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Author(s): S. K. Bundoo

Journal: African Journal of Accounting, Economics, Finance and Banking Research
ISSN 1933-3404

Volume: 1;
Issue: 1;
Start page: 1;
Date: 2007;
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Keywords: initial public offerings | determinants of underpricing | stock exchange of Mauritius

Many studies have documented that Initial Public Offerings (IPOs) of equity are substantially underpriced. This paper provides evidence on underpricing in Mauritius using the whole population of firms that went public between 1989 and 2005. The Mauritius environment is interesting given that the Stock Exchange of Mauritius (SEM) started operations as from July 1989 and the IPO market is seen as an important avenue for the raising of funds and for the growth of the private sector. It is found that a significant number of companies earn large positive returns on the first day of listing. When analyzing the daily return over a 7-day interval, it is found that the positive initial return persists for fifty per cent of the companies. The largest companies are the most underpriced, in agreement with the signaling hypothesis. However companies with small market capitalization also exhibit a high degree of underpricing. The regression model shows that the size of the issue and the return on the SEMDEX (the market index) are the statistically significant explanatory variables accounting for the degree of underpricing.

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