Determinants of Underpricing in Initial Public Offerings: A Study of Firm Size, Earnings per Share, Return on Assets, and Debt-to-Equity Ratio

Abstract

Purpose: This research paper aims to investigate the determinants of underpricing in Initial Public Offerings (IPOs) by analyzing the impact of firm size, earnings per share (EPS), return on assets (ROA), and debt-to-equity ratio (DER) on underpricing levels.

Design/Methodology/Approach: The study adopts an empirical research design, conducting cross-sectional data analysis on 73 companies that conducted IPOs between March 2018 and March 2023. Data is sourced from reputable financial databases and academic sources.

Findings: The results indicate that firm size has a significant negative relationship with underpricing, suggesting larger companies experience lower levels of underpricing. However, no significant relationships are found between underpricing and EPS, ROA, or DER, indicating these financial variables do not significantly influence IPO underpricing.

Originality: The study contributes to the existing literature on IPO pricing and underpricing, particularly focusing on firm size.

Research Limitations/Implications: Limitations include a relatively small sample size and unexplored factors impacting underpricing.

Practical Implications: The findings assist investors, companies, and analysts in making informed decisions about IPO participation and pricing strategies.

Social Implications: Understanding underpricing determinants contributes to a fairer and more predictable IPO pricing mechanism, promoting transparency and efficiency in the IPO market.