IPO initial return in Pakistan: influence of country-level institutional quality

Abstract

PurposeThe present study investigated the influence of country-level institutional quality on IPO initial return using World Bank Governance indices.Design/methodology/approachThis study analysed 84 IPOs listed on Pakistan Stock Exchange between 2000 and 2017 using cross-sectional data. The impact of country-level institutional quality on IPO initial returns was examined using ordinary least square, robust least square, stepwise least square and quantile regression.FindingsEmpirically, the values of political stability, government effectiveness and regulatory quality were positively significant, whereas rule of law and control of corruption were negatively significant in explaining the intensity of IPO initial return. The results also show the presence of significant risk in the market. Hence, investors were compensated with higher initial returns for weak country-level institutional quality. The results also reveal that improving country-level institutional quality would improve the financial market transparency, thereby reducing IPO initial returns.Originality/valueNo studies have been conducted regarding the influence of country-level institutional quality on IPO initial return in Pakistan. This study is a pioneering study that seeks to give insights into the link between these variables in the context of Pakistan.