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Impact of pricing mechanism on IPO oversubscription: evidence from Pakistan stock exchange

Impact of pricing mechanism on IPO oversubscription: evidence from Pakistan stock exchange The purpose of this paper is to examine the effects of pricing mechanism on initial public offerings (IPOs) oversubscription in Pakistan.Design/methodology/approachThis study used cross-sectional data to analyse 85 listed IPOs on the Pakistan stock exchange during the period of 2000-2017 to assess hypotheses related to influential determinants of IPO oversubscription. Accordingly, ordinary least square, robust regression and quantile regression approaches were applied in this study to evaluate the factors that influenced oversubscription.FindingsThe outcome displayed pricing mechanism is negatively significant with an oversubscription of IPOs. This indicates firms using the fixed-price mechanism signalled higher information asymmetry and uncertainty in their value. Thus, investors are aware that they will be offset with underpricing, and it is expected the demand will be higher for the particular IPOs.Research limitations/implicationsThis study is entirely focused on the available information of prospectus that should not be ignored by potential investors at the time of subscription of IPO. Therefore, the study contributes to extending the available literature in signalling theory whereby issuers should consider using the book-building pricing mechanism in enhancing the efficiency of the IPO offer price during the listing.Originality/valueThis paper provides evidence for the determinants of the IPO oversubscription. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Impact of pricing mechanism on IPO oversubscription: evidence from Pakistan stock exchange

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0114-0582
DOI
10.1108/par-04-2019-0051
Publisher site
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Abstract

The purpose of this paper is to examine the effects of pricing mechanism on initial public offerings (IPOs) oversubscription in Pakistan.Design/methodology/approachThis study used cross-sectional data to analyse 85 listed IPOs on the Pakistan stock exchange during the period of 2000-2017 to assess hypotheses related to influential determinants of IPO oversubscription. Accordingly, ordinary least square, robust regression and quantile regression approaches were applied in this study to evaluate the factors that influenced oversubscription.FindingsThe outcome displayed pricing mechanism is negatively significant with an oversubscription of IPOs. This indicates firms using the fixed-price mechanism signalled higher information asymmetry and uncertainty in their value. Thus, investors are aware that they will be offset with underpricing, and it is expected the demand will be higher for the particular IPOs.Research limitations/implicationsThis study is entirely focused on the available information of prospectus that should not be ignored by potential investors at the time of subscription of IPO. Therefore, the study contributes to extending the available literature in signalling theory whereby issuers should consider using the book-building pricing mechanism in enhancing the efficiency of the IPO offer price during the listing.Originality/valueThis paper provides evidence for the determinants of the IPO oversubscription.

Journal

Pacific Accounting Review – Emerald Publishing

Published: Apr 2, 2020

Keywords: IPOs; Oversubscription; Investor sentiment; Book building; Initial return; Information asymmetry; Pakistan market

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