The Initial Public Offerings Underpricing and Its Determinants in Tehran Stock Exchange

This paper seeks to investigate the initial aftermarket performance of 142 Iranian IPOs listed on Tehran Stock Exchange for the period 1997 to 2005 to contribute to the growing body of international evidence on the anomalous performance of IPOs in the short run. Results suggest that the Iranian IPOs are underpriced on initial trading window of 1 through 4-weeks on average of 14.85%, as are almost all IPOs in different countries. In terms of industry sub-sectors, the adjusted initial underpricing is 7'324% for minerals, 62.31% for oil and nuclear fuel, and 1.12% for multimedia industries. Finally, the investigation of possible factors influencing the high initial positive returns in TSE (the size of the issue, age of the issuing firm, financial risk of the issuing firm, gross proceeds from the issue, market sentiment, offer rate, and the institutional ownership of the issue) indicates that the offer rate and financial risk of the issuing firm are significant determinants of initial underpricing of Iranian IPOs. As such, the results yield strong support for the signaling hypothesis as possible explanation for the underpricing phenomenon on the Iranian IPO market