UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: This paper looks at IPO underpricing in the shipping sector. This sector is of interest as it has unique characteristics, among them pro-cyclicality, long history, and ownership concentration. Moreover, the average level of underpricing in shipping is reported to be substantially lower than the overall level. The effects of shipping-specific factors on underpricing are exhaustively studied in this paper for the first time. In connection with shipping characteristics, we hypothesize sev- eral underpricing theories to be relevant explanations of underpricing in the shipping sector. More specifically, we investigate an investor sentiment theory as shipping is highly exposed to business cycles; an information asymmetry argument as there seems to be low information asymmetry in shipping; and two ownership and control theories, namely, the Brennan and Franks managerial control theory and the Stoughton and Zechner agency cost theory, due to the highly-concentrated ownership prevalent in the shipping sector. In addition, we consider a partial adjustment theory that has gained substantial empirical support in the literature. In order to test the aforementioned theories and shipping-specific factors, we perform a cross-sectional regression analysis using a sam- ple of 60 shipping IPOs from four different stock exchanges. The partial adjustment theory and the Stoughton and Zechner agency cost theory are supported by the results, while the investor sen- timent theory, information asymmetry argument, and the Brennan and Franks managerial control theory are rejected. Importantly, the Stoughton and Zechner theory and downward price revisions prevalent among shipping firms can partially explain the low underpricing puzzle in shipping. The robustness of the obtained empirical results is verified using a control sample of non-shipping IPOs.

Keywords: Initial Public Offering; IPO underpricing; Shipping sector; Partial adjustment theory; Investor sentiment theory; Stoughton and Zechner theory.

JEL-codes: G30

50 pages, September 19, 2017

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