Short-Run Underpricing and Its Determinants: New Evidence from Australian IPOs

Abstract

To find out whether the Australian IPOs are underpriced, this study investigates the short-run market performance of 254 IPOs by industry, listing year and issue year over the period 2006 to 2011.To measure the short-run performance, the first listing day returns are divided into the primary market which is calculated based on the first day beginning prices and issue prices, the secondary market which is estimated based on the first day closing and opening prices and total market which is calculated based on the first day closing prices and issue prices. Then it is extended to the post-day listing analysis which includes returns up to 10 days. To find out the determinants of underpricing, this study estimates binary and multiple regression models with the offer, firm and market characteristics. The marginal probability analysis was also carried out to estimate the associated probability of each determinant under the binary model. The study found that overall the Australian IPOs are underpriced by 25.47% based on the average abnormal return in the primary market and it is statistically significant at 1% level. However, the secondary market analysis indicates that the Australian IPOs are overpriced by 1.55% on the abnormal return which is statistically significant at 5% level. Total market analysis also shows that IPOs are underpriced at 23.11% on the average abnormal return and it is statistically significant at 5% level. The examination of post listing returns shows that Australian IPOs are underpriced based on the average cumulative abnormal returns (CARs) in the 3rd, 6th and 10th days by 24.63%, 24.06% and 23.34% respectively. The primary, total and post listing analysis shows that the industrial sector IPOs are more attractive to investors whereas the chemical and material sector IPOs are less attractive compared to other sectors. As far as the investors’ wealth is concerned, the study shows that the short-run market performance analysis should consider both the first day and post-day returns.The issue and market characteristics are significant explanatory variables of the short-run IPO market in Australia. The IPO period, time to listing, listing delays, total net proceeds ratio, issue price, attached share option and the market volatility are the main determinants for the observed underpricing. The marginal probability analysis also shows that market volatility and total net proceeds ratio have a significant impact on the level of underpricing.