Can Investors Beat the Market?

Mai Andersen

Student thesis: Master thesis


The purpose of this thesis is to examine whether the IPO (Initial Public Offering) puzzle has existed in Scandinavia from 2001 to 2014 and to verify if there are properties within these IPOs that can help predict the short- and long-run performance in order to give recommendations to investors about future investments. The properties of the IPOs are analyzed by testing 13 hypotheses which are based on theories within finance, corporate governance and behavioral finance. Underpricing is tested through 9 hypotheses that includes properties in the market and properties about the company leading up to the IPO. Furthermore, the last 4 hypotheses are tested based on the relationship between underpricing and long-run underperformance. The thesis finds average underpricing of Scandinavian IPOs of 7.8%, where underpricing is 16.3% in Denmark, 7% in Norway and 4.7% in Sweden. The test of hypotheses finds several clear tendencies between IPOs in Scandinavia and the explanatory variables whereas high risk, uncertainty and overoptimism has resulted in higher initial returns. On the long run, IPOs underperform the market by 5.4% on average. The performance is even worse in Denmark with -18.7%. Norway and Sweden experience a smaller underperformance at 1% and 3.2%. The longrun hypotheses reveal a link between long-run underperformance and underpricing. A company that obtains high ex-ante risk and overoptimism at the IPO will achieve higher underperformance than average. However, the thesis did not find any significant tendencies in connection with “hot issue” markets, reinforcement learning, market cap, bookbuilding, offer price and industry on long run. A test of the OLS regression assumptions presented that findings from the analysis of the IPO puzzle was valid. A comparison with other researchers’ results revealed many similarities but also differences. All the accepted hypotheses were consistent with other studies. In the rejected hypotheses some results deviated which mainly was due to different methodology, older theories and results and selection of data. The findings can help investors to understand when to invest and in which companies. The recommendation states that in short-term investment, the investor must acquire high risk shares that achieves high attention before the IPO. Furthermore, market cap and bookbuilding is expected to affect the initial return since high market cap and bookbuilding reduces the possibility to obtain a high return. The long-term investment strategy consists of acquiring low risk IPOs with low attention while the thesis suggests that purchase on the first day of trading possibly results in higher long-term returns

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2018
Number of pages123