Sponsor ownership and IPO initial return: evidence from Pakistan stock exchange
ISSN: 0114-0582
Article publication date: 26 August 2021
Issue publication date: 5 January 2022
Abstract
Purpose
The purpose of this paper was to examine whether or not the sponsor lock-up ratio, lock-up period, regulation changes and interaction variable (oversubscription [OSR]) affected initial public offering (IPO) initial return.
Design/methodology/approach
A complete sample of 111 listed IPOs in Pakistan stock exchange from 1996 to 2018 was incorporated. Based on the cross-section data, this paper estimated using ordinary least square and quantile least square for robustness. In addition to that, this paper estimated the data using stepwise least square to inspect the signalling aspect of the lock-up ratio, lock-up period and regulation changes on IPO initial return.
Findings
This study showed that the lock-up ratio, lock-up period and regulatory changes had a positive impact on the IPO’s initial return. Furthermore, the assertion of interaction variable (regulation changes × OSR) and (lock-up period × OSR) was a negatively significant factor in influencing the IPO’s initial return. The results of this paper were robust to endogeneity bias.
Practical implications
The finding of this study proposed that sponsors of IPOs can be a strong signal of risk or quality, which was consistent with the signalling theory prediction. Concurrently, investors must be aware of the total proportions of lock-up ratio so that they can estimate the chances of getting the highest initial return on IPOs. From the regulators’ point of view, it is suggested that the lock-up ratio and the lock-up period should be determined with a deeper understanding and incorporated into the equity guidelines as it is evident that these factors are priced by the market.
Originality/value
Studies on the effect of sponsors have always been centred on well-recognized firms. Therefore, using the IPO samples listed in Pakistan, this paper contributes to the IPO literature by investigating the lock-up ratio of the sponsor, the lock-up period and the regulatory changes to the initial IPO return. Additionally, OSR has been introduced as an interaction variable among the sponsors’ lock-up period and regulations changes to explain the ongoing IPO initial return phenomenon.
Keywords
Acknowledgements
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the quality of the paper. The authors also would like to acknowledge their gratitude for funding from the Fundamental Research Grant Scheme FRGS/1/2018/SS01/UUM/02/7) (S/O Code: 14203) provided by the Ministry of Higher Education, Malaysia.
Citation
Mehmood, W., Mohd-Rashid, R., Ahmad, A.H. and Amin, S. (2022), "Sponsor ownership and IPO initial return: evidence from Pakistan stock exchange", Pacific Accounting Review, Vol. 34 No. 1, pp. 105-126. https://doi.org/10.1108/PAR-02-2021-0020
Publisher
:Emerald Publishing Limited
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