Shariah-compliance and IPO underpricing: evidence from Pakistan Stock Exchange

Abstract

PurposeThis study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan.Design/methodology/approachBesides the ordinary least square’s method, this study used quantile least squares as a robust approach and stepwise regression for further analysis to investigate the underpricing phenomenon in Pakistan. Data of 84 IPOs listed on Pakistan Stock Exchange from January 2000 to December 2018 were collected to determine the impact of Shariah-compliant status and Shariah regulation on IPO underpricing.FindingsResults of the study show that Shariah-compliant status has a negative relationship but Shariah regulation has a positive relationship with IPO underpricing. Hence, it is contended that Shariah-compliant firms have lower asset volatility and uncertainty than non-Shariah-compliant firms because of less information asymmetry, resulting in lower underpricing. These Shariah-compliant firms provide signals of high-quality IPOs as they must comply with the strict guidelines issued by the Securities Exchange Commission of Pakistan in addition to being considered as amicable by investors. Further, this study suggests that investors are more attracted to Shariah-compliant firms than non-Shariah-compliant ones.Research limitations/implicationsThis study’s offers limited consideration of nonfinancial and financial characteristics that could influence the decision of investors to subscribe to IPOs. Besides, future studies could consider the screening benchmarks; for instance, debt and cash may explain the intensity of IPO initial return in Pakistan.Originality/valueThe present work empirically investigated the influence of Shariah-compliant status and Shariah regulation on IPO underpricing in Pakistan’s IPO market, which has been scarcely covered in the existing literature.