Determinants of Initial Public Offer Underpricing in the United Kingdom: Pre and Post Financial Crisis Evidence

Abstract

Initial Public Offer Under-pricing is a global phenomenon that is continuously experienced in various countries and capital markets with well-established theories supporting the concept. The present study investigates the determinants of Under-pricing before and after the financial crisis on 341 UK issues between 2003 and 2013 and also attempted to analyse their long run performance defined as one year after their listings. Four econometric models were specified using secondary data sourced from Thomson Reuters’ database. Ordinary least squares (OLS) regression technique was used for estimation. The results reveal that Initial Public Offer Under-pricing was most in 2004 with 92 issues having first day initial returns averaging 145%, and the total of 341 issues were 62% for the 10 years period. Major causes of Under-pricing identified include size of the issue and market capitalization of firm before offer, which was also seen to impact on buy-and-hold returns in the long run. The ex-ante uncertainty theory is therefore supported in part and the Authors recommend that future research studies should examine why the High Technology industry is seen to be less risky after the financial crisis, and to also elongate the time frame for long run performance analysis.

Keywords: IPO, Underpricing, UK, Offer price, First day return, Underwriters