Abstract: - The study is devoted to a little studied IPO underpricing problem. IPO underpricing is the difference

between the IPO offer price paid by institutional and individual investors who commit to buying shares before

trading on the Stock Exchange and the closing price, which is the last trading price recorded when the market

closes at the end of the day. This price difference shows the extent to which the company did not value itself

and how much capital it did not make due to the too low offer price. By assessing the price difference and

multiplying it by the number of shares issued in public turnover on the Stock Exchange, the company can

calculate exactly how much capital it could additionally invest in financing growth and business development,

which in the long term would also create added value to the entire national economy. The aim of the study is to

research the problem of underpricing in the Baltic capital market.

the Baltics as a whole are still not being fully

realized and used, although interest and demand

from potential investors are growing. However,

whole. An active financial market environment

opens up a wide range of possibilities for more

efficient and dynamic use of savings, which is

particularly relevant in the context of low interest

rates for different categories of investors. For

entrepreneurs, it diversifies the forms and

possibilities of attracting external financing.

actively researched, but there is an aspect that was

not previously given so much attention by

2 Problem Formulation

Financial analysts and scientists around the world

have been studying the phenomenon of IPO

underpricing for several years. IPO underpricing is

the difference between the offer price and the

closing price of an IPO offer. The offer price is what

institutional and individual investors pay when they

commit to buying shares before trading on the Stock

multiplied by the number of shares issued, is the

unearned capital, which is called "money left on the

table" in English.

2.1 Pricing Models

Selection of the cooperation partner (financial

intermediary) that will provide qualitative assistance

in the process of initial placement of shares is very

important. A financial intermediary may issue

securities for consideration or guarantee the

financial intermediary undertakes not only to place

shares on the primary market, but also to provide the

price to sales ratio, EV/Sales enterprise value-to-

sales ratio, EV/EBITDA enterprise value to earnings

before interest, taxes, depreciation and amortization,

etc.).

used approach based on discounting forecast cash

flows at the investor's expected rate of return

(discount rate). In practice, this method often has

limited use, as it can be difficult to determine future

cash flows and an accurate discount rate. The free

value of the company by calculating the present

value of the expected future dividends that the

company will pay to its shareholders. Most often,

investment banks use this model when assessing

stable and profitable companies that regularly pay

dividends. This is due to the fact that it is relatively

difficult to forecast dividends for new companies for

which historical data are not available [5].

conclusion that intermediaries usually choose to

customer and employee relationships, technologies,

brand value, human capital, corporate governance,

etc. are defined as non-financial indicators [6, 22].

Once the intermediary has assessed the company, he

discusses the price range of the IPO offer with the

company's management, which will later be

included in the issue prospectus. However, it should

be noted that after meetings with institutional

investors, price update is possible.

2.2 Underpricing Aspects

A correctly determined price is crucial in the IPO

process. But there are many examples where the

price was set incorrectly. Zoom began trading the

shares on April 18, 2019 on the Nasdaq exchange.

The company's share offer price was set at $36 per

share. A total of 20,869,565 shares were put into

and determining the offer price. Thus, the amount of

capital that the company will receive depends on the

decisions taken by the intermediary. There exist

several studies on the phenomenon of underpricing

affecting companies which are issuing shares [9, 10,

11, 12, 13, 14, 15]. It is important to note that

theories are based on different aspects of the

relationship between investors, issuers and

investment banks. In the context of our research, we

will consider the theory of IPO underperformance

the shares are overvalued and the investment will

not be so profitable. However, at the end of the 20th

century, when the scientists began to study

empirically the profitability of IPO companies

compared to the performance of market indices or

similar companies, it was found that IPO companies

show lower yields. One of the first theories

developed by a professor at New Orleans

University, Edward M. Miller, states that investors

are willing to pay more for the company's shares

the average value of the market. According to

research by American professor Jay R. Ritter, this

happens within three years of the company's IPO. In

addition, Jay R. Ritter highlights as one of the IPO

phenomena the "hot IPO market", which has already

been mentioned at the motivation of companies to

conduct IPOs. At a time of market growth, a so-

called "a window of opportunity" period is created,

when the company's management knows that their

shares will be overvalued, thus being able to raise

disclosures about financial indicators will force the

market to adjust the fair value of the company [15].

According to Jay R. Ritter's calculations of IPO

Source: Author's table based on Nasdaq Baltic data

Table 1), Saunum Group stands out, a company

excessive demand. If the company's certified

consultant, summarizing the demand and wishes of

investors, raised the price, the company could get an

additional hundreds of thousands of euros for the

development of its business. The next company with

one of the higher underpricing rates – 20.34%, is the

Estonian company Express Grupp. As in the case of

Saunum Group, the demand for Express Grupp

shares, both from institutional investors and

individual investors six times exceeded the number

of shares offered. For other companies with

shares were also significantly underestimated, as a

This is largely due to a sharp fall in net profit for all

companies in the third year after the IPO, with the

exception of just a few with a slight increase in

profits.

used to compare ROA ratios. Consequently, the first

hypothesis is as follows:

H0: ROA ratios of companies remains the same

after an IPO;

H1: ROA ratios of companies decreases after an

IPO.

hypothesis is rejected because the p-value is 0,12,

significant, the following hypotheses were set for

the z-test:

H0: ROE ratios of companies remains the same after

an IPO;

H1: ROE ratios of companies decreases after an

IPO.

can be seen that the p-value is below 0,05 (0,001)

drop.

margin or the profitability of turnover. The NMP

ratio indicates the percentage of the company's net

profit on net turnover (see Table 5).

Table 5. Nasdaq Baltic stock market company profit

companies. For many companies, the ratio is less

than 5%, which, however, is considered low. The

difference between pre- and post-IPO indicators is

[12] Gilmartin Group, Director & Officer (D&O)

[15] Kokorev D.A., Chistyakov A.G., Initial public

[16] Ritter J.R., Initial Public Offerings: Updated

[17] Bruzgyte E., Guliyeva G., IPO Underpricing in

[19] Solovjova, I. New Approaches to Regulating

[20] Ahmad Z., Suh Mei L., Operating Performance

[22] Solovjova I., Romanova I. Bank Reliability