CHAPTER 1 INTRODUCTION
3.4 A priori Expectations
3.4.1 Model 1 A priori Expectations
As seen in Table 3, Yar and Javid (2014) claimed that ownership dispersion is another determinant of IPO underpricing. Firms tend to underprice their IPOs to retain more power as it reduces block shares. The sample for their analysis comprises 78 IPOs listed in the KSE from March 2000 to June 2012. The researchers concluded that the ownership structure has a significant impact on the level of underpricing among other determinants.
Table 3.
Table 4 highlights that the firm size can be measured by the total assets that it owns.
Singgih et al. (2018) examined the influence of the market to book value (MBV) and the firm size on the initial return level in the Indonesian Stock Exchange from 2007-2016. The initial return level is assumed to be dependent on the underpricing of the IPO. The researchers
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Ownership Structure
Measured by the annual free float percentage
(+/-) Yar and Javid (2014) argued that the ownership
structure significantly affects the level of
underpricing.
concluded that firm size has a significant and negative impact on the initial returns of the IPO.
Thus, smaller firms are more likely to be underpriced. According to the researchers, this happens because there are several uncertainties in smaller firms that may indicate higher risk.
Thus, this can increase the likelihood of underpricing.
Table 4.
Based on Table 5, Zhou and Lao (2012) analyzed various influencing factors of IPO Underpricing in ChiNext, a NASDAQ-style subsidiary of the Shenzhen Stock Exchange (SZSE).
One of the influencing factors that they examined is firm age. This is calculated by determining the number of years from the company’s incorporation until it has been listed. The researchers concluded that firm age and IPO underpricing are negatively correlated. Thus, the older the firm age is, the lower the underpricing rate is expected.
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Firm Size Measured by the total assets in the last year prior to the year of IPO (in USD)
(-) Singgih et al. (2018) argued that between firm
size and underpricing, there is a negative relationship. Therefore,
smaller firms are more likely to be underpriced.
Table 5.
Meanwhile, Table 6 shows that offering price refers to the price of a stock set by the underwriter during the IPO process. Ibbotson et al. (1994) examined 2439 US IPOs from 1975 to 1984 to determine the various market problems that occur in the pricing of IPOs. With this, they found out that lower-priced shares tend to be more underpriced than higher-priced shares.
Their data and findings show that the average initial return of IPOs that are priced lower than USD3.00 is 42.8% while those that are priced higher than USD3.00 are only at 8.6%. Based on this, the lower the offering price is, the more underpriced the IPO offering is.
Table 6.
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Firm Age Determined by the number of years from incorporation
to listing year
(-) Zhou and Lao (2012) recognizes that firm age
and underpricing are negatively correlated.
Therefore, older firms have a lower underpricing rate as compared to older firms.
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Offering Price The price of a stock set by the underwriter during the
IPO process.
(in USD/share)
(-) Ibbotson et al. (1994) recognizes that offerings that are priced lower tend
to be more underpriced.
Thus, signifying a negative relationship between the
variables.
Table 7 emphasizes that Sochi and Islam (2018) identified factors that may impact IPO underpricing in the Dhaka Stock Exchange including the IPO’s offering size or the number of shares that are issued in the IPO. Their study included data from the biggest stock exchange in Bangladesh from June 2011 to June 2016. They concluded that among the variables that they have tested, they found out that offering size plays a significant role in the level of underpricing.
Additionally, a negative relationship suggests that the lower the offering size is, the higher the underpricing is expected to be for firms on Dhaka Stock Exchange. Similarly, Heerden and Alagidede (2012) also concluded that in the Johannesburg Stock Exchange, underpricing is also dependent on the offering size wherein underpricing is larger on smaller offerings.
Table 7.
As seen in Table 8, financial leverage is the debt-to-equity ratio which is calculated by dividing the firm’s total liabilities by the shareholders’ equity. Mahatidana and Yunita (2017) assessed the determinants of underpricing of two industries, specifically financial and manufacturing industries, of IPOs in the Indonesia Stock Exchange covering the period 2011-2016. The researchers claimed that the collected sample companies had a mean of 3.02
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Offering Size Amount to be raised based on final IPO prospectus
(in USD)
(-) Studies were done by Heerden and Alagidede (2012) and Sochi and Islam
(2018)
confirm that between offering size and underpricing, there
is a negative relationship.
Thus, lower offering sizes are expected to have a higher
level of underpricing.
using the debt-to-equity ratio which means that before entering the IPO, their debt is higher as compared to the capital. Moreover, they asserted that financial leverage is insignificant but is positively correlated to the level of underpricing.
Table 8.
Additionally, Table 9 shows that Yuliani et al. (2019) conducted a study that looks into variables, financial and non-financial, that could potentially affect the underpricing of stock prices. The researchers acknowledge that ROE is a significant profitability indicator as it reflects how a company uses its resources to provide a return on its equity. A high ROE indicates that a company is profitable and would, therefore, indicate a low IPO uncertainty. Given this, it is expected to reduce the level of underpricing.
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Financial Leverage
Debt-to-equity ratio;
Measured the firm’s total liabilities divided by shareholders’ equity
(+) Mahatidana and Yunita (2017)
asserted that financial leverage and level of underpricing are positively
correlated.
Table 9.
Lastly, as seen in Table 10, researchers Islam et al. (2010) looked into the level of underpricing and its corresponding determinants in the Chittagong Stock Exchange in Bangladesh. According to the researchers, the level of underpricing in Bangladesh is relatively higher than in Asian and other advanced markets. Correspondingly, with the total collected sample, firms are categorized based on their respective industry. Based on their study, the manufacturing, food, and allied products, and service and miscellaneous sectors had high levels of underpricing which mainly show that the classification of industries is negatively correlated to the level of underpricing. Hence, with the multiple regression model used, the industry of a firm is significant as it influences the firm’s level of underpricing.
Independent Variable
Definition/
Measurement
A priori Expectation
Supporting Literature
Return on Equity (ROE)
Measured by the Return on Equity formula:
divide net income by shareholder’s equity
(-) Yuliani et al. (2019) claimed that ROE significantly
affects underpricing wherein firms with high profitability
have a lower level of underpricing. Thus, signifying
a negative relationship between the variables.
Table 10.