The short-run underpricing of initial public offerings in the Sri Lankan stock market

This study investigates underpricing of IPOs in Sri Lanka. On average, IPOs are underpriced by 34%. Small issues are more underpriced than large issues, and privatization issues are more underpriced than conventional issues. Investor sentiment is positively related with underpricing and affects small and large issues similarly. Small privatization issues are more underpriced than large privatization issues and partially explain the asymmetry in underpricing between small and large issues. However, even after controlling for investor sentiment, privatization, hot-market conditions, underwriter-size, and industry, small issues remain more underpriced than large issues. The results strongly support the uncertainty hypothesis for larger underpricing of small issues, and privatization issues.