Does the underpricing phenomenon exist for IPO’s on the JSE?

Abstract

It has been widely documented that many stock exchanges experience significant first day returns for listings stocks. In this current research it was undertaken to determine the level of underpricing on the JSE and identify factors that might significantly influence the underpricing. Offer price, share price movement, market movement as well as factors on, listing board, company age, listing underwriter/sponsor, listing size and offer price was collected for 84 companies listing in the period between June 2006 and June 2012. The first day returns, long run buy hold abnormal return (BHAR), pre-listing market movement was calculated. The relationship between first day returns and the factors were analysed by grouping. To establishing their ability to predict the first day returns a normal linear regression model was utilized. One significant relationship was established in the prediction of initial returns. The listing size was negatively related to underpricing, meaning that the bigger the company the more likely it is that the initial return would be smaller. As some authors established listing size a measure of risk it is inferred that risk associated with listing size plays a significant role in the initial return of listing shares. The second significant finding is that the economic sectors have statistically different levels of underpricing meaning listing a share in some sectors would result in different levels of initial returns. Thirdly, the offer price has significant differences in terms of initial return, in that listings with smaller offer prices underprice more than listings with bigger offer prices. The Long run performance for listings shares on the JSE has been seen to be poor with aftermarket share pricing declining from second month onwards for three years after listing.