Initial returns: underpricing or overvaluation ? Evidence from easdaq and euronm

This paper investigates initial returns of Easdaq and EuroNM IPOs and explains part of these returns. Average first day return of 300 IPOs introduced before October 1, 1999, is 36.01 %. The most significant explanatory variable is the mean return of previous IPOs, indicating that high initial returns are caused by too high first trading prices due to investor overreaction and positive market sentiment. Riskier IPOs present substantially higher initial returns. Venture capitalists are not able to significantly reduce initial returns, nor does size of the IPO influence initial returns. Our results indicate that high initial returns are caused by underpricing as well as overvaluation.