Comparing the efficiency of pricing mechanisms in Norwegian ipos

Abstract

On Oslo Stock Exchange, there are mainly two pricing mechanisms that are being used when pricing an IPO, these being book-building and fixed-price. As there do not exist much research on which of these two are the more superior pricing mechanism when pricing a Norwegian IPO, we want to test empirically which of these two are the more efficient pricing mechanism regarding the level and variance of underpricing. In our research, we have gathered data from 125 IPOs from February 2000 until June 2017, where we have limited ourselves to only include data from Oslo Stock Exchange (excluding Axess and Merkur). We used a paired t-test to identify a 1 percent significant level of underpricing of 4,29 and 3,9 percent of book-building and fixed-price IPOs, respectively. We also compared the two pricing mechanisms by using Mood’s Median Test, Levene’s Test of difference in variance and several multivariate regression models. We also compared crosssectional differences within the subsamples with respect to different firm-, issueand market characteristics. This research have us concluding that book-building do dominate fixed price regarding pricing efficiency, where we found that it produces lower conditional variance (variance after controlling for firm-, issue-, and market effects) and are better at incorporating market conditions prior to the IPO.