A Review of IPO Underpricing: Evidences from Developed, Developing and Emerging Markets

Abstract

The empirical evidence of high initial return from Initial Public Offerings (IPO) phenomena known as underpricing. From last three decades, it is an ongoing issue of every financial market throughout the world. We review underpricing research in developed, developing and emerging markets. In this regard, a thorough review of existing literature has been done. In result, higher underpricing of IPOs is found in emerging markets than developing and developed market because in emerging market issuer of IPOs takes underpricing as a signal of their quality IPOs, where information asymmetry is a significant element. Furthermore, based on the review, we managed to pinpoint significant factors that influenced the initial return. However, scale of underpricing among different countries varies depending on the factors, discussed in detail. Various theories and proposition have developed in these three markets to elucidate the phenomena of underpricing. We believe that there exist few factors that could be used as the primary determinants of IPO underpricing in future. These factors are country specific environment, micro and macro-economic factors, quality of legal framework based on listing regulations, and socio-political factors and marketing of IPO, which could provide a promising area of research.