Initial public offerings : an empirical study of the significance of relative pricing and initial demand for the aftermarket performance

Abstract

This thesis investigates initial public offerings (IPOs) on the Oslo Stock Exchange in the years 2009-2014. The analysis focuses on the short-term aftermarket performance, and how this may be affected by the initial demand for the issue and the pricing of the IPO relative to a set of comparable companies. I found the average abnormal returns for the IPOs in the years 2009-2014 to be negative for first day, week and month. The returns aggravated with the time horizon, indicating that the markets require more than one day to eliminate mispricing of IPOs. These results stand out compared to prior research, as fundamental underpricing of IPOs has been considered an established fact on theoretical ground. Assuming the same theories to hold, the apparent persistent overpricing of Norwegian IPOs may entail challenges for companies considering going public. To reflect the initial demand I examined two proxies, namely the placement of the final offer price relative to the indicative price range and the level of oversubscription at the final offer price. The Norwegian IPOs appeared to have strong skewness towards the left of the price range midpoint, and the oversubscription levels came out lower than for international studies. However, both proxies proved strong indicators of aftermarket performance, as the IPOs with high initial demand outperformed the IPOs with low initial demand. The relative peer pricing aspect was reflected through the valuation multiples P/E and EV/EBITDA. For both multiples I found significant underpricing of the IPO companies relative to listed peers. Once again, this contradicts prior research, which has justified higher valuation of IPO companies on the basis of higher growth rates than their mature peers. In accordance with the asymmetric information theory regarding IPO pricing, the IPO companies which were priced cheap relative to peers significantly outperformed the IPO companies which were priced rich relative to peers. It is interesting to observe that although the IPO companies on average were underpriced relative to peers, they underperformed the general market in the time after listing.