Determinants of heterogeneity in investors' opinions on IPO valuation: evidence from the Pakistan stock market

Mehmood, Waqas; Mohd‐Rashid, Rasidah; Che-Yahya, Norliza; Ong, Chui Zi

doi:10.1108/rbf-04-2020-0078

Cited by 12 publications

(16 citation statements)

References 36 publications

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“…A weak legal system can be strengthened to protect the interests of existing investors, potential shareholders and managers (Porta et al, 1998). Finally, risk is measured as a reciprocal of the offer price (Mehmood, et al, 2020c). The risk of an IPO can be inferred from its final offer price; firms with higher risk offer lower prices to attract investors, resulting in higher demand and higher IPO underpricing.…”

Section: Empirical Modelmentioning

confidence: 99%

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

Mehmood

Mohd‐Rashid

Tajuddin

et al. 2021

IMEFM

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Purpose This study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan. Design/methodology/approach Besides 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. Findings Results 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/implications This 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/value The 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.

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Section: Empirical Modelmentioning

confidence: 99%

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

Mehmood

Mohd‐Rashid

Tajuddin

et al. 2021

IMEFM

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“…Doing so benefit issuers by reducing opinion heterogeneity among investors, which leads to lower underpricing. A negative correlation is also documented between book building (Mehmood et al, 2020) and institutional ownership (D. Sundarasen, 2019;Darmadi and Gunawan, 2013;Dumrongwong, 2020). This highlights the essential role institution's retention strategy plays in reducing information asymmetry as well as maintaining market stability.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 79%

“…Other determinants are associated with mixed results depending on the study's country. For instance, there is a negative correlation with oversubscription in Pakistan (Mehmood et al, 2020), yet a positive one in Greece (Kenourgios et al, 2007). Mixed results are reported by other studies (Dhamija and Arora, 2017;Hearn, 2014;Javid and Malik, 2016;Omran, 2005;Sahoo and Rajib, 2010;Tran et al, 2013).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 82%

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

Tizniti

Aasri

2021

IJFAM

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Purpose: We investigated the different impacts warranted and unwarranted discounts have on IPOs valuation performance and underpricing. Research methodology: We used multivariate ordinary least squares regression analysis to examine discounts’ determinants, and their impacts on valuation errors and underpricing. We also used bias and accuracy errors to examine valuation performance. Results: We find both final offer price accuracy errors and underpricing negatively related to warranted discounts and positively related to unwarranted discounts. Additionally, warranted discounts are positively related to fair value estimate bias errors, contrarily to unwarranted discounts. Limitations: The relatively small sample size represents our study’s main limitation. Contribution: Unwarranted discounts allow assessing by issuers' underpricing level and underwriters’ sub-optimal efforts and investors' positive returns. Whereas warranted discounts allow issuers to avoid overpricing IPOs and communicate their intrinsic value, investors assess their negative returns, and underwriters reveal their superior qualitative valuation. Regulators can increase after-market efficiency and protect investors by implementing unwarranted discounts’ constraints and warranted discounts’ thresholds.

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“…Other studies, including Loughran and Ritter (2002) and Ljungqvist and Wilhelm (2005) support the information cascades model. Mehmood et al (2020) also found that the pricing mechanism and the premium offered in IPOs have significant bearing on the initial return.…”

Section: Extant Literaturementioning

confidence: 94%

“…They also argued that high-profile investment banks have more considerable skills and networks to ensure more access to the market. Mehmood et al (2020) and Mehmood et al (2021) studied the Pakistan IPO market and document that the postIPO behavior of the investors and initial return of IPO are influenced by pricing structure of the IPO, extent of oversubscription, degree of leverage and political stability. Signaling hypothesis and information cascades: The signaling model for IPO UP is suggested by Welch (1989), Grinblatt and Hwang (1989) and Allen and Faulhabar (1989). These studies suggest that quality issues segregate themselves from other IPOs by incurring a cost, i.e.…”

Section: Extant Literaturementioning

confidence: 99%

Does syndicate structure create value for initial public offerings? An empirical investigation for the Indian market

Sahoo

Sahoo²

2022

PAR

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Purpose This paper aims to investigate the impact of the underwriters’ syndicate size (SS) and its structure on underpricing (UP), oversubscription rate, liquidity and volatility. The authors use a database of 185 initial public offers (IPOs) issued in India during the period 2012–2019. Design/methodology/approach The authors have used ordinary least squares regression and stepwise regression on cross-sectional data to construct the regression model for the dependent variables under consideration, namely, UP, subscription rate (SUB), listing day volatility and listing day liquidity. Findings The authors find that larger syndicates reduce UP. The authors also find strong evidence of a larger subscription rate for IPOs managed by larger syndicates, suggesting that larger syndicates generate more information in the market. Looking into the composition of investment banks in the syndicate, the authors find that syndicates comprising more lead managers and comanagers attract a higher subscription from potential investors. More book running lead managers and nonmanaging syndicate members help increase liquidity and reduce the volatility of IPO stocks on listing day. Additionally, the authors find that larger firms with reputed lead managers establish larger syndicates while venture-affiliated IPO firms prefer a smaller syndicate. Practical implications The findings would interest issuing firms, investors, intermediaries and policymakers engaged in formulating syndicates for better management of IPOs. Originality/value The study extends the present literature on IPO syndicates, particularly in the Indian context as an emerging economy. The study extended the present understanding of SS and composition, creating value for the issuers.

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Determinants of heterogeneity in investors' opinions on IPO valuation: evidence from the Pakistan stock market

Cited by 12 publications

References 36 publications

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

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

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

Does syndicate structure create value for initial public offerings? An empirical investigation for the Indian market

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