Determinants of IPO Underpricing: a Study of Russian Companies

The problem of IPO underpricing became relevant in the late 1960s and since then various theories were advanced connecting this phenomenon to many factors: from information asymmetry in the market to the cultural peculiarities of the host country. Object of research are the characteristics of the Russian companies which undertook IPO in 1996 to 2015 and the results of these IPO. The study aims to identify factors that have a significant influence on the occurrence and magnitude of underpricing of shares in Russian companies preparing their IPOs. This research defined the notion of initial public offerings, concepts of devaluing and underpricing phenomenon, the peculiarities of Russian IPO market and the tendencies of its development. Research and theories of foreign and Russian authors devoted to the subject were analyzed, which uncovered 7 main factors, which are further considered in terms of their influence on the occurrence and magnitude of underpricing. To test the hypotheses, data for 138 IPOs of Russian companies for 1996-2015 was collected, and 2 types of econometric models (logit-model and the model of multivariate linear regression) were proposed. Analysis showed that two factors influence the occurrence and the magnitude of the underpricing of Russian companies’ IPOs: the amount of accommodation and the provision of accommodation prices in the price corridor, announced by the company. Large volume placements decrease the likelihood and size of underpricing of placements of Russian companies. The increase in accommodation prices relative to the average value of the boundaries of the price corridor also leads to increased probability and growth exceeded the offering price by the closing price, but in this case it is necessary to talk about the reassessment of the Issuer's shares by the market. Also, recommendations for Russian issuers on the formation of the strategies of the IPO are made.