Underpricing and performance of IPOs in Saudi Arabia

Finance/ Research: Underpricing and performance of IPOs in Saudi Arabia
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Background and context of project
There is a growing interest on investments in Saudi Arabia, since foreign investors are better placed to invest in the country more than even before. In 2014, the Capital Market Authority came up with plans to allow investors to have up to 10% of the stock exchange value (Martin & Nair, 2014). At the moment, foreigners mostly rely on swaps to trade indirectly shares in the Saudi stock exchange, but Saudi citizens invest directly. As private firms seek to raise capital through the stock market, there is a need to understand how the shares perform in the long-term, and if under pricing characterizes most of the stocks. Even though, under pricing and underperformance have previously being discussed, research has mostly focused on western countries with long history of stock market participation.Aims and objectives
To determine the extent to which there was under pricing and underperformance after issuing an IPO.
To determine whether companies issuing an IPO in the Saudi market influence the offer price.
Assess the performance of Saudi companies which went public after one year and 5 years.
Determine whether the owners and structure of firms issuing the IPO affect their performance over time.
Literature review
Research o the performance of IPOs typically report that under pricing occurs in most counters across the world, but some then use theories to explain performance and under pricing of IPOs. Alhassan, Delgado and Omran (2007, p. 19), delved into the performance of IPOS in the GCC countries, reporting that consistent with previous research, there are abnormal returns related to the IPOs among the six GCC countries, for 47 firms. The performance of IPO is typically assessed using the returns on assets (ROA) ratio, where it is possible to assess performance post IPO. Alanazi & Liu (2013, pp. 15-16) reported the decline in profitability for IPOs in GCC countries, and this could be a result of the rise in agency costs.
According to Alqahtani & Mayes (2014, p. 10), in most cases IPOs tend to be oversubscribed, and issuing companies may offer new equities at a discount given that there is information asymmetry for new investors. Nonetheless, there are other factors that cause firms to underprice the IPOs. Mispricing is one of the problems that affects IPOs, and under pricing can often be a result to misjudgment and lack of proper information (Alqahtani & Mayes 2014, p.2). Because of Sharia compliance, research on undepricing would provide a more broad cont...