Review of Quantitative Finance and Accounting, 22: 179–198, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Initial Public Offerings in Australia 1994 to 1999,
Recent Evidence of Underpricing and
Doctoral Student RMIT Business and Deakin University, Melbourne, Victoria, Australia
Research Development Unit, RMIT Business, Melbourne, Victoria, Australia, Tel.: 61-3-9925 5594,
Abstract. This paper analyses whether ﬁnancial and non ﬁnancial characteristics of Australian initial public of-
ferings (IPOs) can explain observed underpricing and long term underperformance over the period 1994 to 1999.
A number of previous Australian studies have investigated initial day underpricing and longer term underperfor-
mance of IPOs and this study updates those papers. We ﬁnd that initial day underpricing can in part be explained
by market sentiment, forecast dividend per share yields, underwriter options and share options. Our longer term
analysis supports the ﬁnding of previous studies in that IPOs on average, underperform the market in the ﬁrst year
following their listing.
Keywords: IPOs, underpricing, long term performance
JEL Classiﬁcation: G14, G32
Initial public offerings (IPOs) of equity capital are a common occurrence in ﬁnancial mar-
kets around the world. This ﬁnancial transaction seems simple and normal enough, except
that the returns achieved by investors in IPOs historically have been substantial. What
makes the returns even more remarkable is the fact that they are achieved on the ﬁrst day
of the company’s shares being listed on a stock exchange and the fact that the returns are
achieved with empirical regularity in ﬁnancial markets around the world. This practice of
the issue price of a newly listed company’s shares being below the price at which the shares
subsequently trade is known as underpricing.
The authors would like to thank an anonymous referee for their helpful comments on previous versions of this
Address correspondence to: Research Development Unit, RMIT Business, GPO Box 2476V, Melbourne, Victoria,