Determinants of Initial Public Offerings Subscription Level

(Evidence from Egyptian market)

Kareem Yahia Mohamed a, ▪ Mai Abd Elzaher a ▪Hassan El-Sadya

a Faculty of Commerce, Cairo University, Giza, Egypt
▪
Corresponding author: [email protected]

Abstract
The main objective of this study is to identify the critical variables that affect the sum
of money that investors pay to subscribe to an initial public offering (IPO) of a company listed
on the Egyptian market. The continues need to understand the factors that affected IPO
subscription levels, whether high or low is the main drive for carefully examining this
phenomenon in Egypt. The population from which the sample was drawn is the total number
of companies on the Egyptian stock exchange between 2005 and 2022. The study’s data were
initially sourced from the disclosure department of the Egyptian Stock Exchange. To identify
the factors that influenced the volume of investor subscriptions during a company’s IPO,
multiple regression analyses were carried out to look into the connection between independent
variables and subscription level as a dependent variable.

Keywords: IPOs, Subscription level, Egyptian stock market, Underwriters.

1
1. Introduction
The primary objective of an initial public offering (IPO) is to successfully raise money to
permit the expansion of a business without increasing costs of borrowing or depleting the
company’s cash reserves. Two additional reasons for conducting an IPO are to increase the
revenue of the business and the probability of mergers and acquisitions (Christopher, 2017).
A secondary offering followed by a rights issue is a common format for mixed IPOs,
wherein shares are bought and sold at the IPO price then some of the sale proceeds are put back
into the company in light of the distribution of the rights issue to the shareholders who are
selling their shares at the IPO valuation. Because it guarantees that shareholders will have
ownership of their shares as soon as trading resumes on the Egyptian Exchange (EGX), this
structure is preferred; there is no wait for the laborious capital increase formalities to be
finished (Angel et al., 2015).
The oversubscription ratio, which Chowdhry and Sherman (1996) argued was a reliable
indicator of the value of a company and was crucial to the success of an IPO issuance because
it served as a stand-in for investor demand. In an effort to learn more about investor, demand
for IPOs, this study builds on the work of Low and Yong (2011).
The need to ascertain whether the study’s variables, including issue size, offer price, firm
age, financial leverage, return on equity(ROE) , firm size, market volatility, market condition,
and industry type, are what influence the IPO subscription ratio for companies available on the
EGX, a reputable stock exchange in the Middle-East and North Africa region (MENA),
illustrates the research gap. Consequently, the research question is as follows: What elements
influence investor subscription levels for IPOs in the Egyptian stock market whenever
businesses go public.
2. Literature Review
Indicators of oversubscription discovered in the finance literature lend support to the
theories discussed regarding the level of IPO subscription. Researchers have used a variety of
determinants as stand-ins to exemplify the. Theoretical foundations underlying the IPO
subscription level. It is believed that IPO demand has an impact on the level of oversubscription
(Low & Yong, 2011)
To explain the IPO first-day returns, many researchers have used the oversubscription ratio
as an independent variable. The subscription ratio and the IPO procedure’s success were found
to be positively correlated by a number of researchers, including Agarwal et al. (2008);
Boudriga et al. (2009), Kandel et al. (1999), and Chowdhry and Sherman (1996).
To explain investor demand and the long-term performance of Australian IPOs, Dimovski and
Brooks (2004) proposed 13 financial and nonfinancial characteristics. Bhabra and Pettway
(2003) also took into account the firm's financial, operational, and offer characteristics to
determine a firm’s oversubscription. Johnston and Madura (2002) have explained the
distinctions between market- and issue-related characteristics.
Nevertheless, Ogden et al. (2003) unequivocally proved that all IPO characteristics can be
categorized into two groups: those related to the offer (valuation statistics, offer price, primary
shares, secondary shares, ownership statistics, underwriter spread, overallotment option
statistics, and lockup statistics) and those specific to the firm (age statistics, leverage, firm size,
and dividend policy profitability).
Several studies on IPO oversubscription are beginning to publish (e.g., Low & Yong, 2011;
Tajuddin et al., 2016). When researching occurrences of oversubscription Malaysia., Low and
Yong (2011) discovered that the IPO volume, offer price, chance cost to the fund, and investor
zeal are significant variables that significantly affect the ratio of oversubscription.
But Tajuddin et al. (2016) used the use of proceeds for investment to measure growth
opportunity as a deciding factor in analyzing oversubscription. They also concluded that other
variables, which were not looked at in earlier studies, such as firm size, financial leverage, offer

2
price, and industry type, may likewise be factors in oversubscription.
The oversubscription ratio (OSR) also referred as subscription intervals, the public's
interest in an IPO as measured shares of the prospective company and has a significant effect
on the stock immediately following the IPO.
By dividing the total number of shares, the offer is determined for public subscription by
the total number of IPO shares that have been requested (Rasidah et al., 2013).
High subscription time, which probably influenced by the optimism and confidence of
investors about the issue, is a sign of high investor demand for the new IPO issue. Therefore,
both researchers and participants in the Egyptian capital market are interested in learning more
about the factor(s) affecting IPO subscription times.
According to earlier studies, we have concluded that there is much disagreement in
academia regarding the impact of IPO oversubscription on the Egyptian market between 2005
and 2018, a topic that has, as far as we know, has not yet been studied. The analysis becomes
more grounded in reality as a result. In addition, we use a brand-new set of variables to confirm
the type and scope of its influence on the IPO Oversubscription.
Three main stakeholder groups exist with regard to publicly traded companies: the
shareholders, whether they are retail or institutional investors, the underwriters, and the issuing
companies. In most IPOs, one or more investment banks serve as the underwriters. The
company issuing the shares, or the issuer, enters into a contract with a lead underwriter to sell
its shares to the general public, or investors. The underwriter then approaches investors and
makes them offers to buy these shares )Roosenboom, 2007).
A common determinant of IPOs level is the influence that board structures have on
investors’ decisions to buy stock in companies that are preparing to go public. A disadvantage
of a developing market is that investors are unfamiliar with IPO companies. The idea that board
prestige is viewed positively by investors as a sign of organizational legitimacy, reducing the
risk of a new market entry and boosting IPO firm stock performance is supported by the
signaling theory, institutional theory, and sociological research on prestige. In addition, it can
be contended that the characteristics of the board, particularly their sense of status, affect
investors’ perceptions of the board’s prestige (Certo, 2003).
Dhamija & Arora (2017) looked at the connections among ownership structure, corporate
governance, and the IPO process. They examined equity holdings by numerous institutions,
including corporations prior to an IPO using international and domestic financial institutions,
venture capitalists, and banks with and without lending relationships. The authors also looked
at the connections between ownership structure and corporate governance. Using a unique data
set of 152 Indian IPOs from 1999 to 2001, they examined share ownership by key shareholder
groups.
The authors found a relationship between ownership structure and firm-specific variables
like leverage, sales, and profitability as well as variables related to IPOs, for example, the
percentage of equity locked up, gross proceeds, and exchange of listing. A strong correlation
between ownership by various institutional types also exists. Ownership is also connected to
bank lending relationships. Finally, Dhamija & Arora (2017) identified important relationships
between various aspects of corporate governance and ownership. Businesses with foreign
investors, for instance, are more likely to have an external CEO and offer an employee stock
option plan (Hall & Murphy, 2003).
Typically, at the time of a company’s IPO, shares are held by venture capitalists, corporate
investors, insiders, and angel investors. We looked into the role angel investors play in the IPO
process. We found that angel investors provide equity funding in industries where venture
capitalists are less likely to operate and that stockholders in companies with angel investment
are more likely to sell shares during the offering. The fact that angel-backed IPO firms do not
exhibit the same underpricing as venture capital-backed IPO firms suggests that angels may be

3
the preferred investor for early-stage companies (Johnson & Sohl, 2012).
A significant IPO will usually have a lead underwriter that is made up of several investment
banks, or a syndicate. The underwriters keep a commission from the sale of the shares, that is,
a portion of the shares’ market value. According to Gao et al. (2017), the lead underwriters are
typically the ones selling the most shares in an IPO. Practices ensure that issuers benefit from
the marketing efforts of investment bankers. The pre-offer shareholders in the IPO, however,
may also benefit from the success of an investment banker’s marketing efforts.
It is customary for the issuing companies to conduct road shows. Roadshows are meetings
between the underwriters and representatives of the company (typically the CEO, CFO, and
possibly an investor relations specialist) and potential significant investors to market the
offering (Mumtaz et al., 2016). Upon printing and distribution of the initial prospectus, the road
show for an IPO begins and may last 2 to 3 weeks. Depending on the size of the offering and
how the company operates, the road show may include meetings in foreign cities. The price of
the offer is fixed after the completion of the roadshow and the effective date of the registration
statement (Gao et al., 2017).
That the underwriters promise to sell an IPO is not always a given. However, that decision
is dependent on the type of underwriting that is chosen in conjunction with the stock’s issuer.
Depending on the type of underwriting, different amounts of risk are assumed by the
underwriter, and different payment methods are used. The most frequently employed
underwriting techniques include both bought deals and best-effort deals (Williamson, 2009).
In a bought deal, an underwriter purchases a company’s entire IPO issue and then resells it to
the investing public.
The difference between the price the underwriter pays to buy the stock from the issuer
(typically at a discount) and the price it charges to sell it to the general public represents the
amount of compensation that the underwriter receives. The underwriter continues to hold any
unsold shares, so it is in their best interest to sell the entire new issue because in this scenario,
they assume all of the risk associated with selling the stock issue (Chen, 2015).
In a best effort agreement, the underwriter guarantees only to sell the issue to the investing
public at the best price feasible; the company issuing the stock must use its best efforts to do
so without necessarily purchasing any of the IPO issue. As opposed to a purchased deal, the
issuing company keeps the shares that were not sold if a portion of the issue is not sold. In the
best efforts scenario, the underwriter is compensated a flat fee, so even the underwriter’s gains
are constrained if the issue does well because there is less risk involved (Chen, 2015).

3. Research Methodology
All IPOs listed on the EXG between 2005 and 2022 make up the population for the study.
The data came from a website database where information on the offer price, issue size, firm
age, financial leverage, ROE, firm size, market condition, market volatility, and industry type
and prospectus of IPO companies were gathered. This study also divided the population into
five industry classifications, including communications, banking and financial services,
noncyclical consumer goods and services, industrial, and others.
We will use a multiple regression framework to look at the factors that affect the IPO
oversubscription ratio to evaluate the impact of investor demand on the process in the Egyptian
market. We specifically run the regression that is described below:
IPO_SLi,t = α + β1 IPO_SLi,(t-1) + β2 OPi,t + β3 ISi,t+ β4 AGEi,t+ β5 LEVi,t+ β6 ROAi,t+ β7
SIZEi,t+ β8 MVi,t+ β9 MHi,t+ β10 S_SECTORi,t+ β11 M_SECTORi,t + Errori,t
Where OSR, or oversubscription ratio, measures the demand from investors for an IPO. This
ratio determines how frequently investors overdemand an IPO by using the following formula:
IPO_SL = No. of shares subscribed ÷ total shares issued

4
 The following table clarifies how independent variables measured:

Table (1) Measurements and Abbreviation of Independent Variables.

Variables Abbreviation Measurement

IPO offer price OP Offer price of the issue
IPO issue size IS The number of shares issued × the issue price
Firm age AGE Natural Logarithm of firm’s age
Financial leverage LEV Total debts ÷ Total assets
Profitability ROA Net Profit ÷ Total assets
Firm size SIZE Natural Logarithm of firm’s total assets in million
EGP
Market volatility MV Standard deviation of daily market returns over the
period before the closing date of the offer 60 day.
Market Hotness MH Dummy variables , value '1' if hot ; '0' if cold
Service sector S_SECTOR Dummy variable that takes the value of 1 if a firm
operate in service sector and zero otherwise.
Manufacturing sector M_SECTOR Dummy variable that takes the value of 1 if a firm
operate in manufacturing sector and zero
otherwise.
Financial sector F_SECTOR Dummy variable that takes the value of 1 if a firm
operate in financial sector and zero otherwise.

4. Analysis of Data and Discussion of Results

Descriptive Statistics:
We discussed the characteristics of both the continuous and discrete variables used in
manufacturing research in this section in Table (3), including the mean, the standard deviation,
the minimum, and the maximum. According to the above table, the mean, which is the
arithmetic average for the subscription level of the IPO, is 19.10, the standard deviation is 13.53,
and the minimum and maximum values are 1.00 and 61.36, respectively. The minimum and
maximum values for the offer price are sequentially 0.30 and 22.59, with the mean being 9.19
and the standard deviation being 6.27.
Table (3)Descriptive Statistics for the continuous Variables
IPOS_S LNIND-
UBSCRI LNISS(I T(INDU LNFS( FINANCI PROFITAB MARKET_
PTION_ OFFER SSUE STRY FIRM_ FIRM AL_LEVE ILITY_RO VOLATILI
Variables LEVEL _PRICE SIZE) TYPE) AGE SIZE) RAGE A TY
19.1042 9.1890 16.363 18.408 13.858 20.933
Mean 1 39 26 85 97 78 0.147020 0.083441 81.66750
19.0000 7.3584 16.397 18.480 13.000 20.992
Median 0 53 67 83 00 94 0.143014 0.069322 82.04503
Maximu 61.3600 22.594 18.845 21.540 33.000 24.185
m 0 48 95 58 00 75 0.338280 0.199053 123.8334
1.00000 0.3000 13.304 15.520 1.0000 17.958
Minimum 0 00 68 26 00 47 0.015051 0.003844 43.23507
13.5258 6.2775 1.1887 1.3233 8.3579 1.5550
Std. Dev. 7 95 11 01 06 00 0.108150 0.053848 18.93706
0.65444 0.6245 - - 0.5638 -
Skewness 5 60 0.13969 0.26821 71 0.06739 0.396654 0.690086 -0.088335

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 4 9 4
3.53529 2.2013 2.9858 3.0280 2.6576 2.6700
Kurtosis 1 35 07 44 74 91 1.768701 2.452656 2.520522
Jarque- 3.24956 3.5720 0.1271 0.4688 2.2571 0.2063
Bera 4 22 70 97 07 88 3.486332 3.582248 0.424306
Probabilit 0.19695 0.1676 0.9383 0.7910 0.3235 0.9019
y 5 28 94 07 01 52 0.174966 0.166773 0.808841
Observati
ons 39 39 39 39 39 39 39 39 39
Source: By the researcher
The minimum and maximum values for the issue size are sequentially 6.60 and 8.89,
with a mean of 16.36, a standard deviation of 0.63, and a range in between. The mean for the
firm age is 20.93, the standard deviation is 1.56, and the minimum and maximum values are
17.96 and 24.19, respectively. The mean for the value issues is 18.40885, the standard deviation
is 1.323301, and the minimum and maximum values are respectively 15.52026 and 21.54058.
The minimum and maximum values for the firm size are 1 and 33, respectively, with an 8.36
standard deviation.
The minimum and maximum values for financial leverage are respectively 0.015 and
0.034, whereas the mean is 0.015 and the standard deviation is 0.11. Profitability has a mean
of 0.08, a standard deviation of 0.05, and minimum and maximum values of 0.054 and,
respectively. The market volatility’s mean is 81.66750, its standard deviation is 18.93706, and
its minimum and maximum values are respectively 43.24 and 123.83.
Table (4)Descriptive Statistics for the Discrete Variables
IPOMH(MAR
KET SERVICE_SECT MANUFACTURING_SE FINANCIAL_SEC
variables HOTNESS) OR CTOR TOR
Mean 0.589744 0.410256 0.487179 0.102564
Median 1 0 0 0
Maximum 1 1 1 1
Minimum 0 0 0 0
Std. Dev. 0.49831 0.49831 0.50637 0.307355
Skewness -0.3649 0.3649 0.051299 2.619978
Kurtosis 1.133152 1.133152 1.002632 7.864286
Jarque-
Bera 6.52881 6.52881 6.500011 83.06743
Probabilit
y 0.03822 0.03822 0.038774 0
Observatio
ns 39 39 39 39
Source: Compiled by the authors Using SPSS.
The descriptive statistics for IPO market hotness, manufacturing and financial dummy
variables as follows: From the above table, it can be concluded that the mean of IPO market
hotness during the study period is 0.59 which means hat in more than half of the sample the
number of IPOs were greater than the sample average.
The mean of the firms in the service sector during the study period is 0.41which means
that less than half of the firms in the sample operate in the manufacturing sector. The mean of
the firms in the manufacturing sector during the study period is 0.48which means that
approximately half of the firms in the sample operate in the manufacturing sector .the mean of
the firms in the financial sector during the study period is only 0.10 which means that only

6
four firm operate in the financial sector.
4.4. Normality Test:
In order to determine whether the data is normally distributed or not, the researcher
performed the Jarque-Bera test for normality.
Table(5) Jarque-Bera test for normal distrubition
Variable Value probability
IPOS_SUBSCRIPTION_LEVEL 3.25 0.20
OFFER_PRICE 3.57 0.17
LNISS(ISSUE SIZE) 0.13 0.94
LNIND-T(INDUSTRY TYPE) 0.47 0.79
FIRM_AGE 2.26 0.32
LNFS(FIRM SIZE) 0.21 0.90
FINANCIAL_LEVERAGE 3.49 0.17
PROFITABILITY_ROA 3.58 0.17
MARKET_VOLATILITY 0.42 0.81
IPOMH(MARKET HOTNESS) 6.53 0.038
Manufacturing sector 6.53 0.038
Service sector 6.50 0.039
Financial sector 83.07 0
Source: Compiled by the authors Using SPSS.
According to Table (5), By using the Jarque-Bera test at a significant level higher than
(0.05), it can be determined that the normality distribution of research variables in terms of
IPOS_SUBSCRIPTION_LEVEL, and OFFER_PRICE, LNISS(ISSUE SIZE), LNIND-
T(INDUSTRY TYPE), FIRM_AGE, LNFS(FIRM SIZE), FINANCIAL_LEVERAGE,
PROFITABILITY_ROA, and MARKET_VOLATILITY.
In the research variables for IPOMH(MARKET HOTNESS), the manufacturing sector,
the service sector, and the financial sector, on the other hand, are not normally distributed
because the Jarque-Bera statistic's significance is less than (0.05).
It can be said that the data are not significantly skewed because the Pearson skewness
coefficient for all research variables is less than (1). ) Allen G. Bluman (2012).

4.5. Equilibrium or Cointegrating equation Model

Using the Engle-Granger Co-integration test, the following non-stationary time series variables,
both dependent and independent, are examined to see if there are any long-run equilibrium relationships.
Table (6) co-integrating model for dependent and independent variables from 2005 -2022

Dependent tau-statistic Prob.* z-statistic Prob.*

IPOS_SUBSCRIPTION_LEVEL -8.220361 0.0009 -48.19122 0.0013
OFFER_PRICE -5.567637 0.1316 -34.79027 0.1214
LNISS(ISSUE SIZE) -5.057148 0.2628 -31.31407 0.2441
LNIND-T(INDUSTRY TYPE) -6.334813 0.0377 -39.68217 0.0335
FIRM_AGE -7.195219 0.0075 -44.38501 0.0066
LNFS(FIRM SIZE) -7.306225 0.0060 -44.76407 0.0057
FINANCIAL_LEVERAGE -3.775154 0.7782 -21.11569 0.7830
PROFITABILITY_ROA -6.645242 0.0214 -41.45217 0.0190
MARKET_VOLATILITY -3.134949 0.9420 -15.89938 0.9496

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*MacKinnon (1996) p-values.
Source: Compiled by the authors Using SPSS.
Table (6) shows that, based on the Tau-statistic and z-statistic, at a significant level
less than (0.001), there are no long-term equilibrium relationships between the dependent
(IPOS_SUBSCRIPTION) and independent variables (OFFER_PRICE, LNISS(ISSUE SIZE),
LNIND-T(INDUSTRY TYPE), FIRM_AGE, LNFS(FIRM SIZE),
FINANCIAL_LEVERAGE, PROFITABILITY_ROA, MARKET VOLATILITY from2005
to2022.
4.6. Stationary time series test (Group unit root test)
The value of the covariance between two time periods only depends on the distance
between the two time periods and not the actual time at which the covariance is computed for
the research variables in terms of IPOS_SUBSCRIPTION_LEVEL, and OFFER_PRICE,
LNISS(ISSUE SIZE), LNIND-T(INDUSTRY TYPE), FIRM_AGE, LNFS(FIRM SIZE),
FINANCIAL_LEVERAGE,PROFITABILITY_ROA, MARKET_VOLATILITY.

Table (7) Group unit root test for dependent and independent variables from 2005-2022

Table 2: Group unit root test for dependent and independent Cross-
Method
variables from Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
-
Levin, Lin & Chu t* 12.5070 0.0000 9 340
Null: Unit root (assumes individual unit root process)
-
Im, Pesaran and Shin W-stat 12.5497 0.0000 9 340
ADF - Fisher Chi-square 165.262 0.0000 9 340
PP - Fisher Chi-square 165.971 0.0000 9 342

Source: Compiled by the authors Using SPSS.

Table (7) shows that the time series of the dependent and independent variables are
stationary at level 1 (0) based on the constant level through the following criteria: LLC, IPSW,
PP, and ADF, at a significant level less than (0.001).
4.7. Pearson correlation matrix:
The strength and direction of the relationship between the variables under study are
both examined using the correlation matrix. The pearson correlation lies between 1 and -1. .
While the negative value denotes a negative relationship between the study variables,
the positive value denotes a positive relationship. Pearson correlation is displayed in the
following table (8).

8
 Table (8): Pearson correlation matrix to measure a significant linear relationship
between the constructs of both independent and dependent variables
LNIS LNF
S(ISS S(FI
IPOS_SUBSC OFFE UE FIR FINANCIA PROFITA RM MARKET_ IPOMARK SERVIC MANUFACT FINANCI
RIPTION_LE R_PRI SIZE) M_A L_LEVER BILITY_R SIZE VOLATILI ETHOTNE E_SECT URING_SEC AL_SECT
Probability VEL CE GE AGE OA ) TY SS OR TOR OR

IPOS_SUBSC
RIPTION_LE
VEL 1.000000
-----
OFFER_PRIC 1.0000
E -0.435783 00
0.0064 -----
-
LNISS(ISSUE 0.1113 1.000
SIZE) 0.464028 87 000
0.0029 0.4996 -----
-
0.1189 0.040 1.000
FIRM_AGE 0.387541 32 185 000

- -
FINANCIAL_ 0.0819 0.060 0.095
LEVERAGE -0.428707 45 447 974 1.000000
0.714 0.561
0.0067 0.6199 7 1 -----
-
PROFITABILI 0.4140 0.142 0.099
TY_ROA 0.455932 67 923 102 0.172539 1.000000
0.385 0.548
0.0035 0.0088 4 3 0.2936 -----
-
LNFS(FIRM 0.1681 0.502 0.202 1.000
SIZE) 0.538499 57 912 640 -0.061424 -0.052314 000
0.001 0.216
0.0001 0.3062 1 0 0.7103 0.7518 -----
- - -
MARKET_V 0.3124 0.032 0.002 0.128
OLATILITY -0.422503 84 052 573 0.252633 0.462307 023 1.000000
0.846 0.987 0.437
0.0071 0.0528 4 6 0.1207 0.0030 3 -----
IPOMARKET 0.0406 - 0.156 -
HOTNESS -0.241276 97 0.230 344 0.122548 -0.049849 0.289 0.194780 1.000000

2
 556 414
0.157 0.341 0.073
0.9939 0.8057 9 9 0.4573 0.7631 9 0.2347 -----
- -
SERVICE_SE 0.0803 0.133 0.247 0.150
CTOR 0.310892 13 581 964 -0.240944 -0.096530 192 -0.146468 -0.470109 1.000000
0.417 0.128 0.361
0.0541 0.6270 5 0 0.1395 0.5588 4 0.3736 0.0025 -----

0.508 0.061 0.298

0.0031 0.4854 6 1 0.0183 0.0813 0 0.0562 0.0718 0.0000 -----

- - -
FINANCIAL_ 0.0594 0.036 0.096 0.038 -
SECTOR 0.256896 03 852 663 -0.228700 -0.309116 164 -0.270536 0.281963 0.281963 -0.329502 1.000000
0.823 0.558 0.817
0.1144 0.7194 7 3 0.1614 0.0555 6 0.0958 0.0820 0.0820 0.0405 -----

Source: Compiled by the authors Using SPSS.

According to the aforementioned table, there are significant positive linear
relationships between the independent variables of LNFISS, firm age, profitability, and service
sector and the dependent variables of an IPO’ subscription level, with a significance level less
than 0.05. Consequently, businesses in the service sector have seen an increase in subscription
levels. At a 5 percent level of significance, there is no correlation between the level of IPO
subscription and the financial sector.
There is a strong negative correlation between the IPO subscription level and the offer
price, financial leverage, market volatility, and the manufacturing sector. As a result, the
manufacturing sector’s companies have low subscription levels.
4.8. Testing the hypotheses and discussing the results
The statistical analysis was conducted using E-views. The researcher conducted OLS
regression for the study variables in-order to achieve the research objective which is identifying
the determinants of successful IPO in the Egyptian market
Table (9): regression analysis to measure the effect of the covariate Variables on the dependent
variables

Variable Coefficient Std. Error t-Statistic Prob.

IPOS_SUBSCRIPTION_LEVEL(t-1) -0.726392 0.190244 -3.818212 0.0009

OFFER_PRICE -0.688410 0.348706 -1.974185 0.0643
LNISS(ISSUE SIZE) 4.697976 1.498326 3.135483 0.0023
FIRM_AGE 1.080546 0.356912 3.027486 0.0038
FINANCIAL_LEVERAGE -27.33920 13.11983 -2.083807 0.0456
PROFITABILITY_ROA 102.4092 24.73141 -4.140856 0.0003
LNFS(FIRM SIZE) 2.527060 1.188364 2.126503 0.0432

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 MARKET_VOLATILITY -0.352613 0.113145 -3.116470 0.0027
IPOMARKETHOTNESS -7.044649 4.348580 -1.619988 0.0961
SERVICE_SECTOR 6.224719 3.492171 1.782478 0.0853
MANUFACTURING_SECTOR -8.127642 4.047826 -2.007903 0.0551
C 17.14755 28.20931 0.607868 0.5485

R-squared 0.478782 Mean dependent var 19.58063

Adjusted R-squared 0.458267 S.D. dependent var 13.37169
S.E. of regression 11.51622 Akaike info criterion 7.977480
Sum squared resid 3448.209 Schwarz criterion 8.494613
Log likelihood -139.5721 Hannan-Quinn criter. 8.161472
F-statistic 2.171200 Durbin-Watson stat 1.580822
Prob(F-statistic) 0.050981 Wald F-statistic 27.46818
Prob(Wald F-statistic) 0.000000

Source: Compiled by the authors Using SPSS.

IPOS_SUBSCRIPTION_LEVEL = -0.726392*IPOS_SUBSCRIPTION_LEVEL(-1) -
0.688410*OFFER_PRICE + 4.697976*LNISS(ISSUE SIZE) + 1.080546*FIRM_AGE -
27.33920*FINANCIAL_LEVERAGE - 102.4092*PROFITABILITY_ROA +
2.527060*LNFS(FIRM SIZE) - 0.352613*MARKET_VOLATILITY -
7.044649*IPOMARKETHOTNESS + 6.224719*SERVICE_SECTOR -
8.127642*MANUFACTURING_SECTOR + 17.1475505441
According to the Multiple Regression model using ordinary least squares, it can be
concluded that:
The covariate Variables in terms of and the interactions between offer
price,LNISS(ISSUE SIZE),firm age,financial leverage,profitability,LNFIS,market volatility,
IPOMARKETHOTNESS ,service sector, manufacturing sector explain (0.48) from total
variation of IPOS subscription level .
4.8.1 Hypotheses Testing
The researcher draws the following conclusions because the "F test" value is significant
at a level lower than(0.05):
4.8.1.1Testing the first hypothesis (H1)
It can be concluded from the above table that the first hypothesis (H1), which states that there
is a significant relationship between offer price and IPO’s subscription level, is rejected as there
is insignificant relationship between IPO subscription level and the offer price.
4.8.1.2. Testing the second hypothesis (H2)
It can be concluded from the above table that the second hypothesis (H2), which states that
there is a significant relationship between issue size and IPO’s subscription level, is accepted
as there is significant positive relationship between IPO subscription level and the issue size.
4.8 1.3. Testing the third hypothesis (H3)
It can be concluded from the above table that the third hypothesis (H3), which states that
there is a significant relationship between firm size and IPO’s subscription level, is accepted
as there is significant positive relationship between IPO subscription level and the firm size.
4.8.1.4. Testing the fourth hypothesis (H4)
It can be concluded from the above table that the fourth hypothesis (H4), which states that

4
there is a significant relationship between firm age and IPO’s subscription level, is accepted as
there is significant positive relationship between IPO subscription level and the firm age.
4.8.1.5. Testing the fifth hypothesis (H5)
It can be concluded from the above table that the fifth hypothesis (H5), which states
that there is a significant relationship between financial leverage and IPO’s subscription level,
is accepted as there is significant negative relationship between IPO subscription level and the
financial leverage.
4.8.1.6. Testing the sixth hypothesis (H6)
It can be concluded from the above table that the sixth hypothesis (H6), which states
that there is a significant positive relationship between profitability and IPO’s subscription
level, is accepted as the p-value is less than 0.05.
4.8.1.7. Testing the seventh hypothesis (H7)
It can be concluded from the above table that the seventh hypothesis (H7), which states
that there is a significant negative relationship between market volatility and IPO’s
subscription level, is accepted as there is significant relationship between IPO subscription
level and market volatility.
4.8.1.8. Testing the eighth hypothesis (H8)
It can be concluded from the above table that the eighth hypothesis (H8), which states
that there is a significant relationship between IPO market hotness and IPO’s subscription
level, is rejected as there is insignificant relationship between IPO subscription level and IPO
market hotness.
4.8.1.9. Testing the ninth hypothesis (H9)
It can be concluded from the above table that the ninth hypothesis (H9), which states
that there is a significant relationship between type of the industry and IPO’s subscription level,
is rejected as there is insignificant relationship between IPO subscription level and type of the
industry (whether it is manufacturing or financial firm).
4.9.Parameter Estimators Tests
The researcher conducted VIF test for multicollinearity in-order to figure out whether
there is a high correlation between the independent variables and each other or not.

Centered
Variable VIF

IPOS_SUBSCRIPTION_LEVEL(-1) 6.360409
OFFER_PRICE 9.037472
LNISS(ISSUE SIZE) 3.139729
FIRM_AGE 9.624534
FINANCIAL_LEVERAGE 3.198170
PROFITABILITY_ROA 9.323545
LNFS(FIRM SIZE) 3.314690
MARKET_VOLATILITY 7.20344
IPOMARKETHOTNESS 4.241970
SERVICE_SECTOR 3.406352
MANUFACTURING_SECTOR 8.610633
C NA

5
 There is no multicollinearity problem if the VIF is less than 10. Thus, it can be
concluded from the above table that there is no multicollinearity problem.
The researcher conducted Breusch-Pagan test for heteroskedasticity in order to figure
out whether there is heteroskedasticity problem or not.

F-statistic 0.395391 Prob. F(11,26) 0.9455

Obs*R-squared 5.445705 Prob. Chi-Square(11) 0.9077
Scaled explained SS 3.699283 Prob. Chi-Square(11) 0.9779

There is no heteroscedasticity problem if the p-value is more than 0.05. Thus, it can be
concluded from the above table that there is no heteroscedasticity problem.
 Serial Correlation LM Test: Since the significance value of the BG test statistic (≥0.05),
then we would not reject the null hypothesis (H0): there is no serial correlation up to lag

order 𝑝(2).
Autocorrelation Partial Correlation AC PAC Q-Stat Prob

.|. | .|. | 1 0.019 0.019 0.0153 0.902

.|. | .|. | 2 -0.052 -0.052 0.1288 0.938
.|. | .|. | 3 0.027 0.030 0.1615 0.984
.*| . | .*| . | 4 -0.104 -0.109 0.6471 0.958
.*| . | .*| . | 5 -0.149 -0.143 1.6707 0.893
.*| . | .*| . | 6 -0.107 -0.119 2.2195 0.898
.|. | .|. | 7 -0.018 -0.029 2.2348 0.946
.*| . | .*| . | 8 -0.073 -0.096 2.5082 0.961
.|. | .|. | 9 0.067 0.039 2.7426 0.974
.|. | .|. | 10 0.034 -0.024 2.8038 0.986
.|. | .|. | 11 0.006 -0.022 2.8061 0.993
.|. | .|. | 12 0.056 0.017 2.9868 0.996
.|. | .|. | 13 -0.034 -0.055 3.0557 0.998
.*| . | .*| . | 14 -0.110 -0.116 3.8235 0.996
.*| . | .*| . | 15 -0.108 -0.119 4.5996 0.995
.|. | .*| . | 16 -0.061 -0.087 4.8527 0.996

The researcher conducted Ramsey Reset Test for model specification in order to figure
out whether there are variables that should be included in the model though not taken or not.

Value df Probability
F-statistic 2.638865 (2, 24) 0.0921
Likelihood ratio 7.553385 2 0.0229

The model is well specified if the p-value is more than 0.05. Thus, it can be concluded from
the above table that the model is well specified as the p-value is 0.09.

6
IPOS_SUBSCRIPTION_LEVEL = -0.726392*IPOS_SUBSCRIPTION_LEVEL(-1) -
0.688410*OFFER_PRICE + 4.697976*LNISS(ISSUE SIZE) + 1.080546*FIRM_AGE -
27.33920*FINANCIAL_LEVERAGE - 102.4092*PROFITABILITY_ROA +
2.527060*LNFS(FIRM SIZE) - 0.352613*MARKET_VOLATILITY -
7.044649*IPOMARKETHOTNESS + 6.224719*SERVICE_SECTOR -
8.127642*MANUFACTURING_SECTOR + 17.1475505441

 •There is significant positive linear relationships between the Ipos subscription level,
and LNFISS
 There is significant positive linear relationships between the Ipos subscription level,
and firm age
 There is significant positive linear relationships between the Ipos subscription
level,and, profitability
 There is significant positive linear relationships between the Ipos subscription
level,and,,LNFS(FIRM SIZE),
 There is significant positive linear relationships between the Ipos subscription
level,and type of industry
 There is an insignificant relationship between IPO subscription level and financial
sector at 5% significance level.
 There is a significant negative relationship between IPO subscription level and offer
price
 There is a significant negative relationship between IPO subscription level and
financial leverage
 There is a significant negative relationship between IPO subscription level and, market
volatility
There is a significant negative relationship between IPO subscription level and, manufacturing
sector, Which means that firms that operate in the manufacturing sector have low subscription
level.

5. Recommendations
In order to stay competitive, businesses that are engaged in a neck-and-neck race to
develop innovations release their stock to the public shortly after their rival. Collectively, the
results show that a firm's propensity to go public is significantly influenced by the IPO
decisions of its direct rivals. We also identify a novel mechanism—R&D competition—by
which this effect operates.
For "smaller, younger, high-tech, and VC-backed firms," the motivation for going
public in the form of improving firm reputation and attracting analysts' attention is significant
In fact, privatization could reinforce existing gaps in size, wealth, and market shares between
large, capital-intensive firms and SMEs. The announced privatization plan suggests that the
government prefers to “go big” rather than address the constraints presently preventing the
growth of SMEs. If concerned with the latter, the government would prefer IPOs on the
Egyptian Stock Exchange over sales to anchor investors. Stock flotations would attract local
capital, presumably from within market sectors, thus helping to integrate SMEs.
lowering the cost of capital, insiders cashing out (venture capitalist exit), carrying

7
out takeovers, and implementing strategic changes.
If a company is aware that the market undervalues it, it will delay its IPO until the
market is more competitive in order to secure higher prices. When there aren't any other
reputable companies issuing new shares, the companies should avoid going public.A company
that makes its capital available to the market may gain a competitive edge and increased
market prestige; for instance, by raising its market value, the company may inspire
more confidence in other investors, clients, and creditors.
The positive performance of the Egyptian Stock Exchange can be attributed to several
factors, including the government's efforts to improve the investment climate in Egypt, the
country's stable political situation, and the successful implementation of economic reforms.
Additionally, the increasing number of IPOs and the growing interest of foreign investors in
the Egyptian market have also contributed to the positive trend.
6. Future studies
Future studies on the current topic are therefore recommended. Further research in
different market settings seems warranted. Splitting the sample of IPOs into hot and cold
market sub-samples can extend the study. It is aimed to allow comparisons of underpricing
levels different market conditions. It also allows for investigation into the differential in IPO
initial returns between hot and cold markets as characterized by Ritter (1984), where the initial
IPO return is observed to be generally higher in hot market than cold market. As, the purpose
of this paper was to assessment of the performance of Initial public offering (IPOs) In Egypt.
This is an important issue for future research to see if the effect of IPO size, market
volatility, underwriter status and reciprocal of IPO price on the performance of IPOs to other
Islamic countries or is a country-specific characteristic. More firms need to be examined to
identify the market characteristics that drive the returns but this requires the passage of time so
that more IPOs can take place.
Offering new companies on the stock exchange will also work to achieve the greatest
degree of stability in the market and reduce price fluctuations, which currently suffers from the
control of a limited number of shares, indicating that the stock exchange management is
working on a strategy to promote in order to attract new companies and work to increase trading
from by stimulating the demand side.
Based on what was announced in the government companies’ offering program,
which started in 2017, and only a small percentage of it was achieved, pointing out that the
new offerings will lead to an increase in liquidity rates and the attractiveness of the Egyptian
market to foreign investors.

6. Conclusion
Primary, seasoned, or mixed IPOs are all possible in Egypt. Most IPOs are mixed offerings,
which means they incorporate components from both primary and secondary offerings. Due to
this, investors are assured that a portion of the IPO proceeds will be used to reinvest in the
company. It also ensures that shareholders who partially exit through the IPO realize value
(subject to the applicable lock-up requirements).
Egypt conducts IPOs according to a public subscription notice that the Financial
Regulation Authority (FRA) has approved. FRA approval requires the inclusion of adequate
disclosures regarding all pertinent legal, financial, and tax information pertaining to the

8
company, which necessitates thorough due diligence in all those areas. The IPO valuation must
be based on a fair value assessment created by an independent financial adviser (IFA) for the
purpose of pricing the shares to be offered on the EGX. This assessment requires approval from
both the FRA and the annual meeting of the company’s shareholders. The IPO price is provided
as the upper end of the IFA valuation’s price range (Loughran & Ritter, 2004).
An IPO often comprises two parts: a public part as well as a private portion offered through
a private placement to qualified investors provided to retail or general public investors. Pricing
and budgetary allotments for the private component are chosen in accordance with an exercise
called book building that establishes the IPO price for the private component. The IPO price
for the public component may be reduced or the same as the private component, according to
the PSN.
Shares in the public component are allocated in accordance with the final announced price
and order size without the use of book building.From the testing, it can be concluded that there
is a significant relationship between the offer price, issue size, issue value, firm age, financial
leverage, portability, market volatility, IPO’s hotness, type of industry and the IPO’s
subscription level.

9
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