Study reveals that underpricing was 19-30% lower in UAE markets
IPOs in the UAE markets raise more capital than they would in the US, according to a senior economist.
Professor Alex Frino, deputy Vice-Chancellor of University of Wollongong, Australia, based his views on his study which examined the pricing of IPOs on the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) of stocks that would be too small to include in the Standard & Poor’s 500 (S&P500) but would be large enough to be included in the ADX or DFM General Index.
Researchers examined these against a comparable sample of stocks listed on US markets, focusing on underpricing - a comparison of the issue price of stocks to their price on listing. They found underpricing was 19-30% lower in UAE markets.
Professor Frino said this showed companies were able to raise more capital, all else being equal, by listing in the UAE.
“Underpricing is the discount on the issue price that’s given to induce investors to fully subscribe for all the shares in an IPO,” he said. “Wherever we look we find that listings of these kinds of companies in smaller markets require less underpricing, meaning companies can raise more capital on smaller bourses.”
The latest research rounds off a three-year research program looking at IPO potential in various markets vis-a-vis the world’s deepest and most liquid market, the US. The research investigated IPO performance in Australia, Hong Kong, Singapore and UAE markets and, in all cases, underpricing was lower in the smaller markets.
“Even after controlling for differences among a large number of variables known to influence underpricing, including deal size and issue price setting mechanism, we found that underpricing is on average 19-30% lower in the UAE,” said Professor Frino. “Of all the markets we looked at, this was by far the highest difference, meaning companies that wouldn’t make the S&P500 cut-off should be seriously considering the UAE as a listing venue,” he added.
Professor Frino said the study supported the UAE’s potential to be a stronger financial hub.
“The US is still the marquee market for companies to list, but our research shows very significant benefits for listing in the UAE,” he said. “We suspect that the mass of institutional investor money targeting companies of this size in the UAE is greater than it is in the US and that’s a factor that private companies that are planning to list should take into account.”
He revealed his findings during a recent talk entitled ‘The UAE as a Global Financial Centre: New Research into its current performance and future prospects’ as part of a business organised by The University of Wollongong in Dubai (UOWD). More than 30 entrepreneurs attended the event.