Information asymmetry and the valuation of new issues : the case of Egypt

While the literature on underpricing of initial public offerings (IPOs) of common stock is various and expansive, very little research has been undertaken in countries where capital markets are less developed. This thesis therefore attempts to address the shortage of such research in Egypt, which has been witnessing an important phase of transition towards a broader adoption of market-oriented policies through the revitalisation of its stockmarket since 1991. The aim is to measure the short-run performance of IPOs in an effort to compare the maturity of the Egyptian capital market with that of other nations, both of developed countries and a peer group of developing countries. This thesis also seeks to determine whether the underpricing phenomenon is due to the usual factors suggested by classical IPO theories or is related to some specific features of the Egyptian market transformation. This thesis employs a sample of 59 Egyptian IPOs listed in the Egyptian Stock Exchange (ESE) during 1994-2005. This thesis suggests the winner’s curse model can be applied. On average, Egyptian IPOs offer an initial return of about 10.16%, which is considered, to some extent, lower than the initial returns of many other developing countries. Additionally, there is a general tendency for privatised IPOs (PIPOs) to be underpriced to a greater degree than private sector IPOs. The industry of the firm and year of an IPO significantly affects the level of underpricing in Egypt. Results are consistent with the political economy theory as the Egyptian government tried to build up investors’ confidence by underpricing PIPOs more than private-sector IPOs, underpricing regulated industries more than competitive industries and underpricing early IPOs more than late IPOs.EThOS - Electronic Theses Online ServiceGBUnited Kingdo