Pricing Mechanism and IPO Initial Return: Evidence from Pakistan Stock Exchange

Abstract

This study adds to the extent of the literature by examining the impacts of pricing mechanism and premium offered on IPO initial return in Pakistan. Cross-sectional data were gathered using 90 listed IPOs retrieved from Pakistan stock exchange. Accordingly, ordinary least squares, quantile regression, robustness regression, and stepwise regression were employed to assess the factors that influenced initial return. This study describes the intensity of initial return in light of company specific and issue specific variables. Both closing and opening prices to offer price were incorporated to measure the initial return on the initial day of trading. The outcomes showed that after the reform of book building pricing mechanism, the initial return of IPOs increased, when compared to the fixed price offerings in Pakistan. This study concludes that information from book building pricing mechanism and premium had influenced both issuer and investor in subscribing IPO.

IPO initial return in Pakistan: influence of country-level institutional quality

“…Previous studies that explored IPO initial return in Pakistan have highlighted a number of factors that significantly influence initial return, such as ex ante uncertainty, market capitalisation, information asymmetry, corporate governance, market sentiment, ownership structure, issue size, aftermarket IPO risk, issue timing, market volatility, underwriter, premium and pricing mechanism (Afza et al , 2013; Aslam and Ullah, 2017; Javid and Malik, 2016; Kayani and Amjad, 2011; Khalid and Raheman, 2009; Mumtaz et al , 2016; Sohail et al , 2018a; Mehmood et al , 2020d). The existing literature of IPO initial returns, therefore, recognises issue-specific and firm-specific factors but neglects country-specific characteristics that may impact the ex ante uncertainty concerning the value of the firm (Mike, 2009; North, 1991).…”

Shariah-compliant status and investors demand for IPOs: the moderating role of regulatory quality

“…As previously stated, the final IPO price is based on investors' bids (investor demands) following the bidding's closure. Thus far, Mehmood et al (2020aMehmood et al ( , 2020bMehmood et al ( , 2020cMehmood et al ( , 2020d is the only study that had examined the factors causing IPO's demand anomalies in the Pakistani market. Even so, the IPO's demand determinants were subject to the availability of information about the actions of firms throughout the IPO process, including investor enthusiasm, IPO volume, the opportunity cost of funds and the offer price.…”

“…Even so, the IPO's demand determinants were subject to the availability of information about the actions of firms throughout the IPO process, including investor enthusiasm, IPO volume, the opportunity cost of funds and the offer price. Mehmood et al (2020aMehmood et al ( , 2020bMehmood et al ( , 2020cMehmood et al ( , 2020d asserted that pre-listing information could cause higher IPO's demand, particularly in markets that use the book building mechanism. The existing literature on Pakistani IPOs does not cover this issue; therefore, the current study aims to fill this gap.…”

“…In addition to lessening investors' confidence in the stock market and regulators of the trading rules, corruption also increases investors' risk level. Initial return refers to the difference in percentage between the first-day closing price and the offer price (Mehmood et al, 2020a(Mehmood et al, , 2020b(Mehmood et al, , 2020c(Mehmood et al, , 2020d. A stock is considered as under-priced when the offer price is lower than the closing price on the first day of listing.…”

“…The Pakistan Stock Exchange (PSX) is typically characterised by investor sentiments and speculative behaviours (Mehmood et al, 2020a(Mehmood et al, , 2020b(Mehmood et al, , 2020c(Mehmood et al, , 2020d. PSX recorded its highest number of initial public offerings (IPOs) throughout 1992-1998, with an average of 35 IPO listings annually.…”