Sorting out a Profitable Strategy from IPO's : A quantitative study about underpricing and different Buy-and-Hold strategies for IPO's on the Swedish Stock Exchange

Abstract: An alternative way to invest on the stock market is to invest in IPO’s. An IPO (InitialPublic Offering) is the first time a company goes public on a stock market, giving outshares to private investors and financial institutions. However, there might be someuncertainties about the share price as it never has been traded on the stock exchangebefore and it could therefore be difficult to determine a reasonable value for the shareprice. Consequently, if the offering price for the investor is significantly lower thanthe “correct valued” price it will generate positive initial return during the first tradingday and this phenomenon is labelled as underpricing, generating more “money on thetable”. Still, previous researches display an underperformance among IPO’s during alonger period after the introduction compared to already established companies withinthe same sector, arguing that investors should sell their shares early after the firsttrading day.The objective of this study is therefore to determine if underpricing exists for IPO’son the Swedish stock exchange and if there are any differentiations amongst sectors,and also to investigate two different Buy-and-Hold strategies. A final objective for thestudy is to determine if the level of underpricing is affected by some explanatoryvariables.With a quantitative study and a longitudinal approach, the results confirm the effect ofunderpricing for IPO’s on the Swedish stock exchange, generating an averageunderpricing of 5.56%. Additionally, this study cannot display any different medianunderpricing between industry sectors. However, it contradicts with theunderperformance phenomenon, indicating an overperformance for longer Buy-and-Hold strategies. Lastly, a regression of explanatory variables trying to explain thelevel of underpricing demonstrates no statistically significant results.