Determinants of Under-pricing of Initial Public Offerings: Evidence from Pakistan

Under-pricing of Initial Public Offerings: Evidence from Pakistan

Abstract

This study examines the determinants of underpricing of Initial Public
Offerings (IPOs) using Extreme Bounds Analysis (EBA) in the Pakistani
capital market. We measure the short-run performance of 75 IPOs from
listing to the thirtieth-trading day issued on Karachi Stock Exchange from
2000 to 2011. The results confirm that IPOs have been underpriced from the
first to thirtieth-trading day indicating that Pakistani IPOs outperformed
over the sample period. Under EBA technique, eleven determining variables
of IPO underpricing are investigated. With aftermarket risk of the IPO and
oversubscription as the free variables, nine variables are selected as the
variable of interest in combination with three other variables. We found that
after market risk of an IPO, oversubscription, offer price and financial
leverage are the true factors influencing IPO underpricing.