Industry effects on the opening price performance of initial public offerings of common stock

Abstract

In a large percentage of research studies, we find the degree of underpricing uses offer-to-close return as initial return to study factors influencing the degree of IPO underpricing. The objective of this study is to analyze the specific industry effects on the mispricing of new issues. In this research, we divide the initial return into an opening price return and an intraday return. After introducing a least squares dummy variable estimator to do the regression analysis, this paper shows some interesting results. The results demonstrate that companies belong to different industries don’t have significant difference in the degree of underpricing of IPOs. The only significant result is that companies with higher Tobin’s Q ratio tend to have a lower degree of underpricing of IPOs. This may be explained by the aggressive risk-taking phenomenon. Companies with higher growth potential are more desired to recent investors. Consequently, underwriters are able to sell the new issues at higher offer prices. Companies with a greater proportion of intellectual capital tend to have a lower degree of underpricing of IPOs.