International Research Journal of Applied and Basic Sciences © 2014 Available online at www.irjabs.com ISSN 2251-838X / Vol, 8 (7): 873-880 Science Explorer Publications Evaluation of the Factors Affecting Initial Public offering Underpricing by Newly-accepted Companies into Tehran Stock Exchange Mashaallah Randideh Department of Accounting, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran. Corresponding Author: Mashaallah Randideh ABSTRACT: Previous studies have reported three unusual features for initial public offering: underpricing (short-term return), variability of initial offerings from year to year, and negative long- term performance. The aim of the resent study was to examine the factors influencing the underpricing by newly-accepted companies into Tehran stock exchange. New resources are provided for the development of the company on arrival at the stock exchange, that’s why companies like to be traded in stock exchange. In this study, the relationship between the independent variables (age of company, type of industry, and type of ownership) and underpricing were analyzed to evaluate the factors affecting the underpricing of new shares. The statistical society included newly- accepted companies into Tehran stock exchange from 2004 to 2008. The findings indicated no significant relationship between the variables of the study and underpricing during the study period. This indicates that the activity of Tehran stock exchange is similar to that of other countries. Keywords: initial offering, underpricing, age of company, type of industry, type of ownership INTRODUCTION In recent decades, initial public offering has undergone a remarkable growth all over the world. In the late 1990s in the United States, the significant yield of initial public offerings in the technology-based companies at the first day, the formation of internet companies’ bubbles during 1999-2000 and then the bubble’s bursting during 2000-2001 have caused intense fluctuations in initial public offerings. This has attracted the attention of researchers and experimental studies and consequently the theoretical literature has expanded in this field. Using methods and techniques of public offering of stocks is one of the most efficient methods of privatization in most of the countries. Implementing the provisions of the policies of Article 44 of the constitution in transferring the state-owned companies to decrease the government incumbency and to increase optimum supervision on resources, providing the requirements for equity shares and implementing the separation of primary and secondary markets as well as their mechanisms have caused experience be considered important in other capital markets and the process of offering shares be carried out with more accuracy by estimating the possibility of their application in the economical conditions of Iran in terms of content and structure. Initial public offering is a condition in which an enterprise that has not been active in the stock exchange so far, sells its shares to the public. Three similar models of initial public offering that have been observed in the world include: Short-term underpricing of the share Cycles affecting the underpricing of initial shares Poor long-term performance and less than the market performance (Rittre, 1998) These three phenomena have been discussed in the literature. The focus of the present study was on the evaluation of the factors influencing the underpricing in the initial public offering. Hundreds of companies in the world enter the stock exchange daily through initial public offering. They try to provide the required investment to continue and expand their activities. So, it is important for these companies that the determined price for their shares indicate the real value of their properties, development and growth opportunities in the future. This is while the studies conducted on initial offering of shares by many researchers around the world show that the determined price for shares and securities of companies in the initial offering is not favorable and make investors increase their short-term interest to purchase the shares of these companies and gain unusual revenue. Initial public offering means the first selling of a company's shares to the stockholders in the stock exchange. The companies that are offered in the stock exchange for the first time are not newly-established. Intl. Res. J. Appl. Basic. Sci. Vol., 8 (7), 873-880, 2014 The word “initial” here means the company’s shares are offered to the external stockholders in the stock exchange for the first time. The most important and interesting event about initial public offering is underpricing. Underpricing refers to a condition in which the firm offering the shares determines the initial price of share surprisingly lower than the market price. The amount of underpricing or short-term revenue is obtained from the difference between the closing price in the first day of exchange and price of the shares divided by the stock price. Thus, as investors get the shares with lower prices in the initial public offering and sell them with higher prices in the first day of initial offering, they can gain a large benefit. This process is known as underpricing in the initial public offering market. Initial offering in Iran during the recent years has had a remarkable growth so that the number of initial offerings in 2003 and 2004 were 48 and 39, respectively. This was virtually equal to all initial offerings from 1997 to 2994 (89 initial offerings). Enactment of securities act in 2005 by the parliament and enactment of the instructions of registration and public offering of securities in 2006 by the supreme council of stock exchange indicate coherence and systematization in the initial public offering market. This study made an attempt to investigate the factors affecting underpricing in the initial public offering by the newly accepted companies into Tehran stock exchange. The research questions were formulated as follows: What is the relationship between the age of company and underpricing of the shares? What is the relationship between the type of industry in which there is initial public offering and underpricing? What is the relationship between the type of ownership (public and private) when being accepted into stock exchange and underpricing? The general and specific objectives of this study are presented as follows: Identification of the factors affecting underpricing in the initial public offering by the new companies accepted into Tehran stock exchange in order to direct the stock exchange toward determining the primary price and prospective market according to the market conditions as well as other factors. The theories and hypotheses are analyzed with regard to Tehran stock exchange to predict an appropriate model when trading new shares in order to help investors in Tehran stock exchange. Some of the studies conducted in and out of Iran are presented as follows: In the study carried out by Dr. Abdeh Tabrizi & Demouri (2003) in Tehran stock exchange on the shares of the newly-arrived companies in the market from 1990 to 1995, the factors influencing long-term return were the amount of annual trade of shares, size of the company, and short-term return gained from trading the shares of the newly-arrived companies in the stock exchange. The results of this study indicated that higher short-term return and lower long-term return of the newly-accepted companies into stock exchange were comparable to the market (index) return. Thus, the pricing performance of the newly-accepted companies into Iran’s stock exchange could be considered similar to other capital markets in other countries. In his M.A. thesis titled “the measurement of short-term and long-term returns of initial public pricing” conducted in Ahwaz University of Shahid Chamran, Mehdi Alikhani Bowani (2008) investigated 122 companies in Tehran stock exchange from 1998 to 2006. The findings showed that in Iran like other companies, the unusual short-term return of initial public offerings was positive and equaled 13.78%, but there was no evidence on the negative performance regarding long-term return. Also, only the market return affected the 3-year long- term return of initial public offerings among factors such as market return, age of the company, and short-term return. Ritter & Welch (2003) analyzed the initial public offerings in the United States and investigated why companies present initial public offerings. They suggested various reasons the most important of which are presented below: Access to more funds: while the company has initial public offering and its shares are traded in stock exchange, owing to the requirements of special disclosing of stock exchange, financial institutions and banks give larger loans to companies. Joining the stock exchange will expose the company, which has probably been unknown for some time, to millions of investors. This causes an increase in the company's shares and more precise evaluation of the company. Carrying the name of "public limited company" can bring indirect benefits for the enterprise as well, one of which can be hiring competent managers. Gounopoulos (2003) studied the performance of initial public offerings in Athens' stock exchange. By referring to the studies conducted in the capital markets in the United States, England, Germany, Canada, China, Switzerland and Australia, he considered initial underpricing of the new shares as a general and common phenomenon in the capital market. Many studies have been conducted on the performance of the new shares in the Athens' Stock exchange. That's why the researcher made an attempt to analyze the short-term performance of the new companies in Athens's stock exchange from 1990 to 2001. He presented many hypotheses (16 hypotheses) for his study, some of which are presented below: There is a negative relationship between the size of the company and underpricing. 874 Intl. Res. J. Appl. Basic. Sci. Vol., 8 (7), 873-880, 2014 There is a negative relationship between the credibility of the new sharebrokers and underpricing.