Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVI. Cost of Capital and
Long−Term Financial
Policy- Raising Capital © The McGraw−Hill^567
Companies, 2002
Why Does Underpricing Exist?
Based on the evidence we’ve examined, an obvious question is, Why does underpricing
continue to exist? As we discuss, there are various explanations, but, to date, there is a
lack of complete agreement among researchers as to which is correct.
We present some pieces of the underpricing puzzle by stressing two important
caveats to our preceding discussion. First, the average figures we have examined tend to
In Their Own Words...
Jay Ritter on IPO Underpricing around
the WorldThe United
Statesis not the
only country in
which initial
public offerings
(IPOs) of
common stock
are underpriced.
The phenomenon
exists in every country with a stock market, although the
extent of underpricing varies from country to country.
In general, countries with developed capital markets
have more moderate underpricing than in emerging
markets. During the Internet bubble of 1999–2000,
however, underpricing in the developed capital markets
increased dramatically. In the United States, for
example, the average first-day return during 1999–2000
was 65 percent. At the same time that underpricing in
the developed capital markets increased, the
underpricing of IPOs sold to residents of China
moderated. The Chinese average has come down to a
mere 257 percent, which is lower than it had been in
the early and mid 1990s. After the bursting of the
Internet bubble in mid-2000, the level of underpricing
in the United States, Germany, and other developed
capital markets has returned to more traditional levels.
The table below gives a summary of the average first-
day returns on IPOs in a number of countries around the
world, with the figures collected from a number of
studies by various authors.539Sample Time Avg. First-day
Country Size Period Return
Australia 381 1976–1995 12.1%
Austria 76 1984–1999 6.5
Belgium 86 1984–1999 14.6
Brazil 62 1979–1990 78.5
Canada 500 1971–1999 6.3
Chile 55 1982–1997 8.8
China 432 1990–2000 256.9
Denmark 117 1984–1998 5.4
Finland 99 1984–1997 10.1
France 448 1983–1998 9.5
Germany 407 1978–1999 27.7
Greece 129 1987–1994 51.7
Hong Kong 334 1980–1996 15.9
India 98 1992–1993 35.3
Indonesia 106 1989–1994 15.1
Israel 285 1990–1994 12.1
Italy 164 1985–2000 23.9
Japan 1,542 1970–2000 26.4
Korea 477 1980–1996 74.3
Malaysia 401 1980–1998 104.1Sample Time Avg. First-day
Country Size Period Return
Mexico 37 1987–1990 33.0%
Netherlands 143 1982–1999 10.2
New Zealand 201 1979–1999 23.0
Nigeria 63 1989–1993 19.1
Norway 68 1984–1996 12.5
Philippines 104 1987–1997 22.7
Poland 149 1991–1998 35.6
Portugal 21 1992–1998 10.6
Singapore 128 1973–1992 31.4
South Africa 118 1980–1991 32.7
Spain 99 1986–1998 10.7
Sweden 251 1980–1994 34.1
Switzerland 42 1983–1989 35.8
Taiwan 293 1986–1998 31.1
Thailand 292 1987–1997 46.7
Turkey 138 1990–1996 13.6
United
Kingdom 3,042 1959–2000 17.5
United States 14,760 1960–2000 18.4Jay R. Ritter is Cordell Professor of Finance at the University of Florida. An outstanding scholar, he is well respected for his insightful analyses of new issues and going public.