Shariah-compliance and IPO underpricing: evidence from Pakistan Stock Exchange
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 5 July 2021
Issue publication date: 4 November 2021
Abstract
Purpose
This study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan.
Design/methodology/approach
Besides the ordinary least square’s method, this study used quantile least squares as a robust approach and stepwise regression for further analysis to investigate the underpricing phenomenon in Pakistan. Data of 84 IPOs listed on Pakistan Stock Exchange from January 2000 to December 2018 were collected to determine the impact of Shariah-compliant status and Shariah regulation on IPO underpricing.
Findings
Results of the study show that Shariah-compliant status has a negative relationship but Shariah regulation has a positive relationship with IPO underpricing. Hence, it is contended that Shariah-compliant firms have lower asset volatility and uncertainty than non-Shariah-compliant firms because of less information asymmetry, resulting in lower underpricing. These Shariah-compliant firms provide signals of high-quality IPOs as they must comply with the strict guidelines issued by the Securities Exchange Commission of Pakistan in addition to being considered as amicable by investors. Further, this study suggests that investors are more attracted to Shariah-compliant firms than non-Shariah-compliant ones.
Research limitations/implications
This study’s offers limited consideration of nonfinancial and financial characteristics that could influence the decision of investors to subscribe to IPOs. Besides, future studies could consider the screening benchmarks; for instance, debt and cash may explain the intensity of IPO initial return in Pakistan.
Originality/value
The present work empirically investigated the influence of Shariah-compliant status and Shariah regulation on IPO underpricing in Pakistan’s IPO market, which has been scarcely covered in the existing literature.
Keywords
Acknowledgements
The authors are grateful to the editors and anonymous referees of the journal for their extremely useful suggestions to improve the quality of the paper. The authors also would like to acknowledge their gratitude for funding from the Fundamental Research Grant Scheme FRGS/1/2018/SS01/UUM/02/7) (S/O Code: 14203) provided by the Ministry of Higher Education, Malaysia.
Citation
Mehmood, W., Mohd-Rashid, R., Tajuddin, A.H. and Saleem, H.M.N. (2021), "Shariah-compliance and IPO underpricing: evidence from Pakistan Stock Exchange", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 5, pp. 1081-1098. https://doi.org/10.1108/IMEFM-06-2020-0271
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited