Initial Public Offer Underpricing : Case Study of Nigeria's Stock Market (2003-2010)

This thesis carries out an empirical research of the Nigerian stock market using known finance theories for further insight into how this market event occurs. The study aims at establishing if initial public offer underpricing exists in the Nigerian market and how these IPOs perform when it goes into the market. Based on the empirical findings, the study aims at using deductive research approach to proffer some policy implication for the research results.We therefore study the market pricing of initial public offerings (IPOs) using price variation over time. In a sample of 950 firms IPOs from 2003 to 2010, we find that the median IPO is undervalued at the offer by about 40% relative to its industry peers. Undervalued IPOs earn 4% to 10% higher first day returns than overvalued IPOs, but earn 30% to 50% lower returns over the next 12 months. The long-run abnormal performance of undervalued IPOs is robust to return measurement methodologies like the Fama-French three-factor model. Undervalued IPOs exhibit higher sales growth rates temporarily but earn continuously lower profit margins and returns on assets than overvalued IPOs over the period of study, suggesting that any insider trading implicit in the initial valuation fail to materialize subsequently. The research results are inconsistent with behavioral theories based on investor overconfidence and provide support for asymmetric information models of IPO pricing