Investor Interest, Under-Pricing and Trading Volume in Pakistan

This paper investigates the relationship between pre- and post-initial public offering (IPO) investor interest and under-pricing.The IPO investor interest influences the offering price of IPOs and divergence of opinions influence the trading volume of newIPOs. The study is based on secondary data collected from Karachi Stock Exchange (KSE) website and prospectus of companieswhich were going to be public during the study. Data were collected for the 59 companies which have been listed on KSE duringJanuary 2000–July 2010. Regression analysis and test of significance were conducted to examine the level of under-pricing andinvestor interest relationship. The average under-pricing of the Pakistan’s IPOs is found to be 39%. Initial return is found to bepositively related to the investor interest in Pre-IPO demand to offer ratio. The over-subscribed IPOs earn significant and highinitial abnormal returns to investors. The under-priced IPOs have constantly high-trading volume than over-priced IPOs in thefirst 30 days of IPO listing. The additional control variables which influence the level of under-pricing in Pakistan include offersize, ex ante uncertainty, firm size and float, whereas float was found to be the single most important variable in determiningthe under-pricing.