The underpricing of IPOs on the Stock Exchange of Mauritius

Abstract

This paper investigates the underpricing of IPOs on the Stock Exchange of Mauritius (SEM). Taking into account the whole population of firms which went public since the inception of the SEM until 2010, the results show an average degree of underpricing within the range 10 to 20%. Using a regression approach, we demonstrate that the aftermarket risk level and auditor's reputation both have a significant positive impact on initial returns. We propose the use of the Z-score as a composite measure of a firm's ex ante financial strength, and find that it has a significant negative effect on the degree of short-run underpricing.

An examination of short-run performance of IPOs using Extreme Bounds Analysis

“…The coefficient of ROA is positive illustrating that if ROA is higher, underpricing would be higher. However, this finding is contrary to prior research (Agathee et al 2012). Regression II indicates that OPrice and ROA are significant.…”

“…We find that high prestige underwriters are less underpriced as they have more resources to capture the share prices considering all the risk factors. This result is in accordance with finding of prior research (Agathee et al, 2012). Low prestige underwriters are more underpriced as they do not determine the offer price precisely.…”

“…This study follows the methodology used by Agathee et al (2012) in which IPO underpricing is determined by obtaining the initial return and then adjusting the initial return through the benchmark index. This study examines the underpricing over the 3-month period starting on the listing day because it is assumed that in emerging markets the stock prices may take long time to adjust for market expectations to reach their equilibrium prices (Ljungqvist et al, 2006).…”

The Impact of Underwriter Reputation and Risk Factors on the Degree of Initial Public Offering Underpricing: Evidence from Shariah-Compliant Companies

“…IPO underpricing is a common phenomenon for stock markets around the world. Studies from Boulton, et al, (2012); Banerjee, et al, (2010); Nguema and Sentis (2006); Agathee, et al, (2012); Darmadi and Gunawan, (2012); Islam, et al, (2010) ; ;Borges, (2007); Pande and Vaidyanathan, (2007); Chi and Padgett, (2005); Ekkayokkaya and Pengniti, (2012) ;Yamamoto, (2009)) confirmed the existing of underpricing during initial stock exchange trading. However, the factor that influences IPO underpricing varies across countries and that variation still remains largely unexplored.…”

“…This study used a sample of 171 IPOs issued in India during the period 2002 to 2007. Agathee et al (2012) examined evidence on the short-term underpricing of IPO shares listed on the Stock Exchange of Mauritius from 1989 to 2010. The average initial return is 13.14%.…”