IPO Underpricing in North America Compared to Western Europe: An Empirical Analysis

Abstract

This thesis investigates 5,979 IPOs in North America and Western Europe from 01.07.2000 to 22.12.2022. The thesis examines the IPO underpricing puzzle by analyzing and comparing the observed underpricing in the two regions. Such an empirical comparison has never been made before. The fundament of the thesis is based on an in-depth quantitative analysis of the market-adjusted first-day return, which is used as a proxy for IPO underpricing. The factors affecting IPO underpricing are analyzed through nine propositions derived from existing underpricing theories, and the observed differences and similarities between the regions are discussed. The propositions are tested based on the Student’s t-test, Welch’s t-test, and OLS regressions with robust residuals. The underlying assumptions behind the tests and regressions have been tested to ensure the reliability and validity of the results. This thesis finds that systematic IPO underpricing is significantly higher in North America than in Western Europe, with the phenomenon being present in both regions. Additionally, it is found that behavioral finance theories such as ex-ante uncertainty, The Winner’s Curse, and asymmetric information in general significantly affect underpricing in both regions, proving that the two markets’ similar characteristics also lead to similar IPO underpricing patterns. On the other hand, industrial risk compensation and investor sentiment are found only to affect North American IPOs significantly, while using book building as the offer method only could be significantly confirmed to affect underpricing in Western Europe.