Aftermarket Risk and Underpricing of Initial Public Offers in the Arabian Gulf Countries : An Empirical Analysis

The recent evidence has shown that IPO uncertainty continues in aftermarket until a normal market is established. Evidence also indicates that aftermarket risk measured by stock's beta is related to the degree of underpricing in the US market. This may imply that additional underpricing may be required to compensate for aftermarket risk, assuming that the aftermarket risk is important for the investors who want to buy primary shares from the public offers and/or aftermarket trading. Therefore, we examine the relationship between aftermarket risk and underpricing by using data from six Arabian Gulf countries, an economic region where all personal incomes including capital gains are tax-free. The evidence based on 147 samples depicts that IPO firm's aftermarket risk measured by stock's beta has significant relationship with the degree of underpricing. Thereby, it is confirmed that the relationship between aftermarket risk and underpricing also exists in the Arabian Gulf countries, an important economic region outside the US. Paper concludes that that underwriters and/or issuers may need to forecast the expected aftermarket risk while determining the offer price