Extreme IPO underpricing and the legal environment in wealthy emerging economies

•Examine the short- and long-run performance of 139 IPOs in the GCC region.•Underpricing in the GCC is of the largest in the world at 227.4%.•Underpricing is a function of several factors.•IPOs in the GCC perform poorly over the long-run.•Investors initial over optimism could explain the poor long-run performance.

This paper investigates IPO performance in the wealthy economies of the Gulf countries using restricted access data from regularity bodies. Contrary to asymmetric information theories, we find that IPO performance relies crucially on the unique institutional framework adopted by regulators. We also find that governance regulation in economies with weak regulation tends to provide better protection for investors in IPO markets. Finally, we find that underpricing is more severe when foreign investors are banned from sharing IPOs.