Review of Theoretical Explanations of IPO Underpricing

Abstract

Motivated by a lack of availability of theoretical review of Initial Public Offerings (IPO) underpricing, this paper recognized a lack of presentation of theoretical explanations of the phenomenon of IPO underpricing in the literature. This makes scholars and investors interested in IPO underpricing research to face difficulty when it comes to the decision to employ IPO underpricing models. Hence, this paper provides a concise but comparatively adequate review of competing IPO underpricing theories. This review covered 13 theoretical models based on information asymmetry, institutional explanations, ownership and control reasons, and behavioral explanations to elucidate the phenomenon of IPO underpricing. Based on this review, the authors found that the underpricing phenomenon is eventually elucidated by the existence of information asymmetry amongst key IPO parties including the issuing firm, the underwriter, and the investor. Across the 13 reviewed IPO underpricing theories, the Entrepreneurial Wealth Losses (EWL) theory emerges as a compelling asymmetric information model. This is because it solves the problem of information asymmetry between the issuer and investor while accounting for the endogenous relationship between underwriter reputation and IPO underpricing.

The Concurrent Effects of IFRS Mandate and Formal Institutional Quality on the Aftermarket Performance of IPO Firms in Emerging Countries

“…However, in the secondary market, market participants face less information uncertainty concerning IPO firms compared to the primary market. This is because research indicates that investors in the secondary market can attain information from different sources about listed firms including firms' analysts' reports, historical financial reports, media coverage, and firm announcements to reduce information uncertainty (Hong et al 2014;Jamaani & Alidarous 2019;Jamaani & Ahmed 2020). In contrast, in the primairy market, the only source of infirmation investors have access to is the one provided in the IPO prospectus which is entirely governed by the issuing firm.…”

“…Note 34. These sources, for instance, include information about the firms' historical financial reports, analysts' reports, announcements, and media coverage (Hong et al 2014;Jamaani & Alidarous 2019 Brazil, Mexico, Indonesia, and Saudi Arabia did so in 2009, 2008 Note 36. For un-tabulated results, we show the results of the diagnostic analysis for residuals to validate that our OLS models are the Best Linear Unbiased Estimator (BLUE).…”

IPO Under-pricing Phenomenon Approach: Does Covid-19 Has a Negative Sectoral Impact?

“…The phenomenon of IPO under-pricing is still one of the research topics that has attracted the attention of researchers. The main research question was what the theoretical model is and determining factors that can explain such puzzling variations in IPO under-pricing phenomenon (Jamaani & Alidarous, 2019). Compiled from several review articles of previous research (Daily et al, 2003;Fitza & Dean, 2016;Jenkinson & Ljungqvist, 2001;Kennedy et al, 2006;Ljungqvist, 2007;Loughran & Ritter, 2002;Ritter & Welch, 2002) that IPO under-pricing theories can be studied based on information asymmetry, institutional explanations, ownership and control reasons, and behavioural explanations (see Figure 2).…”

“…Compiled from several review articles of previous research (Daily et al, 2003;Fitza & Dean, 2016;Jenkinson & Ljungqvist, 2001;Kennedy et al, 2006;Ljungqvist, 2007;Loughran & Ritter, 2002;Ritter & Welch, 2002) that IPO under-pricing theories can be studied based on information asymmetry, institutional explanations, ownership and control reasons, and behavioural explanations (see Figure 2). Information asymmetry models based on the asymmetric information problem between issuing firms and underwriters, investors and underwriters, issuers and investors, and informed and uninformed investors; institutional explanations for IPO under-pricing has inspired the emergence of three dominant institutionalbased theories, including lawsuit avoidance, price stabilization, and tax advantages hypotheses; ownership and control theories contend that IPO under-pricing works as an effective mechanism in shaping the shareholder base to deter outside investors from intervening in managing their firms once they are publicly listed; and the last theory was the presence of informational cascades as a behavioural explanation, which is discussed where the central argument is that the IPO market is prone to the presence of "irrational" investors who bid up the price of IPO shares beyond their true value (Jamaani & Alidarous, 2019). Several previous studies related to phenomena under-pricing is according to (Akseptori et al, 2019) concluded that internal factors (Debt To Equity Ratio (DER), Earning Per Share (EPS), Return On Assets (ROA), Company Age (AGE), Company Size (SIZE), Percentage of Shares Offered (PSD) has a significant effect on under-pricing and stock performance, while external factors (Inflation (INF), Exchange Rate (KURS), Bank Indonesia Interest Rates (RATE) have no significant effect on under-pricing and stock performance in companies conducting IPOs in the Indonesia Stock Exchange in the infrastructure, utility, and transportation sector in 2010-2018, which in line with (Oktavia & Handayani, 2018) that the rupiah exchange rate does not affect the Composite Stock Price Index (CSPI).…”

Critical Factors of Total Logistics Cost: A Survey of Vietnam-Based Logistics Service Providers

“…However, in order to increase the reliability of the research, we also conducted in-depth interviews with 2 groups of subjects: the first one were Cargo owners who use logistics services to identify logistics cost are accounting for how many percentage of the total cost of sold (Liang & Altankhuyag, 2019;Muzurura, 2019;Doghan 2019;Umobong & Agburuga, 2019;Jamaani & Alidarous 2019;Mousa, 2019) and the second subjects were logistics service providers with the purpose of finding the components of logistics cost, the reason for high logistics cost in Viet Nam.…”