IPO Cycles in Central and Eastern Europe: What Factors Drive these Cycles?

In this paper we provide new evidence on the incentives for initial public offerings (IPOs) in the emerging capital markets of Central and Eastern Europe (CEE) in the 2000s. First, we prove the existence of IPO cycles. Second, we show that the number of IPOs and their underpricing are positively correlated. Third, we provide a unique comparison of the CEE’s IPO cycles with the cycles in the EU’s developed capital markets as represented by the IPO activity on the Deutsche Boerse. We show that the two cycles have a moderately positive correlation. Fourth, we study the drivers of the cycles. Our results suggest that in addition to macroeconomic conditions, investor sentiment is a very important driver of an IPO’s dynamics, which we depict by means of the risk aversion of institutional investors, growth in the assets of pension funds and the volume of trading on the market. Lastly, we provide evidence of drivers of IPO underpricing. We again find that the main driver of underpricing in the CEE region is the current conditions of capital markets, a factor that relates to investor sentiment. In addition, business conditions also contribute considerably to IPO underpricing. We find that a firm’s performance has a moderate impact and that other micro factors do not predict underpricing. This finding conveys an interesting economic message, namely that underpricing is predominantly driven by the environment and much less by specific micro characteristics.