Impact of Country-Level Institutional Quality, Sponsors Ownership and Price Mechanism on Ipo Initial Return in Pakistan Stock Exchange

This study investigates the variables affecting the Initial Public Offering (IPO) initial returns in Pakistan from 1996 to 2019 using three pre-listing information variables namely country-level institutional quality, sponsor ownership, and pricing mechanism motivated by the fact that the Pakistani IPO market contains diverse institutional and regulatory frameworks. Multiple regression analyses, i.e., Ordinary Least Square and Stepwise Regression, were used on 102 IPOs listed in the Pakistan stock market., IPO oversubscription and underwriter reputation are incorporated as moderating variables. Findings show that political stability, government effectiveness, and regulatory quality positively affect IPO initial return, whereas the lock-up ratio give a negative effect. Oversubscription give a negative moderating effect on the relationship between the pricing mechanism and IPO initial return. Political stability was found to lead to a high IPO initial return. Further, the quality of public service, the independence of civil service from political influences, and governmental legitimacy enhance investors’ confidence in companies’ prospects which increase demand for IPOs and higher initial returns. In addition, a good regulatory quality promotes market transparency and reduces uncertainty, which give signal of high-quality IPOs, resulting in high initial returns. The negative impact of the lock-up ratio on IPO initial return supports the prediction of the Risk-Return Trade-Off Theory, which states that the lock-up ratio signals the IPO quality. Meanwhile, the rule of law, lock-up period, and pricing mechanism are insignificant. Similarly, underwriter reputation plays an insignificant moderating role in the link between pricing mechanism and IPO initial return. The results offer valuable insights to market regulators, policymakers, investors, and underwriters in ensuring adequate subscriptions of the shares issued, as these variables are crucial for company transparency and market efficiency. The findings will also facilitate better investment decision-making concerning IPO subscriptions.