, size, leverage, industry, underwriter reputation, on the AIM market. On top, the ownership concentration is included in the model to show the signaling explanation for the underpricing. While most of these proxies show predicted results, both univariate and multivariate analysis do not support the age hypothesis, i.e. there is no significant effect of age variables on the IPO underpricing in the AIM market. Moreover, ownership concentration as a variable also fails to explain the underpricing phenomenon of IPOs in the case of AIM market. These inconsistencies are explained by the unique characteristics of the AIM market. Overall, the findings of this paper provide strong support to the classical theories of IPO underpricing based on information asymmetry, specifically Rock’s (1986) winner’s curse model, which was taken as a basic model for this research.

Keywords: stock market, initial offering, IPO, under pricing, foreign IPOs, asymmetric information

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ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

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