Factors that influence Tech IPO underpricing and their applicability in pricing decision

Abstract

The aim of this thesis was to identify the main factors impacting underpricing in the Tech industry and analyse their applicability in IPO pricing decisions. The main factors that were examined: Number of Underwriters, Issue Size, Price per Share, Underwriter Reputation, Hot & Cold market ratio, Fear & Greed ratio, Fed rates, Treasury Bills and Investor Sentiment. In earlier studies, all of the factors exhibited substantial explanatory power on IPO underpricing, and were established as significant by various researchers. Our findings showed that, Fear & Greed ratio, Fed rates, Treasury Bills and Investor Sentiment did not exhibit any explanatory power for Tech IPOs, while being very significant for non-Tech IPOs. On the other hand - Number of Underwriters, Issue Size, Price per Share, Underwriters Reputation and Hot & Cold market ratio provided high significance for Tech IPOs. It was determined that an increase in Number of Underwriters and/or Issue Size decreases the expected underpricing. In contrast, an increase in Price per Share, Underwriters Reputation and Hot & Cold market ration – increases the underpricing. Therefore, we concluded that by controlling these factors, companies and their management can anticipate and, to higher or lower extent, control the underpricing of the IPOs. Lastly, as the Tech industry is becoming more mature, we observed a decaying effect in the explanatory power of each of the factors. Before the financial crisis of 2007-2008, the factors were able to explain nearly 30% of the underpricing variation, however after crisis it dropped down to a mere 13%. Therefore, due to the decaying explanatory power, some of the factors might no longer be applicable in the IPO pricing decisions to the same extent.