The impact of capital structure on Nordic IPO FirstDay returns and Equity risk : An empirical analysis of Nordic IPOs from 2014 to 2022

Abstract

The objective of this thesis is to examine the relationship between capital structure, equity risk, and first-day stock returns of initial public offerings (IPOs) in the Nordic stock markets. The objective is to find which firm-specific variables influence IPO first-day returns. According to previous literature, IPO offer prices are often set too low, leading to higher returns on the firstday of trading. The empirical data of this thesis shows that, during the period 2014–2022, first-day stock returns for companies going public in Denmark, Finland, and Sweden ranged from 1.20% to 15.01%, indicating that Nordic IPOs experience underpricing as other countries globally. The thesis focuses on IPOs in Denmark, Finland, and Sweden between 2014 and 2022 including total of 201 IPOs. The thesis uses OLS-regression analysis to investigate the relationship between first-day returns, equity risk, and financial ratios, such as book and market net gearing ratios. The regression results show that there is a negative statistically insignificant relationship between equity risk and capital structure. Conversely, previous literature finds a negative statistically significant relationship between equity risk and capital structure. Furthermore, the findings suggest that firms with higher firm-specific equity risk tend to experience more significant underpricing, resulting in higher first-day returns. The OLS regression analysis also reveals that higher firm-specific equity risk is associated with greater underpricing, which leads to high first-day returns for riskier firms. The result of the study finds that IPO underpricing can be partially explained by firm-specific financial variables such as book net gearing ratio, market net gearing ratio, and equity risk. Interestingly, previous IPO literature have found that IPO first-day returns are explained by information asymmetry such as, agency problems, winner’s curse, and investor sentiment. Moreover, the findings suggest that firm-specific variables may play a role in explaining IPO first-day returns.