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Underpricing of IPOs in Saudi Arabia and Sharia Compliance

Underpricing of IPOs in Saudi Arabia and Sharia Compliance

2018 . Faisal Alqahtani



Underpricing of IPOs in Saudi Arabia and Sharia Compliance
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About the book

Purpose - The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs) and whether the sharia-compliance would have a significant impact on the initial returns.Design/methodology/approach - A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.Findings - We find that underpricing not only occurs but is also among the highest levels in the world. While traditional factors affecting initial return include age, market timing and firm size, we find that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in initial public offerings.Research limitations/implications - Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.Originality - This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in IPO market.







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