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Are IPOs underpriced or overpriced? Evidence from an emerging market

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  • Rathnayake, Dilesha Nawadali
  • Louembé, Pierre Axel
  • Kassi, Diby François
  • Sun, Gang
  • Ning, Ding

Abstract

Underpricing of Initial Public Offerings (IPOs) is one of the most widely studied anomalies in the literature on financial economics. This paper examines the short-run IPO performance in an emerging market by using the data of 148 IPOs listed on the Colombo Stock Exchange (CSE) from 1991 to 2017. We found that IPOs on average were underpriced by 47% and that 32 IPOs were overpriced by approximately 17%–18%. The stepwise multiple regression results showed that offer risk, investor sentiment, firm size, market volatility prior to the IPOs, the time lag between IPO issue date and CSE listing date, and hot-issue periods have a significant relationship with IPO returns. The outcomes are hence consistent with the prediction of ex-ante uncertainty, windows of opportunity and the investor sentiment hypotheses. Overall, the results indicate that in Sri Lanka, underpricing accounts for a greater percentage of the IPOs than overpricing.

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  • Rathnayake, Dilesha Nawadali & Louembé, Pierre Axel & Kassi, Diby François & Sun, Gang & Ning, Ding, 2019. "Are IPOs underpriced or overpriced? Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 50(C), pages 171-190.
    • Handle: RePEc:eee:riibaf:v:50:y:2019:i:c:p:171-190
    DOI: 10.1016/j.ribaf.2019.04.013
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    3. Zhao, Yi & Wang, Nan & Zhang, Luyang & Sun, Baiqing & Yang, Yuchen, 2022. "The greater the investor attention, the better the post-IPO performance? A view of pre-IPO and post-IPO investor attention," Research in International Business and Finance, Elsevier, vol. 63(C).
    4. Abdul WAHID & Muhammad Zubair MUMTAZ & Edmund H. MANTELL, 2020. "Short-Run Pricing Performance of Local and Dual Class IPOs in Alternative Investment Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 57-74, March.
    5. Wang, Zhuqing & Wang, Xinyu & Xu, Yan & Cheng, Qiuying, 2022. "Are green IPOs priced differently? Evidence from China," Research in International Business and Finance, Elsevier, vol. 61(C).
    6. Dilesha Nawadali Rathnayake & Yang Bai & Pierre Axel Louembé & Li Qi, 2022. "Interest Rate Liberalization and Commercial Bank Performance: New Evidence From Chinese A-Share Banks," SAGE Open, , vol. 12(2), pages 21582440221, May.

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    More about this item

    Keywords

    IPO; CSE; Underpricing; Overpricing; Ex-ante uncertainty;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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