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Title: IPO underpricing in Europe Effects of variation in IPO price on the level of underpricing.
Authors: Stegehuis, JH
Keywords: IPO
Retail investor
Institutional investor
Offer price
Issue Date: 24-Mar-2016
Publisher: Open Universiteit Nederland
Abstract: The purpose of this research is to establish the possible influence of variation in IPO offer price levels on underpricing. Issuers can control the IPO offer price. According to tradionalists, the offer price itself should not have an influence on the amount of underpricing. However, studies on IPO underpricing exclude issues with offer prices below a certain minimum, since including these issues would distort the results. Furthermore, average share prices vary substantially between geographical areas, or single currency areas. The main research question of this thesis is: Does variation in the absolute and relative value of the IPO offer price explain variation in underpricing in Europe? Research in the U.S. concentrating on the price level of offerings and underpricing seems to be limited to two studies. Bradley, Cooney, Dolvin & Jordan (2006) found that penny stock IPOs are significantly more underpriced than other IPOs, with tests suggesting that the higher amount of underpricing is primarily related to the low offer price. Fernando, Krishnamurthy & Spindt (2004) found that besides low-priced IPOs, high-priced IPOs are more underpriced as well. This thesis extents the research on the relationship between price levels and underpricing by investigating whether the results that have been found in the U.S. will hold in Europe. A distinction has been made between IPOs in Euros and IPOs in British Pounds, since average share price levels in British Pounds seem to be much lower than average share price levels in Euros; conversion into another currency could obscure the results. Based on a sample of 1056 IPOs in British Pounds and 510 IPOs in Euros, starting in 1992 and 2001 respectively, separate regression analyses are performed to establish potential variation in underpricing for different offer price ranges. This thesis finds strong evidence that lower IPO prices in the GBP single currency union are related to higher underpricing, and marginal evidence that higher IPO prices in the Euro single currency union are related to higher underpricing. The results of the GBP regression equation suggest that there is a relatively strong relationship between underpricing and price range within the GBP single currency union, as the independent variable price range explains 17,1% of the variance in the dependent variable underpricing. The outcomes suggest that investors, on average, can make higher first-day returns when the invest in lower priced IPOs in the Pound single currency area, and issuers in the Pound single currency area will, on average, face lower underpricing when they decide to issue their stock at offer prices above the two lowest quintiles. Moreover, it seems fair to suggest that differences in geographical norms are the main cause of variation in the average offer prices between the two samples. Average offer prices in British pounds are significantly lower than average offer prices in Euros at the p < 0,01 level.
Appears in Collections:MSc Management Science

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