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Underpricing of Initial Public Offerings: The Case of Portugal

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Abstract

This paper analyzes the initial public offering (IPO) underpricing phenomenon in Portugal. We show that the ‘hot issue’ market of 1987, coinciding with a speculative bubble in the stock market, is well explained by investor sentiment theories and that the issuing firms seized a ‘window of opportunity’ provided by excessive demand to offer and list their shares. In IPOs prior to the 1987 crash, underpricing is very high while there is a strong reversion to fundamentals in the long run. In the period 1988–2004, we find lower IPO underpricing and overall no evidence of long-run underperformance of IPO firms. Bookbuilding IPOs are more underpriced than other price setting systems IPOs, and firms with seasoned public offerings show abnormal returns in the long run.

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Notes

  1. The Privatization Law stated as its objectives: the reduction of state ownership, raising cash to reduce public debt and budget deficits, improving economic efficiency through the use of capital markets to allocate resources, applying transparent corporate governance rules to privatized firms, developing domestic markets and disseminating share ownership.

  2. In ordr to be listed, the firm is required to have 3 years of business activity and published accounts and an estimated market capitalisation above EUR 2.5 million representing a free float of at least 25%.

  3. We excluded some 1986 and 1987 IPOs due to the unavailability of data.

  4. Decree-Law 172/86, of June 30 1986.

  5. Decree-Law 130/87, of March 17, and Law 2/88, of January 26 1987.

  6. We use the BTA index, which was the most important at the time, because the official index, (BVL Geral) was introduced only in the following year.

  7. These outliers where excluded based on the criterion that the probability of finding at least one value at this distance from the mean in a normally-distributed sample is less than 5%. None of the 41 retained observations exceeded two standard deviations from the sample mean.

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Acknowledgement

The author wishes to thank the participants of the International Atlantic Economic Conference held in New York, New York, U.S.A., 6–9 October 2005 for the comments and contributions made, which improved the paper substantially. Financial support provided by the Fundação para a Ciência e Tecnologia/MCT under the FCT/POCTI programme, partially funded by FEDER, is gratefully appreciated. The usual disclaimer applies.

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  1. Technical University of Lisbon, Instituto Superior de Economia e Gestão, Rua Miguel Lupi, 20, 1249-078, Lisbon, Portugal

    Maria Rosa Borges

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  1. Maria Rosa Borges
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Correspondence to Maria Rosa Borges.

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Borges, M.R. Underpricing of Initial Public Offerings: The Case of Portugal. Int Adv Econ Res 13, 65–80 (2007). https://doi.org/10.1007/s11294-006-9064-9

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  • DOI: https://doi.org/10.1007/s11294-006-9064-9

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