Underpricing of U.S. IPOs in the Oil and Gas Industry
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The thesis investigates 212 IPOs conducted in the U.S. market in the period 2000 to 2020. IPOs appear to be consistently underpriced, which indicates that issuers “leave money on the table” when going public. Based on selected theories explaining underpricing, we define four research questions to investigate if these theories explain underpricing in U.S. oil and gas companies. Through the identification of characteristics in companies and market conditions at the time of the IPO, we aim to find which variables can help predict the degree of underpricing of an IPO. The problem statement we seek to answer in this thesis is: «Can certain market or company characteristics explain the level of underpricing of companies in the oil and gas industry that go public in the U.S. market?» The average underpricing is significantly higher in all companies at 13.6% compared to oil and gas companies at 4.22%. These findings align with research done by Loughran and Ritter (2004), stating that underpricing varies across industries. Less risky industries, like the oil and gas industry less underpriced. The defined regression models provide a basis for investigating the relationship between the first-day return, market risk factors, company-specific risk factors, and the choice of underwriter. We used multiple regressions for the model in our thesis. Our results show that market risk does not provide an explanation for underpricing. By looking at company-specific risk, we find that the size and age do not have any significance in explaining first-day return. We found that larger companies are generally less underpriced, which aligns with previous research stating that larger companies underprice less. The significance of the age of the companies has been previously researched, where the findings have concluded that older companies underprice less. This is supported by theory stating that older, established firms are considered less risky because they have more extended operating history. By looking at the average underpricing, we can determine that there is less underpricing in older companies compared to younger ones. In the cases where the issuing company has used two or more reputable underwriters, we find evidence of less underpricing. Hence, our results align with previous research, which states that companies that hire reputable underwriters are less underpriced. Further, in the cases where the issuing company has used two or more underwriters, where either one or none of the underwriters are amongst the five largest investment banks in the U.S. based on market capitalisation, we find more underpricing. The study shows that there are difficulties in understanding and explaining underpricing in IPOs. Hence, there is room for further research on this topic using new or alternative theories and variables.