Is Operating Cash Flow a Contributing Factor to IPO Underpricing? - A Study of all IPOs conducted on the Stockholm Stock Exchange from 1995-2010

Abstract

Problem There is a substantial amount of research indicating that IPO underpricing exists. Consequently, researchers and market participants are spending vast amounts of time with the intention of identifying the underlying reasons for the existence of underpricing. However, even though considerable studies have been conducted within the area of research, the results are contradictive. The overall problem remains: what are the underlying factors behind IPO underpricing? Purpose The main purpose of this thesis is to analyze the impact of Operating Cash Flows (OCFs) on the occurrence of underpricing in companies going public. This study seeks to empirically examine if a correlation exists between OCFs and the occurrence of underpricing on the listing date and 180 days later. Limitations The aim of this study is to quantify the impact of OCFs on the occurrence of IPO underpricing on the Stockholm Stock Exchange from 1995-2010. Method The study can be categorized as deductive as it attempts to statistically test the theories of Winner’s Curse, Market Efficiency, Signaling and Adverse Selection with the support of the empirical findings. Findings The main conclusion of this study is that positive OCFs are shown to be statistically correlated with the occurrence of underpricing on the day a new stock was listed on the Stockholm Stock Exchange from 1995-2010. Furthermore, the study concludes that the market has corrected for initial underpricing 180 days after the listing date. Suggestions The main suggestion of this study is that future research should identify and test additional variables in conjunction with testing for the significance of positive OCFs in relation to the occurrence of IPO underpricing. The ambition is to contribute to a predictive IPO underpricing model.