IPO Underpricing in Norway. Testing of existing underpricing theories in the Norwegian stock markets

Abstract

In our thesis we have analysed the pricing for 202 IPOs in Norway from 2003 to 2019. A wellknown phenomenon for IPOs known as underpricing is a trend where IPO stocks are offered at a lower price than what the market perceives as the true value of the IPO stocks. This results in a capital loss for the previous shareholders. The objective of this thesis is to check if some of the established underpricing theories are valid for new listings on two of the Norwegian stock exchanges. We have found an average underpricing of 3.475% in the Norwegian stock exchanges from 2003 to 2019, which is similar to results from other studies in Norway. Our results provide support for theories such as underwriter quality theories from Carter and Manaster (1990) and Michaely and Shaw (1994), and Ibbotson and Jaffe's (1975) study on hot and cold markets. Loughran and Ritter’s (2003) study on industries with higher underpricing due to risk compensation is also supported by our findings. More known theories such as investor sentiment and information revelation theory are also supported by our findings. However, Rock’s (1986) “The Winner’s Curse” does not explain underpricing with our use of proxies for valuation uncertainty. We have corrected our analysis for econometric issues with robust standard errors and have performed the necessary econometric testings. Even though most of our selected theories explain some of the underpricing in Norway, there are still theories or approaches that would be suitable for further research. We want to thank our supervisor, Johann Reindl, who has contributed with relevant insight, solutions to our problems and constructive feedback for our work. Oslo Stock Exchange has also been helpful by providing data. In addition, we want to thank Finanstilsynet for adding the missing prospectuses from Oslo Stock Exchange. To summarize, we would like to thank the library staff at OsloMet for the opportunity to access and retrieve data from Thomson Reuters and Datastream.