A Review of IPO Underpricing: Evidences from Developed, Developing and Emerging Markets
The empirical evidence of high initial return from Initial Public Offerings (IPO) phenomena known as underpricing. From last three decades, it is an ongoing issue of every financial market throughout the world. We review underpricing research in developed, developing and emerging markets. In this regard, a thorough review of existing literature has been done. In result, higher underpricing of IPOs is found in emerging markets than developing and developed market because in emerging market issuer of IPOs takes underpricing as a signal of their quality IPOs, where information asymmetry is a significant element. Furthermore, based on the review, we managed to pinpoint significant factors that influenced the initial return. However, scale of underpricing among different countries varies depending on the factors, discussed in detail. Various theories and proposition have developed in these three markets to elucidate the phenomena of underpricing. We believe that there exist few factors that could be used as the primary determinants of IPO underpricing in future. These factors are country specific environment, micro and macro-economic factors, quality of legal framework based on listing regulations, and socio-political factors and marketing of IPO, which could provide a promising area of research.
Agathee, U.S., Sannassee, R.V., & Brooks, C. (2012). The underpricing of IPOs on the stock exchange of Mauritius. Research in International Business and Finance, 26(2), 281-303.
Aggarwal, R., & Conroy, P. (2000). Price discovery in initial public offerings and the role of the lead underwriter. the Journal of Finance, 55(6), 2903-2922.
Aggarwal, R., & Rivoli, P. (1990). Fads in the initial public offering market? Financial Management, 45-57.
Al-Hassan, A., Delgado, F., & Omran, M. (2010). The under-pricing of IPOs in the Gulf cooperation council countries. Research in International Business and Finance, 24(3), 344-360.
Alanazi, A.S., & Al-Zoubi, H.A. (2015). Extreme IPO underpricing and the legal environment in wealthy emerging economies. Journal of Multinational Financial Management, 31, 83-103.
Avelino, R.R. (2013). The underpricing of Brazilian IPOs and the adjustment to public and private information. Revista Brasileira de Economia, 67(1), 03-23.
Bajo, E., & Raimondo, C. (2017). Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, 139-153.
Bakar, N.B.A., & Uzaki, K. (2012). A Test of Initial Public Offerings (IPOs) Underpricing Performance in Malaysian Stock Exchange (MSE). Paper presented at the Third Asian Business and Management Conference, Osaka, Japan. Retrieved from: http://iafor. info/archives/offprints/abmc2012-offprints/ABMC2012_0035. pdf.
Banerjee, S., Dai, L., & Shrestha, K. (2011). Cross-country IPOs: What explains differences in underpricing? Journal of Corporate Finance, 17(5), 1289-1305.
Bansal, R., & Khanna, A. (2012). Pricing mechanism and explaining underpricing of IPOs-evidence from Bombay stock exchange, India. International journal of research in finance and marketing, 2(1), 205-216.
Barry, C.B., & Jennings, R.H. (1993). The opening price performance of initial public offerings of common stock. Financial Management, 54-63.
Belghitar, Y., & Dixon, R. (2012). Do venture capitalists reduce underpricing and underperformance of IPOs? Applied Financial Economics, 22(1), 33-44.
Bodnaruk, A., Kandel, E., Massa, M., & Simonov, A. (2007). Shareholder diversification and the decision to go public. The Review of Financial Studies, 21(6), 2779-2824.
Boonchuaymetta, E., & Chuanrommanee, W. (2013). Management of the IPO performance in Thailand. Journal of Multinational Financial Management, 23(4), 272-284.
Boulton, T.J., Smart, S.B., & Zutter, C.J. (2010). IPO underpricing and international corporate governance. Journal of International Business Studies, 41(2), 206-222.
Boulton, T.J., Smart, S.B., & Zutter, C J. (2011). Earnings quality and international IPO underpricing. The Accounting Review, 86(2), 483-505.
Boulton, T.J., Smart, S.B., & Zutter, C.J. (2017). Conservatism and international IPO underpricing. Journal of International Business Studies, 48(6), 763-785.
Bradley, D.J., Gonas, J.S., Highfield, M.J., & Roskelley, K.D. (2009). An examination of IPO secondary market returns. Journal of Corporate Finance, 15(3), 316-330.
Bradley, D.J., & Jordan, B.D. (2002). Partial adjustment to public information and IPO underpricing. Journal of Financial and Quantitative Analysis, 37(4), 595-616.
Brau, J.C., Cicon, J., & McQueen, G. (2016). Soft strategic information and IPO underpricing. Journal of Behavioral Finance, 17(1), 1-17.
Brealey, R., Leland, H.E., & Pyle, D.H. (1977). Informational asymmetries, financial structure, and financial intermediation (1540-6261). Retrieved from
Brealey, R.A., Myers, S.C., & Allen, F. (2008). Brealey, Myers, and Allen on real options. Journal of Applied Corporate Finance, 20(4), 58-71.
Brennan, M.J., & Franks, J. (1997). Underpricing, ownership and control in initial public offerings of equity securities in the UK. Journal of Financial Economics, 45(3), 391-413.
Cai, K.N., Lee, H.W., & Sharma, V. (2011). Underpricing of IPOs that follow private placement. Journal of Financial Research, 34(3), 441-459.
Chang, E., Chen, C., Chi, J., & Young, M. (2008). IPO underpricing in China: New evidence from the primary and secondary markets. Emerging markets review, 9(1), 1-16.
Chorruk, J., & Worthington, A.C. (2010). New evidence on the pricing and performance of initial public offerings in Thailand, 1997–2008. Emerging markets review, 11(3), 285-299.
Coakley, J., Hadass, L., & Wood, A. (2009). UK IPO underpricing and venture capitalists. The European Journal of Finance, 15(4), 421-435.
Cornanic, A., & Novak, J. (2013). Signaling by underpricing the initial public offerings of primary listings in an emerging market.
Correia, C., & Holman, G. (2008). An analysis of underpricing and aftermarket performance of initial public offerings on the Alternative Exchange (AltX). South African Journal of Accounting Research, 22(1), 97-117.
da Silva Rosa, R., Velayuthen, G., & Walter, T. (2003). The sharemarket performance of Australian venture capital-backed and non-venture capital-backed IPOs. Pacific-Basin Finance Journal, 11(2), 197-218.
Darmadi, S., & Gunawan, R. (2013). Underpricing, board structure, and ownership: An empirical examination of Indonesian IPO firms. Managerial Finance, 39(2), 181-200.
Dempere, J.M., Griffin, R., & Camp, P. (2014). The Marketability Discount and Its Impact on Initial Public Offering Underpricing and Price Adjustment. Journal of Global Business and Technology, 10(2), 60.
Dhamija, S., & Arora, R.K. (2017). Impact of quality certification on IPO underpricing: evidence from India. Global Business Review, 18(2), 428-444.
Dimovski, Philavanh, & Brooks. (2011). Underwriter reputation and underpricing: evidence from the Australian IPO market. Review of Quantitative Finance and Accounting, 37(4), 409-426.
Dimovski, Ratcliffe, C., & Keneley, M. (2017). Another piece of the puzzle: REIT IPO underpricing after the financial crisis. Journal of Property Investment & Finance, 35(3), 264-276.
Eijgenhuijsen, H., & Valk, R.v.d. (1997). Initial public offerings in Mexico and Argentina: 1991-1994 Initial public offerings in Mexico and Argentina: 1991-1994. Faculty of Economics, Business Administration and Econometrics: VU University Amsterdam.
Ekkayokkaya, M., & Pengniti, T. (2012). Governance reform and IPO underpricing. Journal of Corporate Finance, 18(2), 238-253.
Engelen, P.J., & Van Essen, M. (2010). Underpricing of IPOs: Firm-, issue-and country-specific characteristics. Journal of Banking & Finance, 34(8), 1958-1969.
FTSE Russell. (2018). FTSE Russell. Retrieved from http://www.ftserussell.com/
Gounopoulos, D., Nounis, C., & Stylianides, P. (2007). The short and long term performance of initial public offerings in the Cyprus Stock Exchange.
Guo, Y., Wang, T., Jia-Lang, S., & Hung, S.S. (2017). The Effect Of Disclosure Patterns Of Risk Factors In Prospectus On The Relation Between Strategic Alliances And Underpricing Of Biotechnology IPOs. Journal of Applied Business Research, 33(3), 509.
Habib, M.A., & Ljungqvist, A.P. (1998). Underpricing and IPO proceeds: a note. Economics Letters, 61(3), 381-383.
Habib, M.A., & Ljungqvist, A.P. (2001). Underpricing and entrepreneurial wealth losses in IPOs: Theory and evidence. Review of Financial Studies, 14(2), 433-458. doi:10.1093/rfs/14.2.433
Hahl, T., Vähämaa, S., & Äijö, J. (2014). Value versus growth in IPOs: New evidence from Finland. Research in International Business and Finance, 31, 17-31.
Hamao, Y., Packer, F., & Ritter, J.R. (2000). Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan. Pacific-Basin Finance Journal, 8(5), 529-558.
Hasan, T., & Quayes, S. (2008). Underpricing of initial public offerings in Bangladesh. Applied Financial Economics Letters, 4(1), 5-8.
Hearn, B. (2014). The impact of institutions, ownership structure, business angels, venture capital and lead managers on IPO firm underpricing across North Africa. Journal of Multinational Financial Management, 24, 19-42.
Henricson, T. (2012). Underpricing in the Swedish IPO market: Can investors earn abnormal returns by investing in IPOs? In.
Husnan, S., Hanafi, M.M., & Munandar, M. (2014). Price stabilization and IPO underpricing: an empirical study in the Indonesian stock exchange. Journal of Indonesian Economy and Business: JIEB., 29(2), 129.
Ibbotson, R.G. (1975). Price performance of common stock new issues. Journal of Financial Economics, 2(3), 235-272.
Islam, M.A., Ali, R., & Ahmad, Z. (2010). An empirical investigation into the underpricing of initial public offerings in the Chittagong Stock Exchange. International Journal of Economics and Finance, 2(4), 36.
Isola, M.N., Teixeira, F.J., & Ferreira, F.A. (2014). Initial Underpricing and the Euronext Lisbon-listed Companies. Procedia-Social and Behavioral Sciences, 110, 1116-1123.
Javid, A.Y., & Malik, H. (2016). Performance and capital structure of IPOs in Pakistan from 2000 to 2015. Financial Innovation, 2(1), 14.
Jelic, R., Saadouni, B., & Briston, R. (2001). Performance of Malaysian IPOs: Underwriters reputation and management earnings forecasts. Pacific-Basin Finance Journal, 9(5), 457-486.
Jewartowski, T., & Lizińska, J. (2012). Short-and long-term performance of Polish IPOs. Emerging Markets Finance and Trade, 48(2), 59-75.
Johnston, J., & Madura, J. (2002). The performance of internet firms following their initial public offering. Financial Review, 37(4), 525-550.
Jung, K., Kim, Y.-C., & Stulz, R. (1996). Timing, investment opportunities, managerial discretion, and the security issue decision. Journal of Financial Economics, 42(2), 159-186.
Kiymaz, H. (2000). The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul stock exchange. Journal of Multinational Financial Management, 10(2), 213-227.
Kooli, M., & Suret, J. (2002). The Aftermarket Performance of Initial Public offerings in Canada. Journal of Multinational Financial Management, 14:1, 47-66.
Kucukkocaoglu, G. (2008). Underpricing in Turkey: a comparison of the IPO methods. International Research Journal of Finance and Economics, 13(1), 162-182.
Logue, D.E. (1973). On the pricing of unseasoned equity issues: 1965–1969. Journal of Financial and Quantitative Analysis, 8(1), 91-103.
Loughran, T., & Ritter, J. (2004). Why Has IPO Underpricing Changed Over Time? Financial Management, 33(3), 5-37.
Loughran, T., Ritter, J.R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific-Basin Finance Journal, 2(2-3), 165-199.
Loughran, T., & Schultz, P. (2006). Asymmetric information, firm location, and equity issuance. Unpublished Working Paper, University of Notre Dame.
Lowry, M., Michaely, R., & Volkova, E. (2017). Initial public offerings: A synthesis of the literature and directions for future research. Foundations and Trends® in Finance, 11(3-4), 154-320.
Moshirian, F., Ng, D., & Wu, E. (2010). Model specification and IPO performance: New insights from Asia. Research in International Business and Finance, 24(1), 62-74.
Mumtaz, M.Z., & Ahmed, A.M. (2014). Determinants of underpricing of initial public offerings: Evidence from Pakistan. Journal of Business & Economics, 6(1), 47.
Nagata, K. (2013). Does earnings management lead to favorable IPO price formation or further underpricing? Evidence from Japan. Journal of Multinational Financial Management, 23(4), 301-313.
Omran, M. (2005). Underpricing and Long‐Run Performance of Share Issue Privatizations In The Egyptian Stock Market. Journal of Financial Research, 28(2), 215-234.
Pande, A., & Vaidyanathan, R. (2007). Determinants of IPO underpricing in the National Stock Exchange of India.
Park, H.D., & Patel, P.C. (2015). How does ambiguity influence IPO underpricing? The role of the signalling environment. Journal of Management Studies, 52(6), 796-818.
Perera, W., & Kulendran, N. (2012). New evidence of short-run underpricing in Australian IPOs.
Pu, D., & Wang, S. (2015). The impact of pricing mechanism reform on underpricing of initial public offerings in China. Applied Economics Letters, 22(14), 1144-1149.
Rashid, R.M., Abdul-Rahim, R., & Yong, O. (2014). The influence of lock-up provisions on IPO initial returns: Evidence from an emerging market. Economic Systems, 38(4), 487-501.
Ritter, J.R. (1998). Initial public offerings, Warren Gorham & Lamont handbook of modern finance. Contemporary Finance Digest, 2(1), 5-30.
Ritter, J.R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. the Journal of Finance, 57(4), 1795-1828.
Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1-2), 187-212.
Rupawaththa, R., & Gunasekara, W. (2016). Evaluation of Short-Run Market Performance and its Determinants Using Marginal Analysis and Binary Models: Evidence from Australian Initial Public Offerings.
Sahoo, S., & Rajib, P. (2010). Post-issue promoter groups holding, signalling and IPO underprice: evidence from Indian IPOs. International Journal of Financial Services Management, 4(2), 95-113.
Samarakoon, L.P. (2010). The short-run underpricing of initial public offerings in the Sri Lankan stock market. Journal of Multinational Financial Management, 20(4-5), 197-213.
Satta, G. (2017). Initial public offerings in the port industry: exploring the determinants of underpricing. Maritime Policy & Management, 44(8), 1012-1033.
Schultz, P.H., & Zaman, M.A. (1994). Aftermarket support and underpricing of initial public offerings. Journal of Financial Economics, 35(2), 199-219.
Sherman, A. E., & Titman, S. (2002). Building the IPO order book: underpricing and participation limits with costly information. Journal of Financial Economics, 65(1), 3-29.
Song, S., Tan, J., & Yi, Y. (2014). IPO initial returns in China: Underpricing or overvaluation? China Journal of Accounting Research, 7(1), 31-49.
Soongswang, A. (2017). Is there IPOs’ under Pricing on the MAI?
Stoll, H.R., & Curley, A.J. (1970). Small business and the new issues market for equities. Journal of Financial and Quantitative Analysis, 5(3), 309-322.
Suherman. (2011). Reduced-Monitoring Hypothesis or Increased-Monitoring Hypothesis? A Study on IPO Underpricing in Indonesia.
Tian, L. (2011). Regulatory underpricing: Determinants of Chinese extreme IPO returns. Journal of Empirical Finance, 18(1), 78-90.
Tran, T.H.L., Le, D.C., & Hoang, T.P.T. (2014). The underpricing and long-run underperformance of initial public offerings: evidence from Vietnam. International Journal of Business and Emerging Markets, 7(1), 3-24.
Utamaningsih, A. (2017). The Influence of Underpricing to IPO Aftermarket Performance: Comparison between Fixed Price and Book Building System on the Indonesia Stock Exchange. International Journal of Economics and Financial Issues, 7(4).
Van Heerden, G., & Alagidede, P. (2012). Short run underpricing of initial public offerings (IPOs) in the Johannesburg Stock Exchange (JSE). Review of Development Finance, 2(3-4), 130-138.
Wan-Hussin, W.N. (2005). The effects of owners' participation and lockup on IPO underpricing in Malaysia.
Wang, X.A., & Wan, W.P. (2013). Explaining the Variance in Underpricing among Venture Capital‐Backed IPOs: A Comparison Between Private and Corporate VC Firms. Strategic Entrepreneurship Journal, 7(4), 331-342.
Welch, I. (1992). Sequential sales, learning, and cascades. the Journal of Finance, 47(2), 695-732.
Wong, Ong, S.E., & Ooi, J.T. (2013). Sponsor backing in Asian REIT IPOs. The Journal of Real Estate Finance and Economics, 46(2), 299-320.
Wong, WB, R.W., & Ting, L.S. (2017). Initial public offering (IPO) underpricing in Malaysian settings. Journal of Economic & Financial Studies, 5(02), 14-25.
Xu, Z.J., Wang, L., & Long, J. (2017). The impact of director’s heterogeneity on IPO underpricing. Chinese Management Studies, 11(2), 230-247.
Yar, M.M.S., & Javid, A.Y. (2014). Liquidity Benefits from Underpricing: Evidence from Initial Public Offerings Listed at Karachi Stock Exchange. Retrieved from
Yong, O. (2011). Winner’s curse and bandwagon effect in Malaysian IPOs: Evidence from 2001-2009. Jurnal Pengurusan (UKM Journal of Management), 32.
Yong, O., & Isa, Z. (2003). Initial performance of new issues of shares in Malaysia. Applied Economics, 35(8), 919-930.
Yu, X., & Zheng, Y. (2012). IPO underpricing to retain family control under concentrated ownership: Evidence from Hong Kong. Journal of Business Finance & Accounting, 39(5‐6), 700-729.
Zheng, S.X., Ogden, J.P., & Jen, F.C. (2005). Pursuing value through liquidity in IPOs: underpricing, share retention, lockup, and trading volume relationships. Review of Quantitative Finance and Accounting, 25(3), 293-312.