Underpricing of IPOs in Saudi Arabia and Sharia compliance

Journal of Islamic Accounting and Business Research, Vol. 6, Issue 2, 2015

Posted: 12 Jul 2014 Last revised: 4 Mar 2018

See all articles by Faisal Alqahtani

Faisal Alqahtani

University of Auckland; Taibah University

David G. Mayes

University of Auckland Business School (Deceased)

Date Written: September 23, 2014

Abstract

Purpose – The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs) and whether the sharia-compliance would have a significant impact on the initial returns.

Design/methodology/approach – A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.

Findings – We find that underpricing not only occurs but is also among the highest levels in the world. While traditional factors affecting initial return include age, market timing and firm size, we find that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in initial public offerings.

Research limitations/implications – Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.

Originality – This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in IPO market.

Keywords: Islamic finance, initial public offerings, Stock returns, Market performance, Saudi Arabia

JEL Classification: E44, G11, G24, P17, G10

Suggested Citation

Alqahtani, Faisal and Mayes, David G., Underpricing of IPOs in Saudi Arabia and Sharia compliance (September 23, 2014). Journal of Islamic Accounting and Business Research, Vol. 6, Issue 2, 2015, Available at SSRN: https://ssrn.com/abstract=2464955

Faisal Alqahtani (Contact Author)

University of Auckland ( email )

Auckland
New Zealand

Taibah University ( email )

Prince Naif Ibn Abdulaziz, Tayba, Medina Saudi Ara
Mediana, Madinah
Saudi Arabia

David G. Mayes

University of Auckland Business School (Deceased)

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
944
PlumX Metrics