The Degree of Underpricing in the Swedish Market : An analysis of the most relevant factors influencing IPO underpricing between main and secondary markets

Abstract: Underwriters evaluate the optimum price of IPO issued shares and conduct underpricing based on a higher degree of risk and information asymmetry. These are calculated under a series of determined risk proxies that adjust the most suitable offering and opening price of IPOs in both main and second tier markets.   Quantitative results are obtained by regression analysis and t-test. It is verified that the degree of underpricing differs between main and second tier markets and this difference influences the risk proxies and the underwriters differently when evaluating the optimum price of IPOs.   This study performs a comparison of eight risk proxies; market volatility, age of the firm, leverage book value, earnings per share, bank prestige, leverage and IPO activity between the OMX as representative of the main market and Aktietorget as representative of the second tier market. The comparison reveals how these risk proxies influence the underpricing of an IPO in different Swedish stock markets.   A theoretical analysis, backed by 101 observations of several newly listed IPOs during the period from 2003 to 2013 indicates that IPOs in the secondary tier market are more underpriced than IPOs listed in the primary market. Regarding the influences from the variables, book value and market volatilities seem to have a strong influence on the degree of underpricing, in addition to the finding that there is no relation between the independent variables and underpricing of IPOs listed in the Aktietorget, it suggests that further research must be conducted in this area.