Underpricing and Long-run Performance of IPO's on the Scandinavian Market from 2006 to 2016

Mervan Sarac

Student thesis: Master thesis


The purpose of this thesis is to test if theories can explain the underpricing of initial public offerings in Scandinavia from 2005 to 2016, and to analyze how the Scandinavian IPOs performs on the long run. It is found that Scandinavian IPOs’ initial return in the period is underpriced by an average of 7.11%, after an adjustment for the movements of comparable indices. The result is significant at the 1% level. For a better understanding of the underpricing phenomenon, a selected amount of theories is chosen to test their relationship with the underpricing of Scandinavian IPOs. It is found, that neither the Winner’s Curse theory (Rock, 1986), the Signaling theory (Welch, 1989) nor the Information Sharing theory (Cornelli & Goldreich, 2001) can explain the underpricing. However, it is found that the Hot Issue Markets theory (Ritter, 1984) is efficient at explaining the underpricing. Lastly, McDonald & Fisher’s (1972) theory about a positive relationship between the underpricing and short run performance of IPOs, is proven applicable on the Scandinavian market, and can explain the initial return. Most notably, the Hot Issue Markets theory on an industry basis is only applicable on the Cyclical, Consumer industry, contrary to Ritter (1984) who found, that it was the energy/natural resources industry, where Hot Issues was most applicable. Therefore, based on a comparison of this study’s findings and Ritter’s (1984) findings, there is still an industry that is more applicable to Hot Markets than others, but it differs from the American market to the Scandinavian market, on which industries it is, which is most applicable to the Hot Issue Markets theory. Nonetheless, it is not all theories that can explain the underpricing of IPOs in the Scandinavian market, but some theories has still been possible to explain it. To test the long run performance, a method inspired by Ritter (1991), is used to test the performance in the long run. The long run return and performance, is based on a 3-year period, counting from the day after the IPO. It is found that the index adjusted long run return is -3.25%, and when it is adjusted by market movements instead, it is even lower at-5,9%. Using Ritter’s (1991) Wealth Relative ratio to conclude the evaluation of the performances, a WR of 0.97 and 0.95 proves that the Scandinavian IPOs has underperformed, as both WR’s has a value lower than 1.0. Although, both results is significantly different from 0%. Throughout the study, a control of all the models used in the study, is done to ensure the quality and validity of the models and results.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2020
Number of pages98