The Worlds Most Expensive Puzzle: Underpricing of Initial Public Offerings and the Impact of Financial Sponsorship on Nasdaqs Main Markets

Abstract

With a sample of 809 IPOs on Nasdaq's main markets between 01-01-2010 and 12-31-2022, we find a mean underpricing of 25.47%. However, due to asymmetrical distribution of data and endogeneity issues, a subsetted dataset is constructed which renders a final sample size of 627 observations with a mean underpricing of 15.93%. Our findings imply that there is insufficient evidence to infer a relation between underpricing and the combined effect of venture capital and private equity sponsoring. Furthermore, we cannot find support for a certifying effect of either venture capital or private equity sponsoring. While private equity firms exhibit insignificance across all models, we find that the presence of a venture capital sponsor in an IPO in the subsetted models increase underpricing by 4.41%, in comparison with non-sponsored IPOs and private equity sponsored IPOs. Furthermore, we provide evidence that issue size and high-tech also are positively related with underpricing, where the former goes against expected results. Variables that do not display an ability to influence underpricing are firm age, underwriter reputation and market sentiment. In contrast to certification, we find that venture capitalists contribute with signaling strength of the issuing firm. Based on our findings, we provide actionable recommendations that implicate both investors and issuers for how they can incorporate our findings into their respective strategies to claim the greatest amount of money left on the table. Lastly, we provide avenues for additional research based on collected insights as well as a spin-off hypothesis from our findings.

First, we want to extend our sincerest gratitude to our primary supervisor, Christian Rix Nielsen, for providing insights, guidance, inspiration and constructive feedback during the entire process. Secondly, we want to acknowledge our original supervisor Jørgen Bo Andersen. You greatly inspired us in the early writing process, and for that we are thankful. Lastly, we want to thank the teams at Bloomberg and S&P Capital IQ for providing continuous help in gathering the necessary data.