IPO Underpricing and Short run Performance in Bangladesh:

Determinant Attribution and Explanation

By-

M. A. Faisal Mahmud
ID- 10-180
10th Batch (BBA Program)
Department of Finance
University of Dhaka

Under Supervision of –

Dr. A. H. M. Habibur Rahman

Professor
Department of Finance
University of Dhaka

[ This is an Internship Report prepared in partial fulfillment of the

requirements of Bachelor of Business Administration Program ]

1
Letter of Transmittal

March 31, 2009

Mr. Dr. A. H. M. Habibur Rahman

Professor
Department of Finance
University of Dhaka
Dhaka-1000

Subject: Submission of the Intern report.

Dear Sir
This is the exceptionally overwhelming experience of submitting the thesis report
which I have prepared with my hard work and being driven by the urge as a finance
student always put up with on. I joined Securities and Exchange Commission (SEC)
for the internship and worked on various departments. Finally I endowed myself in
study about IPO Underpricing and empirical experiment in the context of Bangladesh.
This report has attempted to focus on the IPOs experienced the market from 2005 to
2008 and judged how far they are underpriced. I have prepared this report with the
best feasible ways as well as have tried to make it as sound as possible.

Hence, I would like to take this opportunity to request you to kindly go through the
report and scrutinize how far I have been successful in my effort.

Truly Yours

M. A. Faisal Mahmud
Roll: 10-180
10th Batch
Bachelor of Business Administration (BBA) Program
Department of Finance
University of Dhaka.

2
Acknowledgement

I am deeply indebted to my supervisor Prof. Dr. A. H. M. Habibur Rahman whose

help, stimulating suggestions and encouragement helped me in all the time of research
for and writing of this thesis. I would pay my gratitude to Mr. Dr. Professor Mahmood
Osman Imam who supported me in my work by providing help, support, interest and
valuable hints.

Special gratitude is extended to all of the Securities and Exchange Commission (SEC)
employees for their contributions while I conducted extensive pre-site discussion,
prepared the summary of the pre-site visit data, recorded and paraphrased the
departments’ responses, and organized this phase of the report from the beginning
through the end.

Recipients of the report are encouraged to share the information herein broadly in the
hope that the observations presented will promote the further development of IPO
pricing issue in Bangladesh.

3
Table of Contents

Abstruct……………………………………………………………………………… i
Study covered…………………………………………………………………. ii
Part I
Purpose of the study……………………………………………………………iii
Rationale of the study………………………………………………………… iii
Scope of the study……………………………………………………………...iii
Limitation of the study…………………………………………………………iii
Introduction……………………………………………………………………..1
Part II
Empirical Evidence and Literature Review…………………………………….2
Theoretical ground……………………………………………………………...4
Part III
The Market……………………………………………………………………..14
Experiment Data ………………………………………………………………16
Experiment Methodology……………………………………………………...18
Pert IV
Results of Experiment………………………………………………………….22
Part V
Determinants Attribution ………………………………………………………27
Explanation……………………………………………………………………..31
Part VI
Towards pricing efficiency…………………………………………………….34
Book Building: a new era……………………………………………………...35
FCF inclusion in Fixed Price method is a growing demand…………………..39
Part VII
Conclusion…………………………………………………………………….41
Part VIII
Appendix 42
Reference: 55

4
List of tables

DSE in last 4 Years……………………………………………………………15

Initial return percentage……………………………………………………….22
Descriptive Statistics for the 32 IPOs…………………………………………24
Correlations…………………………………………………………………...28
Model Summary(b)…………………………………………………………...29
ANOVA(b)……………………………………………………………………29
Coefficients(a)…………………………………………………………………30
Coefficient Correlations(a)……………………………………………………52
Collinearity Diagnostics(a)……………………………………………………53
Residuals Statistics(a)…………………………………………………………54
Underwriter Reputation and Ranking…………………………………………46
Money Left on the Table at First Day…………………………………………47

List of figures

IPO pricing phenomenon……………………………………………………..13

Market condition judgment…………………………………………………...16
Sector representations in IPOs………………………………………………..17
Return by issue size…………………………………………………………..22
Return by underwriter’s prestige……………………………………………..23
Return by market condition…………………………………………………..23
Year wise Return……………………………………………………………..23
Losers and winners…………………………………………………………...24
P/E comparisons……………………………………………………………...25
Daily aftermarket return……………………………………………………...26
Cumulative holding period return……………………………………………26

5
Abstract

This paper empirically examines the underpricing and the short run performance of
IPOs in Bangladesh. In an effort to minimize the practice of underpricing and to probe
the reasons behind it, this study compares the offer price against actual stock market
performance one month after listing. Results indicate that the IPOs are under-priced
as is evidenced by the positive listing day returns and can’t out perform the market in
the subsequent period almost up to 30 days.

The average underpricing of Bangladeshi IPOs is 221.38%, the highest of any major
world market. Using a sample of 32 IPOs listed on the Dhaka Stock Exchanges
between 2005 and 2008, I examine empirically the determinants of this extreme level
of underpricing. I find it is caused partly by the information asymmetry recompense,
high demand due to the shortage of alternative investment opportunities, the
ignorance of the investors, the pricing alternatives constraints. The result can be
explained as a carrot to induce the primary market share holders in secondary market
as the market here is emerging.

Book-building method will be adopted by the SEC. It will be used by higher quality
issues and will reduce uncertainty in valuation, and with reduced under-pricing of
issues. I recommend the issuer should be allowed to value the issue using the FCF
method so that the growth prospect of the firm is not ignored.

However, I can not be fully emphatic about my finding because of a small sample
size.

6
Study covered

Firstly, how much IPOs are Underpriced and how they Perform in Short Run in

Bangladeshi Equity Market.

Secondly, As frequently seen IPOs are normally Underpriced in Bangladesh, should

we go for pricing efficiency, if YES then how far should SEC be concerned with
introducing new methods of pricing

7
Purpose of the study

Bangladeshi capital market is juvenile and does not have many characteristics of
developed market. So just relying on empirical performance of major capital market
to judge a rough estimation short term return pattern of Initial Pubic Offer is
imprudent. That’s why I tried to reveal the return pattern of the IPOs of Bangladeshi
capital marker. The purpose of the study is basically judge how far the equities here in
Bangladesh is underpriced and judge the short run performance of the securities. The
paper endeavored to find the determinants of the short run return.

Rationale of the study

The emerging capital market of Bangladesh is getting the increased concentration any
time ever and the capitalization has been doubled last year with a growth rate of
135.28%. That’s why as of late market requires more efficient regulatory framework
and co operation to maintain its stability. Apart from theoretical ground this literature
will allow the readers to assess the short tern return of the IPOs. It’s prudent to go
through the market at a glance before investing in an IPO.

Scope of the study

The study encompasses the IPOs of Dhaka Stock Exchange from 2005 – 2008 tenure
and all 32 samples are from equity. The study includes return series analysis and
multiple regression analysis to determine the factor behind the underpricing.

Limitation of the study

Just being constrained by the time I can’t take a large sample to evaluate the IPOs
return. I guess a 3 year period is not adequate to comment that the market will award
you like 200% return. I should have attribute different other models and significance
test of abnormal profit from the market, but with this sample the result will not be that
much representative. The sample is dominated by a bit hot IPO tenure and strong
dominance of Banking and Insurance Sector. The sample does not cover the sectors
like Pharmaceuticals, Textiles, Food and Allied or IT.

8
Introduction

Valuation has seen a constant debate between what something is worth versus what
the market thinks its worth and versus what a strategic or motivated buyer thinks its
worth. Initial Public Offerings (IPOs) provide a significant abnormal return in the
initial days of trading is the most investigated anomalies in finance. This anomaly has
been well documented in almost all the financial markets of the world (Jenkinson and
Ljungqvist (1996)). While a number of theories have been put forward to explain this
anomaly, the academics are undivided in their conclusions that the presence of
abnormal returns shows evidence of deliberate underpricing.

I reported underpricing of IPOs as by offering type, by underwriter reputation, by

industry type, in hot and cold markets. Various determinants like the Issue Sige, Age
of the Firm, Sponsors Share holdings, Total asset, Profitability of the firm, market
condition and the risk of the security has been tested to identify the extent of
dependence of the return.

Amongst other determinants the pricing method followed in the IPO process is also
important. Performance of IPO depends on the investors expectation of the stock,
which is difficult to estimate properly. The rough the estimation, the inefficient price
will be determined. That’s why, underpricing is severe in the country like Bangladesh
where stocks come to the market using fixed method (in practical strong dominance
of NAV method). Thus the issuer is relying only on accounting data where the growth
prospect of the firm and market’s expectation of the scrip is severely ignored.

In this paper I test the determinants of IPO underpricing and evaluated the short term
return pattern of the IPOs from the period of 2005 and 2008. All of the IPOs in the
sample came to the market with a fixed price offering.

The Methodology adopted follows in Pat III and empirical results are presented in
section IV and results are clarified in section VI.

9
Empirical Evidence and Literature Review

In Bangladesh there is hardly any literature worked on short run IPO performance
issue. Never-the-less few scholars, basically academicians have worked on broad
heading of IPO. These among others includes-

Prof. Dr. Mahmood Osman Imam from Department of Finance, University of Dhaka
worked on "Volatility in the Stock Return: Evidence from Dhaka Stock Exchange
(2003)" and another article titled "The Pricing of Initial Public Offerings: Theory and
Evidence (1998)”.

Prof. Mohammad Sadiqul Islam and Sirajum Munira from Department of Finance,
University of Dhaka has worked on “IPO Flipping and its Determinants in
Bangladesh (2004)”. In their paper, they attempted to determine the degree of IPO
flipping and to investigate the factors that explain IPO flipping in Bangladesh. Based
on a sample of on 96 IPOs in Bangladesh during the period between January 1994 and
December 2001, they documented that the average IPO flipping has been 29.67
percent in the first week, 74.21 percent in the first month and 177.3 percent in the first
three months in the initial aftermarket. They reported that the size of the issue has
significant negative influence and the institutional participation in the issue has
significant positive influence on IPO flipping. In addition, they also find that flipping
is relatively lower in the hot issue market and that flipping varies significantly in
different sectors.

Amirus Salat (University of Dhaka), Mohammad Mominul Hoque Bhuiyan (Asian

University of Bangladesh), Muhammad Zahedur Rahman (Eastern University) have
worked on “Performance Evaluation of the Companies After Initial Public Offerings
(2004)”. They examined the operational performance of companies after IPO in
Bangladesh based on a sample of eight companies taken from 1999 to 2000 IPO's out
of eighteen companies during that period and reported that “most of the companies
made optimistic forecast in their prospectus during the IPO”. They made an attempt to
find that whether they are able to reach their desire expectations. They have studied
the post IPO performance of the companies in the respect of project implementation,
fund utilization, IPO expense, holding of Annual General Meeting, penalization
imposed by Securities and Exchange Commission, payment of dividend etc. The

10
study shows that the performances of most of the companies were not satisfactory as
per above criteria.

Dr. Musa and Dr. Mujibul Hoque worked on " An explanation of IPO Underpricing,
Test of Asymmetric Information Hypothesis: Evidence from DSE (2003)".

But globally Short run underpricing has gone through extensive observation and
found that regardless of the method of pricing, IPOs tend to yield substantial returns
in the days (and sometimes weeks) immediately following issue.

Previous studies have shown that the IPOs of common stock yield positive short-run
raw returns (Rock, 1986; Jog and Riding, 1987; Tinic, 1988, Finn and Higham, 1988;
Ritter, 1991; Keasey and Short, 1992; Levis, 1993; Kunz and Aggarwal, 1994; Lee,
Taylor and Walter, 1996).

The positive short-run returns documented in the literature are interpreted as an

evidence of underpricing in the offer price. Carter and Manaster (1990) develop an
equilibrium model that explains the relationship between this underpricing and the
prestige of the underwriter who brings the issue to the market. According to their
model, prestigious underwriters (those with high reputation) are associated with lower
amounts of IPO underpricing. Since the early 1970s, several studies have tested this
argument by using different measures of underwriter reputation (McDonald and
Fisher, 1972; Block and Stanley, 1980; Neuberger and LaChapelle, 1983; Beatty and
Ritter, 1986; Johnson and Miller, 1988; Carter and Manaster, 1990; Booth and Chua,
1996; Nanda and Yun, 1997; Carter, Dark and Singh, 1998. Similar to results from
developed markets, several studies document positive abnormal initial day IPO
returns in emerging markets (Dawson, 1987; Aggarwal, Leal and Hernandez, 1993;
Lee, Taylor and Walter, 1996b). On the other hand, several characteristics of
emerging markets might cause the relationship between underwriter reputation and
IPO performance in these markets to be different than the relationship observed in
developed markets (Harvey, 1995). It is usually argued that the information
asymmetry is severe and the informational efficiency is low in emerging markets.

11
A summary of initial returns in major markets:

Ritter (1987), Welch (1989), Ibbotson (1994) and Rajan and Servaes (1997) among
others provide evidence suggesting that the existence of average initial returns of up
to 16% has been a regular feature of the US new issue market.

Lee (1994), Jacquillat (1986), Kaneko and Pettway (1994) and Ljungqvist (1997)
among others provide evidence of abnormal returns of up to 14% in the developed
markets of the world such as Australia, France, Japan and Germany.

For British IPOs, the studies of Dimson (1979), Buckland (1981), the Bank of
England (1990), Jenkinson and Mayer (1988) and Levis (1993) indicate average first
day returns ranging from 8.6% to 17%.

Country specific initial return emerged from Empirical works as Brazil 78.5%,
Finland 9.6%, India 35.3%, Japan 32.5%, Korea 78.1% and usually Smaller offerings
underpriced by more than larger ones.

Theoretical ground

An IPO can be a risky investment. For the individual investor, it is tough to predict
what the stock or shares will do on its initial day of trading and in the near future
since there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, and they are
therefore subject to additional uncertainty regarding their future value. This
uncertainty should provide reward to risk taker.

Concerning the general issue of underpricing, it appears that there is a player in each
party who is incentivized to underprice. The investment bank views underpricing as a
form of compensation. The insider, or manager, has personal wealth incentives, and
the outsider, or hired party (investment bank) is incentivized as well.

12
Besides empirical evidences the dominant theories explain underpricing are like the
followings-

- It is obvious that some firms “good” and some “bad” in the economy. Firms
cannot reveal this credibly so price is same for all firms. Informed investors can
tell “good” firms from “bad” but uninformed cannot identify and thus Informed
investors only buy “good” firms. Typically all buyers of “bad” firms are
uninformed, buyers of “good” firms are mixed (rationing). If price is fair
(averaged over all firms), informed investors have positive returns, uninformed
have negative return. Since uninformed buyers know this, they demand all
firms to be underpriced to compensate them as explained by Rock (1986). It is
the famous winner’s curse model.

- Investment bankers often underprice IPOs to get investors with private info to
truthfully reveal valuations as explained by Benveniste and Spindt (1989)

- Cascades Hypothesis states that Investors normally pay attention to world

around them. If no one else willing to buy, even investor with positive info may
not enter in the market. That’s why Banks often underprice to get first few
investors to buy, hope to start a cascade or a snowball effect. Underpricing is
like paying to advertise and build a brand name here, as explained by Welch
(1992)

- Bank has monopsony power, superior knowledge of market conditions than

firm and Underpricing is the “price” firm pays to bank. And usually Bank uses
underpricing to reward its clients and build relationships. It Works because of
rationing and Clients most often purchase other services, pay high fees as
explained by Baron and Holmstrom (1980)

- Anyone who signs prospectus is usually liable and Underpricing is one way to
avoid lawsuits. However, as empirically found - 93 IPOs that were
subsequently involved in lawsuits had similar initial returns to control firms that
were not sued as stated by Drake and Vetsuypens (1993)

13
- Underpriced issues leave a good taste with investors, allowing firm to sell
future offerings at higher price. Good firms willing to underprice because they
will recoup underpricing in subsequent offerings, as explained by Welch (1989)

- Some countries (obviously Bangladesh) require offer prices set based on book
values. Book values do not take into account growth opportunities, therefore
IPOs are underpriced.

- Banks buy lots of shares in immediate after market to prevent price from
falling. This drives initial prices up, as explained by Ruud (1993). Firms
intentionally underprice in order to have many small dispersed owners. This
both increases liquidity and makes takeovers more difficult. Again If there is
some segmentation between IPO market and broad market, than purchasers
may need extra premium for bearing risk then there exists market
incompleteness.

- Underwriter bears all risk for IPO since agrees to buy at some predetermined
price and Underwriter usually underprices to reduce risk of getting stuck with
an unsuccessful issue. This implies riskier issues have most underpricing. This
is confirmed by several studies - Reilly and Hatfield (1969), Stoll and Curley
(1970), McDonald and Fisher (1972), Reilly (1973), and Bear and Curley
(1975).

- Entrepreneurs care more about change in their wealth than level of wealth. In
IPOs, wealth loss from initial underpricing less than gain on retained shares by
preissue shareholders. Those IPOs that leave money on the table are
simultaneously discovering that they are wealthier than they expected because
the shares gained value as explained by Loughran and Ritter (2002)

- Tinic (1988) suggests that IPO underpricing serves as a form of insurance. He

demonstrates that gross underpricing serves as an efficient form of protection
against legal liabilities and the associated damages to the reputations of both the
investment bankers and the issuers. In other words, this hypothesis posits an
implicit contract between issuers, underwriters and investors. Under this
implicit contract, the investors are provided with excess returns as an ‘insurance

14
 premium’ in return for which they are willing to overlook small errors (e.g.,
related to the disclosure requirements of the securities regulations) without
taking recourse to the courts.

- As noted by Aggarwal, Krigman and Womack that to minimize their risk of

holding unallocated shares investment bankers need sufficient reward. And
obviously compensation should be provided to clients who supply the bank
with substantial business. Rock (1986) suggests that IPO returns are required by
uninformed investors as compensation for the risk of trading against superior
information.

- Another factor was well noted by Habib and Ljungqvist that “Some IPOs are
more underpriced than others because their owners have less reason to care
about underpricing.” This idea examines the extent to which “issuers care about
underpricing.” They note, “issuers care about underpricing primarily to the
extent that they [personally] participate in the offering. The more shares they
sell, the greater their incentive to decrease underpricing.”

A company that is planning an IPO appoints lead managers to help it decide on an

appropriate price at which the shares should be issued. Companies can be floated in a
variety of ways. The choice tends to be influenced by the size of the company, its
riskiness and the institutional and regulatory arrangements in each particular country
There are two ways in which the price of an IPO can be determined: either the
company, with the help of its lead managers, fixes a price or the price is arrived at
through the process of book building.

In Fixed Price Method the investment bank in consultation with the firm fixes the
price at which an investor can subscribe to. This price could be at par value or at a
premium above the par value.

Book Building Method on the other hand fixes a price band instead of a fixed price.
The lowest price in the price band is called as ‘floor price’ and the highest price is
called as ‘cap price’. An investor can subscribe at a price anywhere in the price band.
An investor who wants to subscribe at any price can mention the ‘cut-off price’. This
cut-off price is decided once the bid period is over. Once the issue is closed a book

15
with descending order of prices is prepared. Cut-off price is the price at which the
entire issue gets subscribed. This is the most commonly used method.

In book building mechanism, during the period for which the book for the offer is
open, the bids are collected from investors at various prices, which are within the
price band specified by the issuer. The process is directed towards both the
institutional as well as the retail investors. The issue price is determined after the bid
closure based on the demand generated in the process. Bookbuilding has been widely
adopted in international markets since the early Nineties, Evidenced by Ljungqvist,
Jenkinson, and Wilhelm (2003) and Sherman (2001) for a discussion of global trends
in IPO selling methods.

Bookbuilding vs. Fixed Price:

Fixed price offerings are priced without first soliciting investor demand, with price
discovery taking place mainly in the aftermarket. In contrast, bookbuilding involves
road shows and one-to-one meetings with potential investors that allow the
underwriter to ‘discover’ investor valuations prior to setting the offer price.

Both methods require that money be left on the table for investors in the form of
underpricing. Underpricing is needed in fixed price offerings in order to compensate
the uninformed retail investors for the winner’s curse they face as informed investors
crowd them out of good deals (Rock, 1986). While the winner’s curse is not a concern
in bookbuilding -- because the underwriter solicits investor information prior to
pricing -- a discount is still required to reward investors for surrendering information
(Benveniste and Spindt, 1989).Several papers have compared in theoretical settings
the underpricing required under the two methods, and the consensus finding has been
that bookbuilding requires on average a lower discount (e.g., Benveniste and
Wilhelm, 1990, Spatt and Srivastava, 1991, Benveniste and Busaba, 1997, and Biais
and Faugeron-Crouzet, 2001).

Investors who possess information about the value of an IPO can participate in the
offering as well as trade strategically in the aftermarket. Both the bookbuilding and
the fixed price IPO selling methods require more underpricing when aftermarket

16
trading by informed investors is considered. Bookbuilding becomes especially costly,
since the potential for profit in the aftermarket adversely affects investors’ bidding
behavior in the premarket. Unless the underwriter building a book can target a small
enough subset of the informed investors, a fixed price strategy that allocates the issue
to retail investors produces higher proceeds on average, contrary to the conventional
wisdom in the literature.

The only way an investor benefits from possessing information is through receiving
allocations of shares in IPOs. Put differently, an informed investor who does not
participate at the IPO stage cannot make money by trading in the aftermarket. This
assumption, however, is in sharp contrast to the fundamental premise underlying the
market microstructure literature, which focuses on the trading behavior of, and the
profit made by, informed investors. It also prohibits the consideration of the IPO
process as a sub game within a broader context in which informed investors can
choose to participate in the premarket of an IPO, wait until the aftermarket and then
trade on their information, or do both.

The inability of informed investors to generate profits in the aftermarket is of

paramount importance in the design of the price/allocation rule in the existing
bookbuilding models. In these models, the investment banker, on behalf of the issuing
firm, attempts to gather investor feedback prior to setting an offer price. To induce
investors to truthfully reveal interest, the banker designs a price/allocation rule that,
on the one hand, minimizes the benefits from downplaying interest and, on the other,
rewards investors for truthfully revealing strong demand.

The threat to cut the allocation to investors who reveal weak interest is the “stick”
with which the banker “punishes” cheating investors, and the allocation of
underpriced shares is the “carrot” offered to truth tellers. The “stick” might not be as
threatening, however, if investors who do not receive an allocation in the IPO can still
profit from their hidden (misrepresented) information through trading in the
aftermarket. In fact, the ability to trade in the aftermarket creates further incentive for
investors to misrepresent interest during the premarket, because they can cause
mispricing of the IPO and then trade in the aftermarket to exploit the mispricing. To
outweigh this additional benefit and induce truthtelling during bookbuilding, the

17
“carrot” has to be larger, therefore. In other words, bookbuilding would be more
costly than previously thought if aftermarket trading were considered.

Fixed price offerings also would be more costly in this framework. Even if informed
investors can be completely excluded from IPOs -- a situation that would lead to zero
underpricing in Rock’s (1986) framework -- these investors can still trade
strategically in the aftermarket, profiting at the expense of the uninformed investors
who are allocated the IPO shares and who may have to trade in the aftermarket for
liquidity or other reasons. Several arguments that finalize the debate includes-

• Fixed price offerings require a lower discount than that needed under the
bookbuilding method as modeled in the literature. Misrepresenting
information during bookbuilding and then trading in the aftermarket generates
a higher profit on average for the informed investors than aftermarket trading
in fixed-price offerings. This is because in the first instance, informed
investors can cause and then benefit from the highest possible mispricing,
requiring the underwriter building a book to pay (through underpricing) for the
full value of investor information. In fixed price offerings, the underwriter sets
the offer price by integrating over possible investor information, and any
mispricing that remains is due to the ‘absence’ rather than the
misrepresentation of information. It is therefore cheaper for the firm to sell its
offering through the fixed price method.

• There is a strategy that makes price discovery in the premarket cheaper. If

investor pieces of information are sufficiently correlated, the banker building a
book can target a subset of the informed investors that is just enough to buy
the whole issue. The targeted investors can be induced to surrender their
information through the promise of larger allocations of slightly underpriced
shares, as the alternative for these investors if they withhold information is to
compete in the aftermarket with the rest of the informed public. If the ratio of
the targeted investors to the entire informed public is small enough,
underpricing under bookbuilding could drop below that required under fixed
price

18
 • And last, the SEC should review the efficiency of the bookbuilding
mechanism. Benveniste and Wilhelm (1990) show that successful
bookbuilding requires that the underwriter have discretion over share
allocations. Specifically, the banker has to be able to discriminate among
investors participating in the premarket on the basis of the indications they
give. Without such discretion, the banker cannot solicit reliable indications
and bookbuilding loses its advantage even relative to a fixed-price strategy
that suffers from the winner’s curse like in Rock (1986). The dominance of
bookbuilding can only be established if the banker has the added discretion to
limit the participation in the premarket to a select group from the informed
investors at large.

Why Price Rises in the Secondary Market?

The price increases in the secondary market because of ownership constraints in the
primary market and heterogeneous information to all investors about the stock. To
illustrate the relation between the ownership-constrained offer price and the
equilibrium secondary market price consider a simple example of a firm seeking to go
public and sell two shares (public float). Based on the information about value
provided, two investors A and B value the shares as VA and VB. The relations
between offer price (OP) and the equilibrium secondary market price (MP), and thus
initial underpricing or initial returns (IR) will depend on several conditions:

(1) If VA = V B, then OP=MP, IR=0;

(2) If VA>< VB, and there is a wealth constraint (i.e. each investor can only
afford one share) at the initial offering and in the secondary market,
then OP=MP, IR=0;
(3) If VA><VB , there is no wealth constraint, and the ownership restrictions
are not binding at the offering (i.e. the investor who values the issue
the most is allowed to purchase both shares at the offering), then
OP=MP, IR=0;

19
 (4) If VA><VB, there is no wealth constraint, and ownership restrictions are
binding at the offering but are relaxed in the secondary market, then
OP<MP and IR>0.

In the first case, there is no divergence of opinion among the investors; the issue will
not be underpriced. Both the investor values the share at the same price. In case (2),
because of the wealth constraint in both the initial offering and the secondary market,
each investor can only afford one share. There is divergence of opinion, for example
VA > V B. The offer price will be set at V B to clear the market. Each investor will be
allocated one share. The investor who values the share higher (investor A) cannot
drive up the price in the secondary market because of the wealth constraint.
Therefore, OP=MP and IR=0. In case (3), wealth constraint is not binding and each
investor (A or B) can afford to buy both shares. Let say VA > V B. The offer price
will be set at VA, which is the market clearing price. The investor who values the
shares the most (investor A) will purchase both shares. Therefore, OP=MP and IR=0.

The more interesting case is case (4). Here the wealth constraint is not binding, but
there is an ownership restriction at the offering and that results in rationing. Again
assume VA > V B. Investor A is willing to buy both shares at VA, but he is rationed to
buy only one because of ownership restriction. To satisfy the ownership restriction,
i.e. to sell shares to both investors A and B, offer price has to be set at V B or below
(to entice investor B to participate in the offering). At V B or lower, both investor A
and B would like to buy 2 shares. Because they are rationed to only one share each,
they (especially investor A) will try to bid up the price in the secondary market when
the ownership restriction is relaxed, thus resulting in initial underpricing (OP<MP and
IR>0).

Investors A and B have different estimates of value because they have heterogeneous
opinions. The price of the IPOs will eventually increase in the initial trading day.
That’s why there exist underpricing. This means that initial underpricing is
unintentional and is a natural by-product of divergence of opinion and ownership
dispersion constraint.

20
Again, we know the scarcity of capital is a common feature of emerging markets. The
rapid industrialization in the country required capital. As there are no attractive
investment opportunities other than fixed earning from the bank or investment in
share, the domestic institutions and households can only either deposit their money in
banks or invest in shares. The low interest rates offered depositors derived a high
demand for equity investments. The IPO pricing phenomenon is formulated as the
following chart.

B F
PF D
E H
PE

O QE Q

The demand curve of investors is BE and the supply curve of issuers is OD. In a
competitive primary market, the equilibrium of demand and supply, point E, prices
the IPO shares at E P with issuing E Q amount of shares. The demands of investors
are actually depressed at this stage, because of the asymmetric information about the
intrinsic values of IPO firms. The process of public offerings disseminates
information. After learning more about the quality of IPO firms, the demand of shares
increases and the demand curve shifts from BE to GH on the first day of trading.
Since the quantity of IPO shares cannot be changed immediately; there is a temporary
rigidity of supplies. The supply curve is OEF. On the first day of public trading, the
share price therefore increases from E P to F P. Due to the information asymmetry
between the issuer and investor, the investor demands some extra reward. This IPO
investment risk is observed worldwide, and may also induce part of the underpricing
in Bangladesh.

21
The Market

The capital market in Bangladesh has a relatively recent beginning. It is gradually

evolving as an economic institution in response to the internal requirements of a
fledgling modern economy, which has emerged as a result of economic development
and industrialization efforts. Bangladesh is still a predominantly agricultural
economy. However, the industrialization process over the last three decades since
independence has diversified the economic base of the country at least to some
degree. In spite of some degree of industrialization and in spite of the fact that the
equity market has existed since 1954, it still displays features of an emerging equity
market for several reasons.

First, market capitalization is still a very small proportion of the country’s GDP.
Second, investment in stocks and shareholder participation is limited to a small
proportion of the population.
Third, domestic resource mobilization for industrialization and economic
development is still done primarily through the regular banking system. And
Finally, with increased liberalization and openness of the economy since the 1990's,
the equity market in this country has experienced some growth partly due to increased
foreign participation.

Two stock markets in Bangladesh, one is named Dhaka Stock Exchange ( DSE) in
Dhaka and another one is called Chittagong Stock Exchange ( CSE) in Chittagong
comprise of the capital market of Bangladesh. A central regulatory agency which is
the Securities and Exchange Commission (SEC) overseeing the activities of the entire
capital market including issue of capital, monitoring the issue of stocks, and operation
of the stock markets. The number of listed companies in DSE are 432 of which are
shares,8 debentures,1 corporate bond and 10 mutual funds. The listed companies in
CSE are 242 with shares, 16 mutual funds and 1 debentures.

22
 DSE in last 4 Years
Particulars FY05 FY06 FY07 FY08
No. of listed securities* 277 303 325 378
Issued equity and deb* (in billion) 66.4 85.7 164.3 284.4
New equity through private placement & IPOs (in billion) 1.2 1.7 3.1 7.4
Market capitalization (in billion) 224.6 225.3 491.7 964.8
Turnover in value (in billion) 75.6 46 164.7 543.3
Turnover in volume (no. in billion) 1 0.6 2 3.8
All-share price Index 1713 1339.5 1764.2 2588
Source : Dhaka Stock Exchange.
* Including companies, mutual funds, debentures and
Government Treasury Bonds.

During the period of 2005 and 2007 total number of tradable securities increased by
11.12% and the issued capital of all listed securities increased by 62.33%. In 2008
market has been affluent by 2 more mutual fund and 12 IPOs. However, both total
turnover of securities and total traded amount of securities has increased enormously
compared to that of the previous year. The total Market Capitalization of all listed
Securities in the DSE amounted to US$ 10822.36 million in 2007.

It is to be noted here that special incentives are provided to encourage nonresident

Bangladeshis to invest in the capital market. The nonresident Bangladeshis were to
enjoy facilities similar to those of the foreign investors. Moreover, they can buy
newly issued shares/debentures of Bangladeshi companies and can maintain foreign
currency deposits (styled as NFCD1 account) in special accounts for up to five years.
A quota of 10% reserved for nonresident Bangladeshis in primary shares (IPO) has
also been initiated.

Recent Developments in DSE:

Twelve companies raised new equity of Taka 7.4 billion in the primary market in
FY08, higher than the Taka 3.1 billion raised by the same number of companies in
FY07. Of the new equity issued, Taka 1.5 billion raised through private placement
and Taka 5.9 billion (of which Taka 2.4 billion was collected by three SOEs from the
capital market in direct listing opportunities) through public offerings in FY08 as
against Taka 0.04 billion raised through private placements and Taka 3.1 billion
through public offerings in FY07.

23
 Market condition judgement

3500.00
3000.00
Index 2500.00
2000.00
Index
1500.00
1000.00
500.00
0.00

1-Jul-2005

1-Jul-2006

1-Jul-2007

1-Jul-2008
1-Jan-2005

1-Jan-2006

1-Jan-2007

1-Jan-2008
1-Apr-2005

1-Oct-2005

1-Apr-2006

1-Oct-2006

1-Apr-2007

1-Oct-2007

1-Apr-2008

1-Oct-2008
Date

In the sample period the market had a mixed performance. The moving average shows
that the index was decreasing up to July 2006 and then rebounded. From July 2006 to
December 2008 the market was hot. IPOs at that period had greater return. The
volume of public offerings in FY08 was predictably oversubscribed more than four
times indicating the high demand of new securities in the primary market. Bonus
shares valued at Taka 9.2 billion were issued in FY08 by seventy-one companies
against retained profits, higher than the Taka 6.8 billion issued in FY07 by fifty
companies.

Experiment Data

Variables on which the effectiveness of fixed method can be determined will be

determined with using two variables as - First-day returns and the final offering price
range for IPOs.

A. Variables
The first-day return is a percentage change in the price of a share at the end of its first
trading day from the offering price. Investors experience positive first-day returns
when they sell their shares to other investors at a higher price than what they paid the
issuer during the IPO. By implying that there are other investors in the market who
are willing to pay a higher price for the new shares, positive first day returns strongly
suggest that an issuer’s shares were under-priced, and that the issuer failed to
maximize gross proceeds received from the IPO. On the other hand, negative first day
returns may be observed if the IPO attracted fewer investors than expected. Finally,

24
positive or negative first-day returns also directly measure the fluctuations in the
issuer’s share price immediately after the IPO.

Offering prices were obtained from IPO prospectuses filed by the issuer with the SEC.
First-day closing prices were obtained from the DSE database. Before investment
banks promote an IPO, they calculate an initial price for the issuer’s shares after
analyzing the issuer’s business prospects and financial position.

B. Data
The sample I analyze is some what narrow to carry out an explanation about the Short
run performance of the IPOs. I gather a sample of IPOs brought to the Dhaka Stock
Exchange between 2005 and 2008.While working at SEC I go through different IPO
files, which give data on the extent of over-subscription of issues. From prospectus I
got some information on issuer-specific characteristics prior to the IPO date. Firm
data includes book value of asset, profit, age of the firm. Issue data include the offer
data, number of share issued, amount raised, offer price, first aftermarket price and
other offering detail.

To estimate under-pricing, we need information on the stock prices of issues on their

opening day of trading. These price data are obtained from the records of the stock
exchange. the sample is dominated by a bit hot IPO tenure and strong dominance of
Banking and Insurance Sector. Of the 32 IPOs, all of the firm used the fixed pricing
and all but Barger Paints used Book value or Net asset value per share. Barger Paints
(BD) Ltd used Dividend Discount Model (DDM) in asset valuation.

Sector Representation in IPOs

32%

6% Bank
Insurance
6%
Engineering
3% Fuel & Power
Miscellaneous

53%

32 IPOs in the sample is basically dominated by the Banking and Insurance sector.
Only seven IPOs were from engineering, fuel and power and Miscellaneous.

25
Experiment Methodology

To facilitate comparison on empirical IPO underperformance throughout the globe I

calculated the return using the methodology used by Aggarwal, Leal and Hernandez
(1993). For simplicity, I describe the methodology below.

The total return for stock ‘i’ at the end of the first trading day is calculated as:
Ri1 = (Pi1 / Pi0) − 1
Where, Pi1 is the price stock ‘i’ at the close of the first trading day, Pi 0 is the offer
price and Ri1 is the total first-day return on a stock.

The return on the market index (DSE General Index) during the same time period is:
Rm1 = (Im1 / Im0) − 1

Where Im1 is the DSE General Index value at the end of first trading day and Im0 is
the index value on the offer day of the corresponding stock, while Rm1 is the first
day’s market return.

Using these two returns, the Market Adjusted Abnormal Return (MAAR) for each
IPO on the first day of trading is computed as:

MAARi1 = 100 × {[( 1 + Ri1 ) / ( 1 + Rm1 )] − 1}

Thus the value of MAARi2, MAARi3,……MAARit for IPO ‘2,3,………N’ on the

2nd,3rd,….tth day of trading can be computed in the similar way.

This measure of the abnormal returns does not take into account the systematic risk
associated with each issue. When MAARi1 is interpreted as an abnormal return, the
assumption is that the systematic risk of the IPOs under consideration is the same as
that of the index.

I have used the DSE General Index as a market proxy rather than DSI or DSE-20 for a
valid reason that the use of DSI or DSE-20 will lead to misleading assessments of

26
abnormal performance when the composition of the sample of companies under
assessment differs from the DSI and DSE-20 index criterion.

The DSE General Index measures the performance of companies other than z
category and as the new issues are fresh one and has uploaded in the market by
satisfying criterion and the index is not constrained within 20 companies, as in DSE-
20 which itself is a debate whether actually it represents Blue Chips properly. DSE
General Index Properly reflects the Bangladeshi Equity Market.

Performance measurement for a group of IPOs is assessed by the wealth relative,

which is defined as:
WR1 = [1 + 1/N RiN ] / [1 + 1/N RiN]
Where WR1 is the Wealth Relative for the first day’s trading and N is the total number
of IPOs in the sample. A wealth relative above one (1<WR1) implies that the IPOs
outperformed the market in that period. A wealth relative below one (1>WR1)
indicates underperformance.

The sample Mean of Market Adjusted Abnormal Return for the first trading day,
MAARi1, may be viewed as a performance index which reflects the return, in excess
of the market return, on a Taka of investment divided equally among N new issues in
a sample:

MAARi1 = 1/N MAARiN

To test the hypothesis that MAAR i1 equals zero, I computed the associated Z statistic:

Z = [MAARi1] / SD] / [SQRT(N)]

Where SD is the standard deviation of MAARi1. If underpricing of new issues exists,

one would expect a positive value of the MAARi1.

27
Aggregation of daily abnormal returns

Commonly used IPO event study methodology is followed to calculate abnormal

returns and test for significance. Cumulative excess returns are examined over a 1-
month period following the date the security is listed on the Dhaka Stock Exchange.
The DSE General Index serves as a proxy for the market returns.

The following three equations describe the process for computing excess returns (xr),
average excess returns (AXR), and cumulative excess returns (CXR). First, the excess
return for each security i on day t (xri,t) is computed as the difference between the
return of the security on day t (ri,t ) and the return of the market index on day t (rm,t).
For computing monthly excess returns, t represents the respective month.

xrit= rit-rmt
Next, the average excess return for the sample for each month t (AXRt) is derived
from the mean of the sum of the excess returns of each of the n securities during
month t.
AXRt= (1/N)Σ xrit

Finally, cumulative excess returns as of month T are computed as the summation of

the average excess returns starting at month 1 until month T.

CXRit= Σ AXRt

P-values for monthly average excess returns (AXR) and the cumulative average
excess returns (CXR) are calculated and tested using a Z-score to determine
significance at the .10 alpha level. The respective p-values for these tests are given in
the Tables 1 and 2. Cumulative abnormal returns are tested for each month to
determine whether the foreign equity is yielding a greater return than DSE General
Index. A p-value of .10 or less indicates the abnormal return or cumulative abnormal
return is significantly different from 0. The p-value is derived from the Z score:

Z Test = 1 – Normal Distribution [(X-Uo)/S/square root N)]

28
where: X is the sample mean; Uo = 0 to test that the average is different from 0; S is
the sample standard deviation; N is the number of monthly returns in the sample; The
normal distribution of the z-score tells the probability that X is not equal to zero.
Therefore, a p-value of .10 indicates that there is a 90 percent probability that the
foreign equity return differs from the DSE General Index return. Calculations are
performed through Microsoft Excel.

Regression Analysis
In this section linear regressions are used to investigate the determinants of
underpricing of the initial public offerings on the DSE. The explanatory variables are
selected on the basis of previous empirical work, with emphasis on testing the
signaling hypothesis. The initial regression model investigated is the following:

Raw Return = β + β log Issue_Size + β log Total_Asset + β log Net_Profit + β log

o 1 2 3 4

Age_Firm + β Risk+ β Market_Return.

5 6

29
Results of Experiment
I will now apply the methodology outlined above to assess the returns on the IPOs in
my sample. I compute WRt, MAARit, and the associated t statistic. I will look for
what is the Market adjusted Abnormal Return on the First Trading Day of the stock
and also the Month level Mispricing. After analyzing the underpricing phenomenon I
will check the Short Run Performance of IPOs in DSE. With Regression analysis, the
determinants of the Initial return will be pointed out.

Sample 32
Underpriced 29
Overpriced 3

The average returns on the first day of trading are 221.38 percent for the entire
sample.the result is statistically significant (p=.4247).

Return by Issue sige

large 209.13
Sige of issue

medium 209.27 return (%)

small 239.16

190 200 210 220 230 240 250

Return (%)

Of the 32 IPOs in the sample only 3 were overpriced. If segmented by the issue size
then Large and medium issue emerges with the same return like 209 % but on the
other hand small issue has a return has 239.16%. Small issues suffer from larger
underpricing. The total sample was assessed by small (<100 million; n=13), medium
(100<500 million; n=13) and large issue (>500 million; n=6) variant. So the return
does not differ immensely if analyzed issue wise. The empirical results here
contradict the theory that the large issues will have relatively high return to agitate the
investors to absorb large issue.

30
 Return by Underw riters Pres tige
return (%)

high prestige 222.71

Prestige
low prestige 217.99

214 216 218 220 222 224

Re turn (%)

The prestige was determined by two Reputational Variable (URV1 and URV2)
measured by no of total issue and percentage of total issue underwritten by a specific
investment bank. Segmented by the underwriter’s prestige the return is almost same
some where near 220%.This means the investment banks here in Bangladesh does not
have that much influence in the initial return.
Re turn by M ark e t Condition
Return (%)
Market Condition

Hot 183.76

Cool 247.13

0.00 50.00 100.00 150.00 200.00 250.00 300.00

Re turn (%)

Market has significant impact on the MAAR and in the hot market (July 2006 to
December 2008) the return was 247.13% while in cool market (before July 2006) it is
183.76%.

Yearw is e IPO Re turn

2005 282.61

2006 117.96
Year

2007 225.20

2008 357.84

0.00 100.00 200.00 300.00 400.00

Return

31
 Return on IPOs in 2006 was a bit slacking after 282.61% in 2005. In 2008 the overall
market was in upward trend and IPOs at that period experienced 357.84% return on
an average.

Losers & Winners

MAAR %
900.00

800.00

700.00

600.00

500.00
R eturn

400.00

300.00

200.00

100.00

0.00

L
N

IF
AN

NK

S
NK

A
NS

NK

F IN

E
AN K

K
H

N
P

ER
S

NS
NT

C
TL

SL

IF
C

NS
IN
R PB
ST
XF I

A IN

L IF
SSE

N SO

-100.00

RLE
L IF

AFI

AN
DB

CA

E SL
N IN

B IF
IP D

T IL

IC F
EN I

RB

BA
BA

BA
OR

OL I
IL F
OU

OW
ME
A CI
CR
EN I
ST B

IO N

NA
ME

AB

RB
K AB

GE
NT I
EL A

GA

M IE
LDE
M IE

GR
AC
ST S

AM
H JA
SA P

AM
YG

PR I
AM

N IT
I TP
AP

GH
UN
PR I
PH O

NA
UN

B ER
CO

TRU

PR A
BR

PR O

PR E
IS L
C IT

LAN
PR E
F ID

PA R

ASI
GO

SA L
F IR

SU M
SH A

JA M

ME
SO
IPOs

The winners and losers of this exercise are exhibited in the charts above. Amongst the
32 sample SAPORTL has significant mispricing with a first day return 781.49% this
is the maximum in the sample. The sample has a mean return of 222.61% in the 1st
trading day. The offering was underwritten by Alliance Financial Services Limited
(AFSL). ASIAPACINS is found overpriced with a negative return of -40.90%.
Wealth Relative
(WR) 3.216

Wealth Relative (WR) is 3.216 means that the sample IPOs has outperformed the
market 300 times in the First day of trading.
Panel A: Descriptive Statistics for
the 32 IPOs
Standard
Variable Mean Minimum 25th 50th 75th Maximum Deviation
Offer price (OP) 108.28 10.00 100.00 100.00 100.00 225.00 47.39
First day market price 369.84 19.20 161.25 307.25 453.50 1550.00 338.12
Proceeds, millions 2657.79 91.50 354.56 1174.68 3749.65 17806.30 3605.08
Earnings per share 22.50 0.60 7.89 15.10 39.32 67.37 20.09
Preissue book value/share 148.07 10.22 110.53 136.44 163.08 402.52 76.77
P/E (OP/EPS) 14.44 1.48 3.56 6.51 10.66 119.05 25.71
M/Bpre(MV/BPSpreissue) 2.48 0.47 1.42 2.11 2.99 7.24 1.68

32
Panel A reports some descriptive statistics on firm specific and market related
characteristics. The sample suffers from significant underpricing on an average.
ILFSL had a 225 taka offer price while the offer price ranges from 10-225 taka. First
day market price was thundering 1550.00 taka for DBH. ASIAPACINS on the
other hand was overpriced and this 100 taka face value share had a 59.25 taka closing
price at the end of the first day. P/E (OP/EPS) was maximum 119.05 with a variability
of 25.71.

P/E Comparison
500.00

450.00

400.00

350.00

300.00
P/E

250.00

200.00

150.00

100.00

50.00

0.00
PHOENIXFIN
CONTININS

PRIMELIFE

SUMITPOWER

PRIMEFIN
PROGRESLIF
CITYGENINS

PREMIERLEA

MEGHNALIFE
PREMIERBAN

GOLDENSON
UNIONCAP

NITOLINS
ISLAMICFIN
BERGERPBL
FIDELASSET

PARAMOUNT

PRAGATILIF
FIRSTSBANK

TRUSTBANK

IPDC

SONARBAINS
BIFC
SAPORTL

JAMUNABANK

ASIAPACINS
DBH

ILFSL

SALAMCRST
BRACBANK
SHAHJABANK

LANKABAFIN

IPOs
IPO Pricing Multiplier Secondary Market P/E

Secondary market P/E multiple is significantly higher than that of offering price
earnings and the graph shows that the multiple became five fold higher in case of
Prime life insurance and Progressive life insurance. The earnings of life insurance
firm in the sample were based on the prospectus and assessed by the actuary there on.

33
 Daily After M arket Return

103.00
102.00
101.00
100.00
Return

99.00
98.00
97.00
96.00
95.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Days

After floatation of the share the return in the subsequent period up to 30 days varied
from -03.40 to 3.002%. The fluctuation even though had a negative trend.

Cumulative Holding Period Return

100.00
98.00
96.00
94.00
Days

92.00
90.00
88.00
86.00
84.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Return

In graph above data indicate that the 30 days cumulative excess returns for the IPOs
in the sample is a -10.22%. Therefore, findings indicate that investments in the IPOs
for a 30 day period by taking a long position at the 1st day tend to perform poorer than
the market as a whole.

34
Determinants Attribution

Here is the determinant factors that are expected to have in effect on the IPO returns.
In order to test the different characteristics on the underpricing level some issue
related characteristics, issuer related characteristics and market related characteristics
have been identified as dependent variable. The initial return has been regressed
against these variables. To avoid co linearity with the market variable, MAAR has not
been used as market return is a functional variable in the model.

Descriptive Statistics

Std.
N Minimum Maximum Mean Deviation
Return at Day 1 32 -40.90 781.49 222.61 209.09
Issue Size (mn) 32 45 1150 268.28 310.750
Age of the Firm 32 2 33 8.72 6.012
Total Asset (mn) 32 74.22 46382.59 5928.15 10605.53
Net Profit (mn) 32 .256 7989.00 341.88 1401.14
sponsor's share
holdings (thou) 32 147 260000 12360.78 45538.49
Market Return 32 -.0049 .0067 .00127 .0024
Risk 32 .722 123.37 25.38 28.76
Valid N (listwise) 32

Amongst the 32 sample First day return is maximum 781.49% (SAPORTL) with a
mean of 222.61%. ASIAPACINS is found overpriced with a negative return of -
40.90%. The sample include relatively juvenile firm in the industry SALAMCRST
having only 2 years of business experience and on the other hand experienced
one like BERGERPBL. All of the firms are doing good business and profit making is
a continuous. LANKABAFIN has largest sponsors holdings (260 million). With a
mean of 1.27% last 30 days before the issue on an average the market has a -4.9% to
6.70% return range. The return is extremely volatile with a variability of 2.4%. The
return of the issue in the 30 days window shows much volatility.

35
 Correlations
sponsor's
Return Issue Age Total Net share
at Day Size of the Asset Profit holdings Market
Pearson 1 (mn) Firm (mn) (mn) (thou) Return Risk
Correlation Return at Day 1 1.000 -.047 -.156 .120 .147 -.109 .306 .871
Issue Size (mn) -.047 1.000 -.097 .662 -.103 -.076 .031 .008
Age of the Firm -.156 -.097 1.000 -.097 -.033 .057 -.017 -.127
Total Asset (mn) .120 .662 -.097 1.000 -.030 -.035 .254 .215
Net Profit (mn) .147 -.103 -.033 -.030 1.000 -.054 -.074 .018
sponsor' share
holdings (thou) -.109 -.076 .057 -.035 -.054 1.000 -.142 -.171
Market Return .306 .031 -.017 .254 -.074 -.142 1.000 .200
Risk .871 .008 -.127 .215 .018 -.171 .200 1.000
Sig. (1- Return at Day 1 . .399 .196 .257 .210 .276 .044 .000
tailed) Issue Size (mn) .399 . .299 .000 .288 .340 .434 .482
Age of the Firm .196 .299 . .299 .428 .377 .463 .244
Total Asset (mn) .257 .000 .299 . .436 .425 .081 .119
Net Profit (mn) .210 .288 .428 .436 . .385 .344 .461
sponsor's share
holdings (thou) .276 .340 .377 .425 .385 . .220 .174
Market Return .044 .434 .463 .081 .344 .220 . .136
Risk .000 .482 .244 .119 .461 .174 .136 .
N 32 32 32 32 32 32 32 32

First day return has a statistically significant correlation with the return variability of
the issued securities. This means that the risk of the security requires extra reward in
the form of price increment and thus with positive return.

The First day return is negatively correlated with Issue Size (mn), Age of the Firm
and sponsor's share holdings (thou) and positively related with Total Asset (mn),
Net Profit (mn), Market Return and Risk of the issue. Return depends based on the
hot or cool market issue. That is when the market return is positive the issued security
has positive return. This is because the investors believe that the price momentum of
the market will remain same in the neat future.

36
Model Summary(b)
Mode Std.
l Adj. Error of Change Statistics Durbin-
R R2 R2 Estimate R2 F Sig. F Watson
Change Change df1 df2 Change
1 .903 a .815 .761 102.141 .815 15.129 7 24 .000 2.374

a Predictors: (Constant), Risk, Issue Size (mn), Net Profit (mn), Age of the Firm, sponsor's share
holdings (thou), Market Return, Total Asset (mn) b Dependent Variable: Return at Day 1

In summary above, First day return is predicted from Issue Size (mn), Age of the Firm
and sponsor's share holdings (thou), Total Asset (mn), Net Profit (mn), Market Return
and Risk of the issue. This output shows all independent variables here together
explain 76.10% of the variance in return for this sample. R2 change is the same as R2
because the variables were entered at the same time (not stepwise or in blocks), so
there is only one regression model to report. Since there is only one model, "Sig F
Change" is the overall significance of the model, which for one model is also the
significance of adding the explaining variables to the model in addition to the
intercept. In my sample the F- Statistic is significant, means the variable deemed to
explain the initial return has a significant impact. As Durbin-Watson statistic is 2.374
that’s why I reject the data are autocorrelated (serially dependent) and the
observations are independent.

ANOVA(b)
Sum of Mean
Model Squares df Square F Sig.
1 Regression 1104912.67 7 157844.66 15.129 .000(a)
Residual 250390.02 24 10432.91
Total 1355302.70 31

a Predictors: (Constant), Risk, Issue Size (mn), Net Profit (mn), Age of the Firm, sponsor's
hare holdings (thou), Market Return, Total Asset (mn)
b Dependent Variable: Return at Day 1

The F-Statistic in the ANOVA table is same as the MODEL SUMMARY and
significant at .000 level.

37
Coefficients(a)
Unstandardized Standardized 95% Confidence
Coefficients Coefficients Interval for B
Std. t Sig. Lower Upper
B Error Beta Bound Bound
(Constant) 52.582 44.896 1.171 .253 -40.078 145.242
Issue Size (mn) .037 .083 .055 .445 .660 -.134 .208
Age of the
-1.784 3.095 -.051 -.577 .570 -8.172 4.604
Firm
Total Asset
-.003 .003 -.149 -1.164 .256 -.008 .002
(mn)
Net Profit (mn) .022 .013 .149 1.676 .107 -.005 .050
sponsor's share
holdings (thou) .000 .000 .076 .839 .409 -.001 .001
Market Return 16442.7 8221.32 .189 2.000 .057 -525.27 33410.6
Risk 6.313 .684 .868 9.234 .000 4.902 7.724

a Dependent Variable: Return at Day 1

The risk of the IPOs issued is significant and a good predictor of the IPOs first day
return. Market return and net profit have relatively high importance in explaining the
variation in the return.

In the Confidence Intervals section we see that 0 is between the upper and lower
bounds for the b coefficient for Issue Size (mn), Age of the Firm and sponsor's share
holdings (thou), Total Asset (mn), Net Profit (mn) and Market Return, meaning that
the coefficient for these variables cannot be assumed at the 95% confidence level to
be different from 0 (this is a different way of saying age is not significant). Because
Risk of the issue is significant, 0 is not within its upper and lower confidence bounds.
The zero-order and partial correlations for Risk are almost same because when I
control the zero-order correlation of Risk with Return for Issue Size (mn), Age of the
Firm and sponsor's share holdings (thou), Total Asset (mn), Net Profit(mn) and
Market Return , these has very little influence.

38
Explanation
This is evident from the fact that both underpricing is affected by publicly available
information known prior to the IPO. The following are the variables that are likely to
affect the IPO excess return and the demand for IPO units.

Investment Risks:

IPO underpricing is a universal phenomenon. There was 111.58 percent money “left
on the table” in my sample. The theory of asymmetric information is thus far the most
accepted underpricing rationale. It argues that the investors are afraid of the winners’
curse (Rock 1986) or a negative information cascade (Welch 1992). IPO subscribers’
worries mean that there are significant investment risks in the primary market. The
IPO-specific investment risks depress the demand of investors, which is relieved after
flotation. This provides a theoretical foundation for the shift of demand curves from
BE to GH in my framework. This shift of IPO demand curves and the consequent
change of equilibrium prices are observed in the Bangladesh primary market.

The hypotheses may not cover all of the risks in Bangladesh primary markets, but
they can provide a good test of the demand shift from BE to GH described in the chart
above.

Informational Risk:

Beatty and Rock (1986) argue that the expected underpricing is an increasing function
of uncertainty. IPO underpricing of a better-known firm is lower, since a larger firm is
usually better known than a smaller one. A firm with a longer history is also better
known than one with a shorter history.
These observations lead to our first two hypotheses.

Hypothesis 1.1: Initial returns of IPOs are a negative function of corporate size;
Observed phenomenon: the corporate size explains -14.9% of the initial return and the
coefficient of the logarithm of corporate assets is significant at .256 level. The
underpricing is higher in smaller sized firm and vice versa. Thus the hypothesis is
supported.

39
Hypothesis 1.2: Initial returns of IPOs are a negative function of corporate history.
Observed phenomenon: The year of business parameter explains -5.1% of initial
return. A firm with a longer corporate history should also be relatively better known
and therefore it is less underpriced.

Managerial risk:

McConnell and Servaes (1990) show that, up to a certain point, corporate value
increases with insider ownership. When a firm has high inside ownership, insiders
should be reluctant to underprice the firm’s IPO shares.
Hypothesis 1.3: The size of insider ownership is negatively related to initial returns.
Observed phenomenon: 7.6% is explained by the sponsor’s shareholdings. There is
significant relation between initial returns and the sizes of managerial shareholdings.

Issue size:

Larger IPOs generally more underpriced, perhaps to enable traders absorb the larger
quantity of securities.
Hypothesis 1.4: the offer size is positively related to initial returns.
Observed phenomenon: Result is found contrary here. The smaller IPOs found to
have greater underpriced. The underpricing of IPOs was greater than was necessary to
attract a sufficient level of demand.

Risk of the issue:

It is the standard deviation of daily excess return over 30 days after the IPO. Theory
predicts a positive relationship between underpricing and uncertainty. Rock (1986, p.
189) stated: “the greater the uncertainty about the true price of the new shares, the
greater the advantage of the informed investors and the deeper the discount the firm
must offer to entice uninformed investors into the market.” Welch (1992) proposed
that underpricing is an increasing function of a mean-preserving increase in the spread
of investors’ prior beliefs about the IPO price. In addition, risk-averse underwriters
with firm commitment to absorb the quantity that is unsold at the IPO price may
underprice the issue to reduce their risk. Indeed, empirical evidence shows that
underpricing rises with price uncertainty (Ritter (1984)).

40
Greater uncertainty about the issued securities led to greater underpricing as well as
greater excess demand, which resulted in smaller allocation. That is, the greater
underpricing of riskier IPOs did not necessarily provide greater risk premiums to their
buyers. The result here is consistent with the suggestion that riskier IPOs are priced
lower to protect the interests of risk-averse underwriters.

Oversubscription Rate:

Under the offering quotas, investors in the primary market are not assured of getting
the shares they subscribe to. The underwriters allocate shares by lotteries, and the
lottery success rate of IPO applications reflects the interaction of controlled supplies
and depressed demands in the primary market.
Over Subscriptions Times
Over Subscriptions Times FY04 FY05 FY06 FY07
-Value (Tk. mn) 13.15 12.48 10.62 8.18

Depressed demand in Dhaka Stock Exchange is somewhat responsible for the higher
aftermarket return.

Financial Regulations

The financial regulations of the fixed-pricing method and too much dependence on
accounting numbers while determining the offering price bring about extraordinary
IPO underpricing in Bangladesh. Discounted Cash Flow (DCF) better reflects firms
potential in terms of growth and future prospect. As investors are paying today and
thus hold long position based on future value of the share, thus the present value of
the future cash flows are very much relevant and should be judged before determining
the price. Again Book building method can lower the underpricing because the
investors demand can be better reflected in BBM. Till now Bangladesh has not
adopted BBM (adoption process is ongoing) and thus the price offered is not that
much efficient. In Bangladesh underpricing is severe to induce primary stock holders
to secondary market. This is a rationale why equities here are underpriced.

41
Towards pricing efficiency

Present IPO Pricing Mechanism in Bangladesh:

Fixed Price- price set by the issuer and issue manager at which all the shares are
issued.
Auction – Price is determined from the bids received in sealed envelope.
Book Building- IPO offering price is determined based on demand from
institutionalinvestors.

Determination of Offering Price:

If ordinary shares are being offered, the factors considered in determining

the offering price shall be set forth in the prospectus.

If the issue price of the ordinary share is higher than the par value thereof,
justification of the premium should be stated with reference to-
(i) Net asset value per share at historical or current costs;
(ii) Earning-based-value per share calculated on the basis of weighted
average of net profit after tax for immediately preceding five years or
such shorter period during which the issuer was in commercial
operation;
(iii) Projected earnings per share/book value for the next three accounting
year as per the issuers own assessment duly certified by the auditor of
the issuer;
(iv) Average market price per share of similar stock for the last six months
immediately prior to the offer for common stocks or if issuance is the
repeat public offering market price per share of common stock of the
issuer for the aforesaid period; and
(v) All other factors with justification which have been taken into account
by the issuer for fixing the premium: Provided that premium on public
offering shall not exceed the amount of premium charged on shares
issued within immediately preceding one year.

42
Determination of Offering Price and Distribution of Shares under fixed method:

Issuer and issue manager fix price;

All the shares are issued at same price;

10% shares are reserved for Non-resident Bangladeshi

10% shares are reserved for Mutual Funds

If oversubscribed allocated holding lottery

The Securities and Exchange Commission is adopting new methods of pricing the
IPOs. The Book Building method is under consideration and draft has already been
prepared. The Book Building will bring more pricing efficiency. There will be a
balance between the demand for and supply of the security since book-built price will
be close to the market price.

Book Building: a new era

Security and Exchange Commission is working to introduce Book Building in

Bangladesh. SEC Consultative Committee [CC] has already prepared a draft; Draft
was presented before SEC Advisory Committee on 12 Dec. 2007. Draft rules was
approved by the Commission on its 298th Meeting held on 02 December 2008 for
obtaining comments. Presentation has been made for the stakeholders on 17 February
2008 and 14 September 2008 organized by DSE and CSE. Presentation was made for
honorable Finance Advisor on 26 Nov. 2008 where, among others, Ministry of
Finance, Bangladesh Bank and Stock Exchanges were presented. Comments are being
reviewed for incorporation in the final draft.

Eligibility for Offering Shares under Book Building Method:

[a] The company must have at least Tk. 300 million net-worth;
[b] Shall offer at least 10% shares of paid up capital (including intended offer)
or Tk. 300 million whichever is higher;
[c] Shall be in commercial operation for at least immediate past five years;
[d] Shall have profit in three years out of the immediate last five completed
accounting/financial year;

43
[e] Shall have no accumulated loss at the time of application;
[f] Shall audit at least its latest financial statements by a firm of chartered
accountants from the panel of auditors of the Commission;
[g] Shall be regular in holding annual general meeting;
[h] The Commission if deems appropriate for the interest of investor or
development of capital market, may exempt or relax any of the above
requirements.

Draft of Procedures of Book Building Method for Bangladesh Capital Market :

The Book Building Process will have two stages:

Price Discovery and Book Building by eligible institutional investors;

Public offer based on price found out through Book Building Process.
Stage I:
Price Discovery and Book Building by eligible institutional investors:
• Issuer shall invite for indicative price offer from the eligible institutional
investor through proper disclosure, presentations, documents, seminars and
road shows;
• Draft prospectus shall contain indicative price based on price indications
obtained from at least five eligible institutional investors covering at least
three different categories of investors;
• Issuer shall disclose in the prospectus detail about the qualitative and
quantitative factors justifying the indicative price.

Eligible Institutional Investors:

[a] Merchant Bankers excepting the issue manager and underwriter to the
proposed issue;
[b] Foreign Institutional Investors registered with the Commission;
[c] Recognized Pension Funds and Provident Funds;
[d] Financial Institutions under regulatory authority of Bangladesh Bank;
[e] Insurance Companies regulated under Insurance Ordinance, 2008;
[f] Institutional venture capital and Institutional investors registered with the
Commission;
[g] Any other person permitted by the Commission for this purpose.

44
Book Building Method for IPO Pricing:

The indicative price shall be the basis for formal price building with an
upward and downward band of 20% of indicative price;

Institutional investors shall bid within the price band;

If institutional quota is not cleared within the price band the issue would be
considered cancelled unless the floor price is further lowered within the face
value of security with the approval of the Commission;

Bidding shall commence after getting consent from the Commission;

No institutional investor shall be allowed to quote for more than 10% of the
total security offered for sale;

The bidding will be handled through an uniform and integrated automated
system of the stock exchanges;

The volume and value of bid at different prices will be displayed on the
monitor without identifying the bidder;

The institutional bidders will be allotted shares on pro-rata basis at the
weighted average price of the bids that would exhaust the total number of
securities being issued to them;

Payment Mechanism of Institutional Investor:

Institutional bidders shall deposit 20% of the amount of bid in advance to

the designated bank account; and

the rest 80% shall be deposited within 5 [five] working days prior to the
date of opening subscription for general public.

In case of failure to deposit remaining amount 50% of bid money
deposited by them shall be forfeited by the Commission;

There shall be a lock-in of 15 [Fifteen] trading days from the first trading
day on the security issued to the eligible institutional investor.

Stage II

Public offer based on price found out through Book Building Process:

45
Mechanism of distribution of Shares to General Public:

General Investor, mutual funds and NRBs shall buy at the cut-off price as
was found out through book building process through Stage I;

Cut- off price means the lowest price offered by the bidders at which the
total issue is exhausted.

Issuer may issue share at below cut off price to general investor with the
approval of the Commission;

General investor will apply through banker to the issue and in case of over
subscription distribution will be made through lottery.
Distribution Mechanism of Shares:

Size of Total Issue Eligible General Public

Institutional Mutual Fund NRB Portion
Investors’ Portion Portion
Tk. 30 to Tk. 50 Crore 20% 10% 10% 60% or balance amount
Over 50 Crore to Tk. 100 30% 10% 10% 50% or balance amount
Crore
Over Tk. 100 Cr. to Tk. 500 40% 10% 10% 40% or balance amount
Crore
Over Tk. 500 Crore 50% 10% 10% 30% or balance amount

Probable Impact of Book Building Method on Bangladeshi Capital Market:

Positive Impacts

Good issuers would be encouraged to raise fund from capital market;

Difference between issue price and first day trading price will be narrowed
down;

Tendency for opening fake BO accounts will be reduced;

There will be a balance between the demand for and supply of the security
since book-built price will be close to the market price.
Probable Negative Impacts

Institutional Investors may tend to bid higher price disregarding

fundamentals of the company in bullish market and lower price in the
bearish market;

Retail investors may be disinclined to buy security at higher price of the
issue;

Shares may be issued at price which is more than the real value of
underlying assets.

46
FCF inclusion in Fixed Price method is a growing demand:

Book value – variously called shareholder equity and net worth – is broadly defined
as total assets minus total liabilities. This difference is the excess value a business has
generated in its life. Hence, book value measures only what a business has done, and
does not necessarily have bearing on what it will do. Net book value is the value of a
firm’s equity as seen through the eyes of an accountant. In mature companies and
industries, past history is often a strong indicator of future performance; in such
situations, book value is an effective tool for determining a company’s present value.

Net book value and other accounting-based valuation methods should be used only
when no other information is available. Because these methods are based on historical
cost data, they have little relation to current fair market value. Assets can be worth
more or less than their historical cost depending on inflation, obsolescence,
accounting methods, or a host of other reasons. In addition, the book value of debt
does not consider the market reaction to changing interest rates, debt markets, or the
current credit quality of the company.

Some times value is determined using multiples. This value is generally determined
by examining multiples ascribed to similar companies or by examining a “standard”
long term business model of a company or industry.

In both case, owing to its unique evolution and young age, many firms do not have a
long business history or a set of comparable companies from which to draw from. A
long term “standard” business model for the company is also difficult to ascertain; at
this stage, no one knows if a 2% return on assets, a 20% return on sales, or a 15%
return on net portfolio outstanding is appropriate. Without either tool, determining the
appropriate multiples is impossible. The situation is further complicated by the
differences between firms. Due to the youth of the industry, a plethora of models
continues to persist. Each model has different operating profiles, different profit
potentials, and carries different risk.

47
A few perfectly legitimate accounting adjustments can tweak earnings to
management's delight, but at the end of the day, it's the cash that's left over that count.
Businesses that produce healthy amounts of free cash flow can be valued with a
higher degree of certainty and margin of safety than simply going on profits.

An effective approach must both be forward looking and function in an embryonic

industry. A valuation approach that meets these requirements is the discounted cash
flow (DCF) valuation.

Free Cash Flows are defined as cash flows that remain after we subtract from
expected revenues any expected operating costs and the capital expenditures
necessary to sustain, and hopefully improve, the cash flows. The Free Cash Flows to
Equity (FCFE) represent the free cash available to the equity holder of the company
and is good measure of the company’s capacity to pay dividends and provide capital
gains opportunity to its equity investors. Discounted FCFE, is therefore, is appropriate
way to value equity of a company which is in its initial life cycle stage, does not trade
in public and so far has not paid dividends like most Listed companies.
However FCF, or cash flow from operations less capital expenditures, can't be
manipulated through accounting changes. Remember that the value of any business is
the present value of the future cash flows of the business.

The analyst must look accurately far into the future. Discounted cash flows are
commonly used when a project is too unique for comparison or there are no existing
cash flows to which it can be compared.
A special case of the DCF method is the expected value method, where you run
multiple possible scenarios and then multiply each discounted value by the probability
of its scenario occurring. This provides an expected or “risked” value.

The scenarios and probabilities must include all possible outcomes (in other words,
the sum of all of the probabilities must equal 1) Expected value has most of the
drawbacks of the DCF method, but it allows some risks (those considered explicitly
by mutually exclusive scenarios) to be addressed more directly. It is useful in
situations where a discrete number of possible outcomes have widely differing cash
flows.

48
Conclusion

Regulators are interested in mechanisms that facilitate better functioning IPO markets.
Bangladesh has a relatively juvenile capital market with low correlation with
developed markets in the advanced countries. That’s why the market has a history of
uninterrupted operations even across the financial turmoil around the world as of late.
Historically, the only alternative available for a firm contemplating a public issue was
to make a fixed price offering. The firm going public would set a price and open the
issue for subscription. Allocations were made on a strictly proportionate basis. Until
recently, issuers and investment banks had no pricing flexibility because issue prices
were effectively constrained to accounting par value or the accounting book value of
equity.

Recently Securities and Exchange Commission is going to introduce book building

method to make the pricing more efficient. In principle, book-building can alter the
incentives of both investors and investment banks participating in the IPO process.
These changes can be positive or negative. Discretion in allocation gives investment
banks greater credibility in extracting information because it offers investors the
incentive to engage in more aggressive information gathering prior to an issue. On the
other hand, discretion can also offer opportunities for abuse. Investment banks may
use the flexibility in allocation to dispense favors especially in a market like Banglade

49
 Sample judgment
Coefficients(a)

Zero-order Partial Part Tolerance VIF

(Constant)
Issue Size (mn) -.047 .090 .039 .509 1.965
Age of the Firm -.156 -.117 -.051 .972 1.029
Total Asset (mn) .120 -.231 -.102 .471 2.122
Net Profit (mn) .147 .324 .147 .971 1.030
sponsor's share
holdings (thou) -.109 .169 .074 .936 1.068
Market Return .306 .378 .175 .863 1.159
Risk .871 .883 .810 .871 1.149

Part (semi-partial) correlation for Risk is the same as the zero-order correlation and
little lower than the partial correlation because the remaining variables has very little
control. Tolerance and VIF are tests for multicollinearity (overly high correlation
among the independents), which is zero problem here because VIF is surrounding
between 1 and 2 where the common rule of thumb that only VIF>4.0 indicates a
multicollinearity problem.
Coefficient Correlations(a)
sponsor's
Issue Net Age of share Total
Size Profit the holdings Market Asset
Risk (mn) (mn) Firm (thou) Return (mn)
Correlations Risk 1.000 .180 .001 .113 .163 -.099 -.242
Issue Size (mn) .180 1.000 .133 .062 .133 .190 -.691
Net Profit (mn) .001 .133 1.000 .038 .076 .102 -.079
Age of the
.113 .062 .038 1.000 -.029 -.015 .013
Firm
sponsor's share
holdings (thou) .163 .133 .076 -.029 1.000 .142 -.113
Market Return -.099 .190 .102 -.015 .142 1.000 -.288
Total Asset
-.242 -.691 -.079 .013 -.113 -.288 1.000
(mn)
Covariances Risk .467 .010 .000 .240 .000 -557.672 .000
Issue Size (mn) .010 .007 .000 .016 .000 129.155 .000
Net Profit (mn) .000 .000 .000 .002 .000 11.175 .000
Age of the
.240 .016 .002 9.57 .000 -374.482 .000
Firm
sponsor's share
holdings (thou) .000 .000 .000 .000 .000 .484 .000
Market Return 67590239.
-557.6 129.155 11.175 -374.48 .484 -5.970
905
Total Asset
.000 .000 .000 .000 .000 -5.970 .000
(mn)
a Dependent Variable: Return at Day 1

61
Rule of thumb that multicollinearity exists if a correlation is > .90 or several are >.7
in the correlation matrix formed by all the independents is judged and the correlation
is not suffering from multicollinearity.

Collinearity Diagnostics(a)

Eigen Condition
Model Dimension value Index
1 1 3.706 1.000
2 1.080 1.852
3 1.006 1.919
4 .795 2.160
5 .616 2.452
6 .483 2.769
7 .210 4.199
8 .104 5.977
a Dependent Variable: Return at Day 1

Model Variance Proportions

sponsor'
Issue Age Total Net s share Marke
Size of the Asset Profit holdings t
(Constant) (mn) Firm (mn) (mn) (thou) Return Risk
1 .01 .01 .01 .01 .00 .00 .02 .02
.00 .01 .02 .03 .08 .46 .06 .01
.00 .01 .00 .01 .64 .17 .00 .01
.00 .08 .03 .11 .13 .00 .20 .04
.02 .01 .08 .03 .10 .24 .48 .01
.00 .02 .10 .00 .01 .06 .12 .68
.05 .45 .32 .60 .00 .01 .06 .00
.91 .40 .44 .19 .04 .05 .06 .23

I used Condition indices to flag excessive collinearity in the data. A condition index
over 30 suggests serious collinearity problems and an index over 15 indicates possible
collinearity problems.

My sample’s Condition Index ranges from 5.977 to 1.000 and no collinearity problem
exists. The variables does not have high linear dependence and multicollinearity, with
the effect that small data changes or arithmetic errors does not translate into very large
changes or errors in the regression analysis.

62
The figure above confirms that this example has no collinearity problem since no
condition index approaches 30, making it unnecessary to examine variance
proportions.

Residuals Statistics(a)

Std.
Minimum Maximum Mean Deviation N
Predicted Value 54.34 863.17 222.61 188.79 32
Residual -140.24 230.401 .000 89.87 32
Std. Predicted Value -.891 3.39 .000 1.00 32
Std. Residual -1.373 2.25 .000 .88 32
a Dependent Variable: Return at Day 1

The sample used here fits the model very well and there is vary little difference
between the observed values and those predicted by the regression equation

63
References

 Michelle Lowrya, G. William Schwertb, 2001. “Is the IPO pricingprocess

efficient ?”

 Beatty, P. R. and Ritter, R. J. (1986). Investment Banking, Reputation and the

Underpricing of Initial Public Offerings. Journal of Financial Economics, Vol.
15, pp. 213-232.

 Carter, R. and Manaster, S. (1990). Initial Public Offerings and Underwriter

 Grinblatt, M. and Hwang, C. Y. (1989). Signaling and the Pricing of New

Issues. Journal of Finance, Vol. 44, No. 2, pp. 393-420.

 Levis, M. (1993). The Long Run Performance of Initial Public Offerings: The
UK Experience 1980-1988. Financial Management, Vol. 22, No. 1, pp. 28-41.

 Magnusson, M.A. and Wydick, B. (2002). How Efficient Are Africa’s

Emerging Stock Markets? Journal of Development Studes, Vol. 38, No. 4, pp.
141-156.

 Reber, B.; Berry, B. and Toms, S. (2005). Firm resources and quality
signaling: evidence from UK initial public offerings. Applied Financial
Economics, Vol. 15, No. 8, pp. 575-586.

 Ritter, J. (1984). Signaling and the Valuation of Unseasoned New Issues: A

Comment. Journal of Finance, Vol. 34, No. 4, pp. 1231-1237.

 Rock, K. (1986). Why new issues are underpriced. Journal of Financial

Economics, Vol. 15, pp. 187-212.

 Tinic, S. (1988). Anatomy of Initial Public Offerings of Common Stock.

Journal of Finance, Vol. 43, No. 4, pp. 789 – 822.

 Titman, S. and Trueman, B. (1986). Information Quality and the Valuation of

New Issues. Journal of Accounting and Economics, Vol. 8, pp. 159-172.

64
 Benveniste, L., Spindt, P., 1989. How investment bankers determine the offer
price and allocation of new issues. Journal of Financial Economics 24, 343–
362.

 M. Lowry, G.W. Schwert / Journal of Financial Economics 71 (2004) 3–26 25

 Bradley, D., Jordan, B., 2002. Partial adjustment to public information and
IPO underpricing. Journal of Financial and Quantitative Analysis 37, 595–616.

 Carter, R., Manaster, S., 1990. Initial public offerings and underwriter
reputation. Journal of Finance 45, 1045–1068.

 Daniel, K., 2002. Discussion of ‘Why don’t issuers get upset about leaving
money on the table in IPOS?’Review of Financial Studies 15, 445–454.

 Ibbotson, R., 1975. Price performance of common stock new issues. Journal of
Financial Economics 2, 235–272.

 Ibbotson, R., Sindelar, J., Ritter, J., 1994. The market’s problems with the
pricingof initial public offerings. Journal of Applied Corporate Finance,66–74.

 Ljungqvist, A., Wilhelm, W., 2002. IPO allocations: discriminatory or

discretionary? Journal of Financial Economics 65, 167–201.

 Loughran, T., Ritter, J., 2002a. Why don’t issuers get upset about leaving
money on the table in IPOS?

 Ritter, J., Welch, I., 2000. A review of IPO activity, pricing, and allocations.
Journal of Finance 57, 1795–1828.

 Jing, Padgett, 2002 . Short run underpricing and its characteristics in Chinese
IPO markets.

65