Are IPOs underpriced or overpriced? Evidence from an emerging market

Abstract

Underpricing of Initial Public Offerings (IPOs) is one of the most widely studied anomalies in the literature on financial economics. This paper examines the short-run IPO performance in an emerging market by using the data of 148 IPOs listed on the Colombo Stock Exchange (CSE) from 1991 to 2017. We found that IPOs on average were underpriced by 47% and that 32 IPOs were overpriced by approximately 17%–18%. The stepwise multiple regression results showed that offer risk, investor sentiment, firm size, market volatility prior to the IPOs, the time lag between IPO issue date and CSE listing date, and hot-issue periods have a significant relationship with IPO returns. The outcomes are hence consistent with the prediction of ex-ante uncertainty, windows of opportunity and the investor sentiment hypotheses. Overall, the results indicate that in Sri Lanka, underpricing accounts for a greater percentage of the IPOs than overpricing.