The Impact of Financial Sponsorship on Underpricing of IPOs: Evidence from the Nordic Initial Public Offering Markets Between 2002-2021

Abstract

Using a sample of 304 Nordic initial public offerings (IPOs) between 2002-2021, we find that underpricing averaged at 8.2%. Our study shows that financial sponsors reduce underpricing costs by 62% when they engage in the pre-IPO ownership composition of the issuing firm. By distinguishing financial sponsorship between private equity and venture capital, we find no differential impact on underpricing between the two types of financial sponsors. We similarly provide evidence that underpricing is positively correlated with the market sentiment permeating the IPO market. Further, underwriter reputation has limited certification potential in the Nordics, while the book building process remains an effective tool to reduce underpricing costs. Our study highlights the notion that financial sponsors certify the quality of an issue to reduce information asymmetries and thereby underpricing. Additionally, we make important progress in the nascent academic field of non-sponsors as potential certifiers. Our findings suggest that certification through sponsorship mainly benefits issuers and uninformed investors, while the implications for informed investors are more nuanced