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What Determines the Success of an IPO? Analysis of IPO Underpricing on the Warsaw Stock Exchange

Paweł Małachowski
Paweł Małachowski
 e 
Dominika Gadowska-dos Santos
Dominika Gadowska-dos Santos
   | 21 gen 2021
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Pubblicato online: 21 gen 2021
Pagine: 1 - 14
DOI: https://doi.org/10.2478/ceej-2021-0001
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© 2021 Paweł Małachowski et al., published by Sciendo
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Results of the analysis of the determinants of IPO underpricing on the WSE

Variable Description of variable Impact
PEVC backed Use of private equity/venture capital funds in the transaction −
New shares issued New shares issued in the total number of shares offered during the IPO −
PEV The quotient of the maximum price and the minimum price on the first day of listing +
Turnover The quotient of the trading volume on the first trading day and the number of shares sold during the IPO −
Issued max Offering the maximum issue price within the range established during the book building −
Market return Rates of return of the WIG within 6 months before the IPO +

Descriptive statistics of the variables described in the model

Statistic N Mean SD Minimum Percentile(25) Percentile(75) Maximum
IR 101 0.050 0.117 −0.247 0.000 0.082 0.663
New shares issued 101 0.570 0.440 0.000 0.000 1.000 1.000
PEVC 101 0.267 0.445 0 0 1 1
Market volatility 101 0.914 0.233 0.650 0.710 1.050 1.860
Market return 101 1.811 10.592 −21.690 −4.620 8.290 24.170
TECH 101 0.139 0.347 0 0 0 1
AGE 101 16.525 16.930 1 7 21 137
DE 101 1.974 2.518 0.100 0.670 2.070 12.920
PL 101 0.861 0.347 0 1 1 1
ROE 101 0.308 0.478 −0.380 0.110 0.380 4.380
ROA 101 0.127 0.150 −0.320 0.040 0.180 0.690
EPS 101 2.259 3.492 −3.650 0.600 2.600 20.309
PE 101 22.482 73.955 −139.600 6.740 19.020 686.120
PBV 101 5.226 9.052 0.090 1.180 4.940 67.910
Offer size 101 17.483 3.827 0.000 17.189 18.865 22.404

Research hypotheses verified in the study

Offered capital (log(OfferSize))
Hypothesis The amount of capital offered has a negative impact on the level of IPO underpricing.
Substantiation The amount of capital offered can be treated as a measure of issuance risk. A large amount of capital offered may suggest less risk, leading to a higher issue price and less underpricing.
Metric The number of shares offered during the IPO multiplied by the issue price, logarithmised in order to keep the correct functional form, in line with the principles of the classical linear regression model.
New shares issued
Hypothesis New shares issued have a negative impact on the level of IPO underpricing.
Substantiation A company that offers more new shares during an IPO is expected to send a signal to the investors that it is confident in the IPO success and reduces the level of information asymmetry.
Metric The ratio of the number of new shares issued to the total number of shares offered during the IPO.
Involvement of private equity or venture capital funds (PEVC)
Hypothesis The involvement of private equity or venture capital funds has a negative impact on the level of IPO underpricing.
Substantiation It is assumed that investment funds, due to their experience, are able to better estimate market behaviour and more accurately value a debuting company, which reduces the level of underpricing.
Metric Binary variable, ‘1’ equals involvement of fund, ‘0’ indicates no involvement of the fund.
Market volatility
Hypothesis Market volatility in the 6 months prior to the IPO has a positive impact on the level of IPO underpricing.
Substantiation A market characterised by high volatility indicates high investment risk. Thus, the chance of an IPO succeeding in a highly fluctuating market is much smaller, so a lower issue price is expected (Menyah, 1994).
Metric The standard deviation of the daily rates of return of the WIG within 6 months before the IPO date.
Market return
Hypothesis Market return in the 6 months prior to the IPO has a positive influence on the level of IPO underpricing.
Substantiation Investors operating in the so-called ‘hot market’ are much more inclined to make sudden, often-irrational decisions, which may lead to a higher share price at the close of the first day of trading.
Metric Rates of return of the WIG within 6 months before the IPO date.
New technologies sector (TECH)
Hypothesis Being in the technology industry has a positive impact on the level of IPO underpricing.
Substantiation New tech companies enjoy great popularity on the stock exchange. Based on the theory of behavioural finance, we can conclude that the stocks of a new tech company will immediately rise.
Metric Binary variable, ‘1’ - a company in the new technology sector, ‘0’ – other.
Company age (AGE)
Hypothesis Company age has a positive impact on the level of IPO underpricing.
Substantiation Companies that have been operating on the market for a long time have a lower risk of no profitability and are considered a more secure investment. In addition, they are more recognisable, which may positively affect the company's share price.
Metric Discrete variable, the difference between the year of debut and the year in which the company was established
Company debt-to-equity ratio (DE)
Hypothesis Company debt-to-equity ratio affects the level of IPO underpricing.
Substantiation The debt-to-equity ratio is the basic indicator of the fundamental analysis of a company. The ratio of debt to equity is also a key element of the most popular method of business valuation: the discounted cash flow method (Damodaran, 1996).
Metric The quotient of the company's debt to equity in the last full financial year as detailed in the prospectus.
Country of origin (PL)
Hypothesis The company's country of origin affects the level of IPO underpricing.
Substantiation Investors are often sceptical about foreign companies and are reluctant to invest their capital on the first day of debut. This relationship was proved by Alnodel (2018) using the example of the Saudi Arabian market.
Metric Binary variable, ‘1’ - a company based in Poland, ‘0’ - other
Return on equity (ROE)
Hypothesis Return on equity has a positive impact on the level of IPO underpricing.
Substantiation The value of the ratio shows the company's profitability and ability to use capital. A higher value of the ratio is positively perceived by investors and may positively affect the valuation of a listed company. It is a basic indicator in the fundamental analysis of a company (Zaręba, 2014).
Metric The quotient of the company's net profit and equity in the last full financial year as detailed in the prospectus.
Return on assets (ROA)
Hypothesis Return on assets has a positive impact on the level of IPO underpricing.
Substantiation The value of the ratio shows the company's profitability and ability to use the capital. A higher value of the ratio is positively perceived by investors and may positively affect the valuation of a listed company. It is a basic indicator in the fundamental analysis of a company (Zaręba, 2014).
Metric The quotient of the company's net profit and equity in the last full financial year as detailed in the prospectus.
Earnings per share (EPS)
Hypothesis Earnings per share have a positive impact on the level of IPO underpricing.
Substantiation A basic indicator of fundamental analysis showing how much profit is attributable to one share. The higher the value of the ratio, the higher the potential dividend in the future. A high value of this ratio should translate to investors’ optimism.
Metric Earnings per share in the last full financial year as detailed in the prospectus.
Price/Earnings ratio (PE)
Hypothesis The price/earnings ratio affects the level of IPO underpricing.
Substantiation A basic indicator used in the valuation of an enterprise; its low value may indicate that the company is not very attractive to investors.
Metric The price/earnings ratio in the last full financial year as detailed in the prospectus.
Price/Book value ratio (PBV)
Hypothesis The price/book value affects the level of IPO underpricing.
Substantiation The indicator shows the relationship between market valuation and book valuation and is a kind of investors’ speculation about the company's future prospects.
Metric The price/book ratio in the last full financial year as detailed in the prospectus.

Results of selected linear regression models

Variable Dependent variable
IR
(1) (2) (3) (4)
log(OfferSize) −0.007** (0.003) −0.007** (0.003) −0.007** (0.003) −0.006** (0.003)
New shares issued 0.019 (0.027) 0.020 (0.026)
PEVC −0.078*** (0.026) −0.077*** (0.025) −0.078*** (0.024) −0.075*** (0.024)
Market volatility 0.052 (0.058) 0.051 (0.056)
Market return 0.004*** (0.001) 0.004*** (0.001) 0.004*** (0.001) 0.004*** (0.001)
TECH 0.027 (0.036) 0.029 (0.032) 0.026 (0.031)
AGE 0.001 (0.001) 0.001 (0.001) 0.001 (0.001)
DE −0.001 (0.005)
PL 0.007 (0.035)
ROE −0.020 (0.035) −0.025 (0.028)
ROA 0.129 (0.115) 0.150* (0.089) 0.090 (0.071)
EPS 0.001 (0.004)
PE −0.0001 (0.0002) −0.0001 (0.0001)
PBV 0.0002 (0.002)
Constant 0.090 (0.092) 0.092 (0.086) 0.162*** (0.051) 0.176*** (0.051)
Observations 101 101 101 101
R2 0.267 0.265 0.246 0.216
Adjusted R2 0.147 0.184 0.198 0.192
Residual standard error 0.108 (df = 86) 0.105 (df = 90) 0.104 (df = 94) 0.105 (df = 97)
F-statistic 2.232** (df = 14; 86) 3.252** (df = 10; 90) 5.120** (df = 6; 94) 8.927** (df = 3; 97)

Correlation matrix of the variables described in the model

Variable IR Offer size New shares Issued PEVC Market volatility Market return TECH AGE DE PL ROE ROA EPS PE PBV
IR 1 −0.063 0.044 −0.310 −0.030 0.285 −0.002 0.078 −0.029 0.048 −0.028 0.115 0.036 −0.009 0.015
Offer size −0.063 1 −0.320 −0.103 −0.079 0.245 0.055 −0.003 0.180 0.073 0.001 −0.065 0.247 −0.031 −0.050
New shares issued 0.044 −0.320 1 −0.179 −0.163 −0.021 −0.049 −0.137 −0.029 −0.106 0.055 −0.099 −0.144 0.008 −0.100
PEVC −0.310 −0.103 −0.179 1 −0.012 −0.002 0.146 0.060 −0.095 −0.017 −0.068 −0.045 0.098 −0.082 0.093
Market volatility −0.030 −0.079 −0.163 −0.012 1 −0.481 −0.136 0.063 0.014 0.099 −0.120 −0.125 −0.127 −0.089 −0.093
Market return 0.285 0.245 −0.021 −0.002 −0.481 1 −0.027 0.049 0.115 −0.017 −0.027 0.054 0.099 0.042 −0.0001
TECH −0.002 0.055 −0.049 0.146 −0.136 −0.027 1 −0.142 −0.128 0.078 −0.045 0.048 −0.072 0.015 0.407
AGE 0.078 −0.003 −0.137 0.060 0.063 0.049 −0.142 1 −0.042 0.205 −0.074 −0.103 0.251 0.017 −0.137
DE −0.029 0.180 −0.029 −0.095 0.014 0.115 −0.128 −0.042 1 −0.198 0.286 −0.187 −0.046 0.029 −0.056
PL 0.048 0.073 −0.106 −0.017 0.099 −0.017 0.078 0.205 −0.198 1 −0.351 −0.113 −0.040 0.073 −0.020
ROE −0.028 0.001 0.055 −0.068 −0.120 −0.027 −0.045 −0.074 0.286 −0.351 1 0.578 0.117 −0.048 0.398
ROA 0.115 −0.065 −0.099 −0.045 −0.125 0.054 0.048 −0.103 −0.187 −0.113 0.578 1 0.220 0.011 0.524
EPS 0.036 0.247 −0.144 0.098 −0.127 0.099 −0.072 0.251 −0.046 −0.040 0.117 0.220 1 −0.102 −0.118
PE −0.009 −0.031 0.008 −0.082 −0.089 0.042 0.015 0.017 0.029 0.073 −0.048 0.011 −0.102 1 0.114
PBV 0.015 −0.050 −0.100 0.093 −0.093 −0.0001 0.407 −0.137 −0.056 −0.020 0.398 0.524 −0.118 0.114 1
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