Investor- and issuer-related perspectives of IPO underpricing

In this study, refined measurement forms for the underpricing levels in initial public offerings (IPOs) of common stock are applied to a sample of issues in Hong Kong. This application allows real levels of underpricing, confronting the investors and issuers to IPOs, to be discerned. This exercise is beneficial given reliance, in the existing literature, on the simplistic initial return (IR) measure of underpricing defined as the first market price in IPO shares less the offering price all divided by the offering price. It is noted that the IR measure of underpricing provides a rather misleading view of the initial returns available to investors and of the actual underpricing costs confronting the issuer. Results in this paper for issuer-related and investor-related measures of underpricing indicate that actual underpricing levels are considerably lower than the IR underpricing measure. Given the conventional usage of the IR measure, the findings provide useful information to managers and stockholders in firms contemplating a firm listing and to investors subscribing for IPO shares. For managers and stockholders in unquoted firms, the results suggest that the underpricing costs of listing are less onerous than is commonly believed. In particular, entrepreneurs appear to be 'giving away' less capital in the form of underpricing than is suggested in the literature. For investors, the evidence indicates that the returns attainable from IPO subscriptions are less attractive than is commonly believed.