Underpricing on Scandinavian Initial Public Offerings

Abstract

This thesis examines underpricing on Scandinavian IPO´s, including explanatory factors that are expected adequate at determining if an IPO will be underpriced. Moreover, the thesis discusses if any trade-off underpricing incentives between issuer, underwriter and investor exists in the IPO pricing process. The above elements are examined through well-known underpricing theories and the analysis is based on a dataset consisting of 236 IPOs from the Scandinavian main exchanges and 624 IPOs from Scandinavian growth exchanges. The primary analysis is conducted through an ordinary least square model (OLS) as this approach is found to be the best linear unbiased estimator after testing for potential econometric issues. The thesis finds a statistically significant level of underpricing on the main Scandinavian exchanges as well as the growth exchanges with an average underpricing equal to 7,31% and 9,48%. By use of the OLS regression the explanatory power of carefully chosen proxies based on existing underpricing theories, as well as modifications of those, is examined through a multivariate regression analysis. As expected, econometric issues on the preliminary regression estimates necessitated a deeper examination of data in hand. Heteroskedastic behavior as well as multicollinearity on the preliminary regression estimates constituted a bias that was dealt with. Moreover, the distribution of the data in hand showed potential harmful influence from extreme observations – especially regarding the Scandinavian growth exchanges - why an in dept analysis on the influence of outliers was performed. Analyzed explanatory factors on underpricing are based on existing theory, including asymmetric information models, behavioral explanations and ownership and control theories. Moreover, theories regarding institutional conditions will be discussed as well to ensure a complete insight into well-known underpricing theories with potential explanatory power on Scandinavian underpricing. Based on the applied regression investor sentiment theory is deemed especially relevant as downward adjustments shows significant influence on the level of underpricing on both Scandinavian main- and growth exchanges. Moreover, explanatory factors related to Winner´s Curse revealed interesting results as these indicated significant influence on underpricing, but with unexpected parameter coefficients. The dataset in hand showed immediate underpricing influence from Price stabilization, however the relationship is not examined statistically as this is deemed too complicated for valid results considering the limits of the thesis. Finally, the use of top underwriter showed insignificant results regarding underpricing in preliminary analysis, however looking at the individual top underwriters some interesting findings are made.