IPO underpricing of European property companies

Abstract

The widely known phenomenon of “underpricing” is frequently observable during the IPO process and has been researched extensively. Underpricing refers to the systematically negative difference between the offer price and the first trading price in the secondary market, implying that the issuing company collects less money than would have been possible in a fully efficient market. Whereas underpricing in the real estate sector is has been investigated in considerable depth in the USA, Australia and Asia, European studies in this field are scarce. Yet, the motivation to conduct a pan-European analysis on the underpricing of property IPOs is twofold. First, as stated above there is, to the best of our knowledge, no European study about underpricing differences in the real estate sector. Second, due to a growing number of listed real estate companies in most European countries, a pan-European study should provide clear evidence of IPO pricing in Europe. To investigate the underpricing phenomenon in the European real estate sector, this study uses a pan-European sample of listed property companies and Real Estate Investment Trusts (REITs). Specifically, our sample comprises ten REITs and 92 listed property companies over the period 1999-2014. The study is based on the methodology of Beatty and Ritter (1986) concerning ex-ante uncertainty, for which we use such proxies as gross proceeds, offer price, market capitalization at the IPO date and the age of the company at the issuing date. In addition, we include a dummy variable for the two years before the financial crisis, in order to take into account the high number of IPOs during this period. Finally, the study considers whether there is a significant difference between the initial returns of listed property company and REIT IPOs.