Abstract:
Firms continually make financing decisions in the course of business operations. One
of these is the issuing of equity to the public through an Initial Public Offer (IPO).
Despite the extensive research on the subject of IPOs, little attention has been given on
the possible interaction between market conditions and the determinants of IPO
underpricing. The general objective was to establish the determinants of IPO
underpricing and the moderating effects of market conditions in African Securities
Exchange Association (ASEA) member countries securities market. The specific
objectives were to determine: the effect of transaction volume, offer size, investor
oversubscription and listing delay on IPO underpricing and to establish the moderating
effect of market conditions on the relationship between transaction volume, offer size,
investor oversubscription and listing delay on the level of underpricing of IPOs. The
study was based on market timing theory and the theories associated with information
asymmetry namely the winner’s curse theory, ex-ante uncertainty and signaling theory
to explain what determines IPOs underpricing. The study used stratified random
sampling to sample three countries, South Africa, Egypt and Kenya. The study used
cross-sectional research design. Data was collected for all firms that issued IPOs in
Nairobi Securities Exchange, Egyptian Exchange and Johannesburg Stock Exchange
for a period of fifteen years (1996 to 2011). Data on IPOs offered per year per country
was derived from the respective stock markets and financial information was collected
from firm formation documents, prospectus and financial statements. The results
showed that transaction volume, investor oversubscription and market condition had a
positive and significant effect on IPO underpricing while listing delay had a negative
and significant effect on IPO underpricing. Offer size was not significant. Furthermore,
a hot market condition was found to have enhancing and significant interaction effects
on transaction volume, offer size and investor oversubscription. There was no
interaction on listing delay. This study contributes to theory by centering market
condition on the empirical testing of market timing theory as well as the influence of
share allotment on the reduction of the winners curse. The study recommends to issuers
to take into consideration the market condition before issuing shares in an IPO as it enhances the impact of transaction volume, offer size and investor oversubscription on IPO underpricing. Further to this, the study recommends to policy more stringent scrutiny of offers made during a hot market to protect investors from possible impropriety occasioned by their enthusiasm as evidenced by investor oversubscription. The study suggests future research to investigate the allotment methods used in other developing markets in relation to the winners curse. The study further recommends inquiry on the impact of cold market condition on the determinants of IPO underpricing and an investigation on the events surrounding the transition from hot to cold markets to better understand and utilize the prediction capability of the noticeable indicators.