1. IPO Success in Pakistan:
Institutional Quality,
Sponsor Ownership, and
Smart Pricing
2. Abstract
• Purpose: The purpose of this research is to analyze how institutional quality, sponsor
ownership, and smart pricing strategies influence the success of Initial Public Offerings
(IPOs) in Pakistan.
• Design/methodology/approach: The study uses quantitative analysis of IPO data,
employing statistical methods to examine the impact of institutional quality, sponsor
ownership, and pricing strategies on IPO success in Pakistan.
• Findings: The study finds that good governance, clear rules, and transparency attract
investors to IPOs, while a high lock-up ratio can reduce returns by signaling lower
quality.
3. Introduction
• This study examines the impact of country-level institutional quality, sponsor
ownership, and pricing mechanisms on the initial returns of IPOs in
Pakistan. It highlights the role of governance, regulatory quality, and market
imperfections in influencing IPO performance. Additionally, the research
explores the moderating effect of IPO oversubscription on the relationship
between pricing mechanisms and initial returns.
4. Literature review and hypothesis development
• IPO initial return:
There is a significant body of research on the initial returns of IPOs. The
first-day closing price of an IPO is usually higher than the offer price. . Wei et al.
(2021)
when there are high initial returns, wealth is directly transferred from existing
owners to new investors. Bedard et al.(2008)
the average first-day initial return in Pakistan was 46.00%. Aslam and Ullah
(2017)
5. Country level institutional quality and initial
return
• Country-level institutional quality refers to the WGI research data set that provides an
overall assessment of the quality of governance based on an expert survey.
• To measuring the country-level institutional quality, four dimensions of WGI was used
in this study, which includes,
Political stability and the absence of violence
Government effectiveness
Regulatory quality
Rule of law.
6. Cont....
1. Political stability and initial return. Political stability and the absence of
violence show that the government has a strong control over terrorism and
politically motivated violence. However, unexpected political events and
disruptions indicate weak political stability and poor control over violence.
H1 (a). Political stability and absence of violence have a positive and significant
effect on the IPOs’ initial returns.
7. Cont...
2. Government effectiveness and initial return
Government effectiveness is described based on the quality of civil and public
service with their independence from external political pressures. government
effectiveness reflects on the country’s government credibility in policy
formulation and implementation.
H1 (b). Government effectiveness has a positive and significant effect on the
IPOs’ initial returns.
8. 3. Regulatory quality and initial return.
Higher regulatory quality enhances market transparency, reduces uncertainties,
and positively impacts IPO initial returns.
H1 (c). Regulatory quality has a positive and significant effect on the IPOs’
initial returns.
9. 4. Rule of law and initial return. A strong rule of law builds investor trust,
leading to better-quality IPOs and higher initial returns.
H1 (d). Rule of law has a negative and significant effect on the IPOs’ initial returns
5. Sponsors ownership and initial return. Sponsor ownership and lock-up
provisions influence IPO initial returns by signaling firm quality, investor
confidence, and market regulations.
H2(a). Lock-up period has a significant and positive effect on IPO initial return
10. 6. lock-up ratio
The lock-up ratio signals IPO risk and quality, negatively impacting initial
returns in Pakistan. H2(b)
7. Price mechanism and initial return.
The pricing mechanism, especially book building, significantly influences IPO
initial returns by revealing quality information and adjusting offer prices.
H3. Significant and positive effect
11. 8. IPO oversubscription's moderating effect on pricing and initial return.
The moderating relationship of IPO oversubscription affects the link between
pricing mechanism and initial return by influencing investor sentiment and
market demand.
13. Research methodology
• This study looked at 102 IPOs listed on the PSX between 1996 and 2019 to
see how country-level factors, sponsor ownership, and pricing methods affect
IPO initial returns. It used data from IPO prospectuses and other sources,
with IPO oversubscription and other factors as part of the analysis.
22. Conclusion
• The study shows that weak national governance leads to more unstable IPOs
and higher initial returns. It also finds that longer lock-up periods and book-
building pricing make IPOs more attractive and build investor confidence.
