The Variability of IPO Initial Returns

In my research, I investigated short-run initial returns of Russian IPO companies. First I analysist existence literature and finding concerning underpricing phenomenon in different countries and in different period of time. I pointed out the most interesting and most appropriate hypothesis for Russian market in frame work of asymmetric information analysis. Then I described IPO mechanism and specification of Russian market. In particular, I described the reason behind stock exchange and instrument choice and in detailed showed price discovery process. My main purpose of the work was to show that mean and variance of IPO initial return tend to tome together. My results are not as significant as in work by Lowry et al. (2010), but I was able to find out the main factors behind the level and the dispersion in IPO stock underpricing. And despite the fact correlation coefficients between mean, variance and explanatory variables were similar, only dummy variable, that represented the news about the oversubscription rate was found to be significant for both equations. I constructed a model that included factors from both the demand and supply size of the deal. Factors behind demand side essentially measured market sentiment, which factors behind supply side accounted for both issue- and firm- specific characteristics. The results of my model support feedback hypothesis (which argues for the positive relationship between the level of learning during bookbuilding process and level of underpricing), signaling hypothesis (which states that high quality firm may find it profitable to underprice their shares in order to send positive signal to the market), bandwagon hypothesis (which state that investors’ choice are influenced by behavior of other market participant) and uncertainty hypothesis( which states that the more information is available to the investor the lower the level of underpricing will be).