Underpricing of Scandinavian IPOs: An Empirical Analysis of Select Underpricing Theories

Hege Tjørsvaag Brattebø & Mari Liten Myhren

Student thesis: Master thesis


The following thesis investigates 89 IPOs conducted on the Scandinavian markets in the period 2002 – 2015. The focus is on the phenomenon of IPOs appearing to be consistently underpriced, indicating that the issuer “leaves money on the table” when making its company’s shares available to the public. Based on select previous theories, we define eight hypotheses that we seek to prove or disprove in order to explain the underpricing present in IPOs in the Danish, Norwegian and Swedish markets. Through identification of characteristics relating to companies and market conditions at the time of the IPO, the results are aimed to make recommendations to retail investors regarding which IPOs to invest in to earn initial returns. The thesis analyzes two measures of underpricing; underpricing adjusted for market movements and underpricing adjusted for offer size. As companies usually do not float all of their outstanding shares, the offer size adjusted underpricing shows the real level of underpricing from the company’s point of view. This underpricing is significantly lower than the market adjusted underpricing and will be used in analysis in order to get a deeper understanding of why companies underprice their issues. We find an average market adjusted underpricing of 4.59% on the Scandinavian markets as a whole for the period of interest, which is statistically significant at the 1% level. The average offer size adjusted underpricing is found to be 1.97%, also statistically significant at the 1% level. The regression model defined to provide basis for investigation of the hypotheses violates the normality of error terms assumption. We do not consider our dataset to be sufficiently large to overcome this violation and to ensure unbiased and robust estimators; consequently we perform a non-parametric bootstrap. The bootstrap method provides robust and consistent results by resampling the dataset and running the regression 2000 times. Our results show that theories such as the hot issue markets and window of opportunity are not able to provide an explanation for the underpricing puzzle. Our findings show support opposite of risk compensation theory, specifically for firm specific risk. The expectation is that larger and older companies are less underpriced, but our findings show the opposite to be true. The analysis goes deeper into the data and seeks explanations for these puzzling results. Underpricing of Scandinavian 1 IPOs appears to be higher for companies with no or multiple banking relationships, providing support for James and Wier’s (1990) theory of bank relationships reducing the risk investing in the company and Carletti, Cerasi and Daltung’s (2007) theory of multiple monitors being sub-optimal. Most of the select theories of underpricing do not provide an explanation for consistent underpricing of Scandinavian IPOs, therefore we are not able to make many investor recommendations based on our results. The study shows the difficulties of explaining and understanding why companies seem to leave money on the table when listing on an exchange. There is room for further research within this topic using new or alternative theories. We wish to raise a big thank you to our supervisor, Robert Neumann, who has provided useful insight and help throughout the work with this thesis. In addition, we want to thank all companies who have provided us with IPO prospectuses that were not available in online databases or websites, they have been essential for our final sample size. Finally, we are grateful to the teams at Bloomberg, Thompson One Banker and the Scandinavian stock exchanges, whose published and up to date data has enabled us to perform our analysis with reliable inputs.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages146