An Empirical Investigation of Short runs IPO underpricing: Evidence from Dhaka Stock Exchange

Abstract

This paper investigates empirical existence of theories of IPO underpricing in Bangladesh. The study based on IPO listed at Dhaka Stock Exchange (DSE) from 2003 to 2013 analyses Level of IPO underpricing and its determinants. OLS regression is used to distinguish the relationship between various independent variables with dependent variable-level of underpricing. The result reveals that market capitalization, underwriter's reputation, oversubscription rate, offer size, float, ownership retention and method of issue have significant effect on the level of IPO underpricing, whereas size of the firm and offer timing has very little explanatory power. The significant effect of these variables identifies the presence of signaling theory, agency theory, winners curse theory, anchoring theory and impresario hypothesis in IPO pricing where signaling theory is most prominent one in deciding IPO underpricing in Bangladesh. I. II.Reasons for IPO Underpricing:2.1 Asymmetric Information Theory: a. Adverse Selection(winners curse) model: Adverse selection model initiated by Rock (1986) identifying informational asymmetry between informed and uninformed investors where uninformed investors knows only unconditional mean value of the IPO and its lead to a lemon problem-uninformed investors end up with bad IPOs. So the issuing firm deliberately underprices the offerings to attract uninformed investors. b. Moral Hazard Model: Baron (1982) developed a theory assuming an investor banker is more and better informed than the issuer because issuer cannot perform distribution services unlike an underwriter's. Hence, there should be compensation in the form of underpricing in the presence of asymmetric information.

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