Economics, Management, and Financial Markets

Volume 7(1), 2012, pp. 81101, ISSN 1842-3191

DOES DUAL LISTING AFFECT UNDERPRICING

OF INITIAL PUBLIC OFFERINGS?
EVIDENCE FROM BANGLADESH CAPITAL MARKET

MD. AMINUL ISLAM

amin@unimap.edu.my
School of Business Innovation and Technopreneurship,
Universiti Malaysia Perlis
RUHANI ALI
ruhani@usm.my
Graduate School of Business, Universiti Sains Malaysia
ZAMRI AHMAD
zahmad@usm.my
School of Management, Universiti Sains Malaysia

ABSTRACT. The Law of One Price advocates that identical securities must
have identical prices regardless of where they are traded. Bangladesh capital market
is unique in a sense that IPOs are allowed for dual listing. This means that a
company can be simultaneously listed in both the Dhaka Stock Exchange and the
Chittagong Stock Exchange. This phenomenon is not common in either developed
and developing economies. There is a lack of literature and research on dual listing
and its effect on underpricing and portfolio returns. This compels us to investigate
the issues related to dual listings. A sample of 191companies that were listed during
19952005 is selected to find out the effect of dual listing on the underpricing.
Among these 172 companies are dual listed. Dual listed IPOs recorded higher degree
of underpricing of which 160 IPOs were underpriced and 12 were overpriced. The
level of underpricing among dual listed IPOs was 458.90%. There were 11 com-
panies listed with Dhaka Stock Exchange that are not listed with CSE and the level
of underpricing recorded 58.60%. There were 8 companies listed with Chittagong
Stock Exchange that are not listed with DSE and the level of underpricing recorded
34%. Findings confirmed that dual listing significantly affects underpricing of IPOs
and the law of one price theory is negative in the context of Bangladesh capital
market. Findings shows that age of the firm, company size, offer size, and industry
that an IPO is listed do contribute to the level of underpricing of dual listed IPOs in
the Bangladesh capital market.
JEL Classification: D24, D51, E22, R53

Keywords: initial public offering, underpricing, dual listing,

Dhaka Stock Exchange, Chittagong Stock Exchange

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1. Introduction

Initial public offering underpricing, or high IPO return is a phenomenon

common to most stock markets, regardless of whether these markets are in
developed or emerging economies (Ritter, et al. 1984). A common per-
ception is that underpricing of IPOs is a contradiction to market efficiency
and may hurt emerging firms trying to raise capital for expansion. This
perception has spawned an extensive literature attempting to explain this
apparent financial anomaly. A number of IPOs underpricing have been put
forth and tested against the data of various stock markets. Rocks model of
underpricing as an expected equilibrium results are supported by Beaty
and Ritter (1986), who in turn, proposed that underpricing is related to ex
ante uncertainty. As a follow up to IPOs underpricing, McDonald and
Fisher (1972), Reilly (1978), Dawson (1987), Yong (1996), Haque and
Musa (2002), Lowry et al. (2006), and Taufil Mohd (2007) maintained that
there are significant returns to the investors in the short run. However
there is a lack of literature and studies on dual listing and its affect on
underpricing and the portfolio returns. Although numerous empirical studies
have been carried out and theoretical literature written to enhance peoples
knowledge towards these issues yet it is arduous for people to clearly
understand the various issues related to IPOs especially with different types
of equities in different industries and in different markets.
Previous studies indicated that underpricing occurs across a number of
different times and samples (McGuiness, 1992). The degree of under-
pricing varies from one issue to another. Studies on Bangladesh new stock
offers by Islam (1999), and Haque and Musa (2002) indicate existence of
higher degree of underpricing. The analysis of the excess returns after
trading began also reveals that the price adjusts rapidly to the underpricing
of the initial offers. This result is consistent regardless of whether the amount
of increase registered at the opening day is high or low.
The degree of underpricing in the Bangladesh capital market is relatively
high compared to that of other Asian and advanced stock markets. Islam
(1999) documented that the average initial returns is 116.01 percent during
the period of 19941999. Hoque and Musa (2002) find that during the
period between 1994 and 2001, the IPOs of Dhaka Stock Exchange was
largely underpriced at 285.21 percent. The persistent higher level of under-
pricing is documented in recent studies by Islam et al. (2010a and 2010b).
At the same period the degree of underpricing in Malaysia was 46.44 percent
(Islam and Yeap 2009), Singapore and Turkey were 31.4% and 13.6%
respectively (Laughran et al., 2000) and in US market was 22% (Lowry et
al., 2006).

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 The purpose of this study is to investigate the effect of dual listing on
initial public offerings of the Dhaka Stock Exchange (DSE) and Chittagong
Stock Exchange (CSE) during the period of 19952005. This study is
important so as to educate people about the DSE and CSE, particularly
about the issue of dual listing and its effect on underpricing of initial public
offerings. Different levels of underpricing observed in different countries
show that there might be some unique features in each country and these
features might affect underpricing. Institutional differences in pricing and
allocation of shares play an important role in explaining the degree of
underpricing (Loughran et al., 1994). Bangladesh capital market is unique
in a sense that IPOs are allowed for dual listing. It is found that 95% IPOs
that are listed with CSE are also listed at DSE. Therefore it will be interest-
ing to find out the extent of underpricing and the effect of dual listing on
underpricing of initial public offerings in the Bangladesh capital market.
The remainder of this paper is organized as follows. Section 2 describes
an overview of Bangladesh Capital Market. Section 3 documents literature
review related to underpricing and dual listing. Section 4 discusses the data
and methodology. Section 5 presents the empirical results. The paper ends
with a conclusion of the study.

2. Bangladesh Capital Market An Overview

Bangladesh capital market is quite small compared to both other regional

markets and to the size of its economy. Though generally a capital market
has two prongs, the stock market and the debt market, Bangladesh market
has only stock market in active operation, as a debt market is still in its
developing stage. However, the stock market is also considerably small
due to flexible regulatory framework, lack of incentives and local business
ethos. Among over 40,000 small and medium companies only 350 have
become listed till December 30, 2007, of which 33 have been de-listed in
the past 15 years, though the government put a lot of effort to attract these
companies to get listed, on average only 10 companies have joined the
market each year.
Though industrialization has picked pace in Bangladesh in the last
three decades, capital market has failed to attract the entrepreneurs as the
key source of capital, which has usually been occupied by the banking
system since beginning. That is why Bangladesh capital market has one of
the lowest market capitalizations as percentage of GDP in the region as
well as other similar sized economies, as the following Table 1 shows. Its
neighboring country, India, which shares almost the same industrial history,
has the highest percentage of market capital over GDP.

83
Table 1 Market capital as percentage of GDP (As of December 2008)
Sl Country Indices year Market Capital of Market Capital as
ending 2008 the listed Percentage of
stocks(US$ mn) GDP
01. Bangladesh 1631.34 $15138.51 17.00%
02. India 9647.31 $647204.80 54.99%
03. Pakistan 5865.01 $23500.00 16.45%
04. Sri Lanka 1631.34 $4285.90 13.25%
05. Malaysia 876.75 $189239.20 101.35%
06. Philippines 1872.85 $52030.60 36.12%
07. Singapore 1761.56 $264974.40 164.23%
08. Thailand 449.96 $103128.20 42.03%
09. Hong Kong 14387.48 $1328768.50 641.39%
(Source: www.dsebd.org)

Bangladesh has two stock exchanges, namely Dhaka Stock Exchange (DSE),
established in 1954 and Chittagong Stock Exchange (CSE), established in
1995 Trading on both exchanges is conducted by Computerized Automated
Trading System. Both exchanges are self-regulated, private sector entities
which must have their operating rules approved by the Securities and Ex-
change Commission (SEC). At present, IPOs are allowed for dual listing.
95% IPOs that are listed with DSE are also listed with CSE. Both stock
exchanges practiced fixed pricing system. IPOs can only be priced at Tk10,
TK100 and TK1000. Thus when an existing DSE IPO gets registered with
CSE, investors are aware of the current market price of that IPO at DSE.
This makes it easy for investors to predict the price at CSE. For example,
if an existing IPO price at DSE is TK600 the issuing company may want
to price the IPO on CSE at TK500. But they are not allowed to do this.
The IPO must be priced at TK10, TK100 or TK1000. This results in high
degree of underpricing of IPOs in the Bangladesh capital market.

3. Literature Review

Dual listing is referred to the situation that arises when a security is

registered for trading on more than one exchanges. Dual listings can lead
to increased liquidity for the issue. However, management should not
underestimate the cost and timing implications involved in the dual listing
process. Due to the number of advisers involved in each jurisdiction, it is
inevitable that significant costs will be incurred. The timetable for achieving
a listing date is likely to be extended, as it should factor in that two
regulators may need to approve the prospectus/listing. Logistically, if a
dual listing is sought, a hybrid prospectus/admission document will need to

84
be produced, that satisfies the requirements of both regulators. The law-
yers and the sponsors/brokers should resolve their battle of the forms early
on in the process. The rules of the two exchanges (including corporate
governance) will need to be reconciled to produce a coherent and fully
compliant document.
The company seeks to get dual listed will need to arrange for the settle-
ment of its shares, generally by electronic means, in both jurisdictions and
may require two transfer agents as well as a global registrar in case of
different countries. In certain jurisdictions, transfer taxes may be charged
on the transfer of securities. Once listed, a company will need to comply
with the continuing obligations applicable to it of both stock exchanges,
which will have a continued cost of compliance. One fundamental tenet is
that price sensitive information must be made public to the markets as
soon as possible and synchronized in all jurisdictions where securities are
listed to ensure a level playing field. A listing of a companys securities on
a stock exchange is a major milestone and can be an extremely stressful
and time intensive period for management. Understandably, some companies
come to the view that a simultaneous dual listing is a bridge too far, and
adopt a wait and see approach, obtaining their first listing before embarking
on a second. In these circumstances if a company is listed on a designated
stock exchange (such as ASX, TSX, JSE, Euronext, NASDAQ or NYSE)
for at least 18 months, and wishes to access capital in London and trade on
AIM, it can take advantage of the fast track route to AIM saving costs and
time.
Early research related to initial public offerings (IPOs) documented the
tendency of IPOs to provide abnormal returns to investors who purchased
them at the initial offering (Stoll and Curly, 1970). Refinements and
extensions followed, including efforts to explain the variation in abnormal
returns across firms and underwriters (Miller and Really, 1987). Information
asymmetry, legal liability, and signaling theories have also been incorporated
into IPO related research (Allen and Fauhaber, 1989; Baron, 1982; Rock,
1982; Tinic, 1988).
The price formation process for IPOs may be susceptible to the exis-
tence of significant conditional price trends in the short-run aftermarket for
several reasons, there exists a growing body of literature noting that market
reaction to the signals or news announcements issued by seasoned firms is
not completed immediately (Aggarwal et al., 1990). Instead, market prices
adjust slowly to such news or signals, with trends extending over several
months. IPOs are characterized by a great deal of uncertainty about their
true value because of the scarcity of public information at the time of the
initial offering. In such a noisy environment, judging the true value of a
new issue is extremely difficult. Consequently, the initial return on an IPO

85
(i.e., the difference between the first market price and the offer price) reveals
significant information because it provides the first public indication that
the markets average assessment of the IPO differs from that of the under-
writer and the issuing firm. In addition, under the signaling theories (Allen
and Faulhaber, 1989; Grinblatt and Hwang, 1989; and Welch, 1989) the
initial market price provides a signal of the quality of the IPO.

3.1 Determinants of Underpricing

Much of the theoretical research on IPOs has focused on explaining IPO

underpricing. Possible reasons for underpricing include self-interested invest-
ment bankers (Baron and Holmstrm, 1980) and Baron (1982), the winners
curse (Rock, 1986), lawsuit avoidance (Tinic, 1998 and; Hughes and Thakor
(1992), signaling (Allen and Faulhaber (1989), Grinblatt and Hwang (1989),
and Welch (1989)), market incompleteness (Mauer and Senbet, 1992), book-
building (Benveniste and Spindt, 1989), and informational cascades (Welch,
1992). Evidence suggests also that in some countries IPO underpricing may
be due to the regulatory environment (Loughran, Ritter, and Rydqvist, 1995),
or because the allocation of IPO shares can be used as a bribe. Empirical
studies have found evidence that the underpricing for IPOs of financial
institutions is related to proxies for asymmetric information. Offer size
(Megginson & Weiss, 1991), age of the firm (Muscarella & Vetsuypens,
1989; Barry & Brown, 1994; Megginson & Weiss, 1991; Logue, 1973;
McDonald & Fisher, 1972), and the volatility of the post-offer return (Ritter,
1984) have all been associated with IPO underpricing. Taufil Mohd (2007)
conducted empirical tests on the relationship between regulations and under-
pricing on the Kuala Lumpur Stock Exchange and finds that the length of
time from price setting to listing date is negatively related to underpricing.
It was also found that the protective mechanisms lead to more under-
pricing for firms that went public between 1996 and November 6, 1997 or
those that went public after the Asian financial crisis. Merikas et al. (2009)
in their study on 143 global shipping IPOs in major stock exchanges
across the globe found out that underpricing is positively related to the age
of the firm, the reputation of the stock exchange the IPO is listed in and
the market condition of the period in which the firm went public, and
negatively related to the reputation of the underwriters. Jerry et al. (2009)
also found that the reputation of the underwriters is related to underpricing.
Alli et al. (2010) in their study on IPOs in postapartheid South Africa
concluded that the liberalization of economic policies affected in significant
reduction of level of underpricing of IPOs listed during the postapartheid
period.

86
 A study on IPO underpricing in China by Chang et al. (2008) found
that the initial return in the primary market is negatively related to the sub-
scription or lottery ratio. They also found that the initial return is negatively
related to offering size and offering prices; and positively related to the
market return. Farmer, Kelley and Katz (2010) found that underpricing is
higher in countries with corporate governance that strengthens the position
of investors relative to insiders. They conclude that when countries give
outsiders more influence, IPO issuers underprice more to generate excess
demand for the offer, which in turn leads to greater ownership dispersion
and reduces outsiders incentives to monitor the behavior of corporate
insiders. In other words, underpricing is a cost that insiders pay to main-
tain control in countries with legal systems designed to empower outsiders.
Similar findings reported by Thomas et al. (2010). Table 2 summarizes past
researchers findings of previous studies on determinants of underpricing
across the globe:
Table 2 Past research on the determinants of underpricing
Author(s)/ year Significant factors
1 Baron and Holmstrm (1980), and Baron (1982) Self-interested investment
bankers
2 Rock (1986) the winners curse
3 Tinic (1998) and Hughes and Thakor (1992) Lawsuit avoidance
4 Allen and Faulhaber (1989), Grinblatt and Hwang Signaling
(1989), and Welch (1989)
5 Mauer and Senbet (1992) Market incompleteness
6 Benveniste and Spindt (1989) bookbuilding
7 Taufil Mohd K. N. (2007), Loughran, Ritter, and The regulatory environment
Rydqvist (1995)
8 Chang, E. et al (2008), Sobhesh Kumar Agarwalla Offer size
(2008), and Megginson & Weiss (1991)
Merikas et al (2009), Muscarella & Vetsuypens Age of the firm
(1989); Barry & Brown (1994); Megginson &
Weiss (1991); Logue (1973); Mc Donald & Fisher
(1972)
9 Taufil Mohd K. N. (2007) Timing of offer
10 Merikas et al. (2009), and Jerry, C. et al. (2009) Reputation of the
underwriters
11 Alli, K. et al. (2010) The liberalization of
economic policies
12 Khurshid, Mudambi and Georgen (1999) Size of the company
13 Farmer, Kelley and Katz (2010) Corporate governance

A number of theories have been proposed as explanations for the under-

pricing of IPOs conducted through the bookbuilding process. These various
hypotheses can be categorized into three groups, which identify underpricing
either as a necessary consequence of the bookbuilding process, an inten-
tional choice on the part of the issuer, or a collusive outcome serving the

87
interests of investment banks. While these theories are not mutually exclusive,
an attempt has been made to identify which are most important.
This research selected offer size, age of the firm, timing of offer, size
of the company as factors that determine the level of underpricing of dual
listed IPOs in the Bangladesh stock market. This study is not behavioral in
nature and therefore factors such as corporate governance, liberalization of
economic policies, reputation of underwriters, and regulatory environment
are excluded. Bookbuilding is not chosen as determinants of the level of
underpricing as it is not implemented in either DSE or CSE yet. However
type of industry that an IPO listed is selected as an additional variable
even though there is no evidence in the literature that it affects the level of
underpricing. This factor is chosen due to the fact that there is sectorial
dominance in the Bangladesh capital market. The securities have been
categorized in 16 different sectors. By number the largest sector is textiles
with 44 companies have been categorized. Banks and financial institutions
come second with 39 companies, followed by food and allied industries
with 36 companies and insurance companies with 32. However, banks and
financial institutions together is the largest sector in terms of issued and
market capital, net asset value, and almost all other market performance
indicators. The numbers of IPOs listed from the other sectors are not sig-
nificant.

3.2 Dual Listing and Underpricing

Dual listing refers to the listing of a security on more than one exchange.
Many stocks that are traded on the major stock exchange of a country are
also traded on one or more of the regional exchanges. For example, the
common stock of General Motors is listed on the New York Stock Ex-
change, but it also enjoys a large amount of activity on regional exchanges.
Most of the studies on dual listed stocks concentrated on cross-autocor-
relation of dual listed stock portfolio returns. Wang (2006) examined cross-
autocorrelation of dual listed stock portfolio return in the Chinese Stock
Market and finds that upon the opening of B-share market, a change from
underreaction to overreaction in the response pattern of B-share market,
producing a negative cross auto-correlation. Chui and Kwok (1998) test the
Chinese A-share and B-share markets and find that B-share market leads
A-share market during the period of 19931996. Two factors are reported to
have contributed: the mechanism of information transmission and differences
between market participants. A-shares are mainly traded by domestic in-
dividual investors, compared to the majority of foreign institutional investors
in B-share market, who are more likely to have more advanced technology
for processing and analyzing information. In addition, foreign investors get

88
information from the free market of Hong Kong, while domestic investors
are constrained by the mainland media and publishing industry which is
under firm controls of central government. Consequently, public information
is expected to reach the B-share market before the A-share market. How-
ever, whether foreign investors in China possess information advantage
deserves closer examinations. The existence of information asymmetry on
values of local assets between foreign investors and domestic investors has
been documented extensively in Brennan and Cao (1997), Stulz and Wasseer-
fallen (1995) and Kang and Stulz (1997). It is assumed by literature that
domestic investors are better informed than foreign investors. This case is
confirmed in Chinese market by Chakravarty et al. (1998) and Su and
Fleishre (1999).

4. Research Methodology

The underpricing/overpricing was measured by taking the difference of the

closing price at the specific date in question with the offering price and
divided by the offer price as shown below:
Rj,t = [Pj, t - Pj, 0]/Pj,0
where Rj, t is the return of stock j in the period t, Pj,t is the price of stock j
at the period t, and Pj, 0 is the offer price of stock j.
The return of the new issue of dual listed stocks are measured by
taking the difference of the closing price at the specific date in question
with the offer price and divided by the offer price. For example, Baximco
Textiles was listed at DSE and started trading on 1st June 1995. Then it has
got listed at CSE and started trading on 2nd November 1995 meaning that
Baximco became a dual listed company on 2nd November 2nd 1995. The
offer price was Tk100.00. The first day closing price at CSE (began trading
as dual listed) was Tk140.00 while on the same day the price was Tk137.48
at DSE. Therefore the underpricing was calculated as explained earlier; 1st
day closing at CSE minus offer price divided by the offer price and in this
case it is (140 100)/100 = 40 percent.
This study examined new companies, which were listed on the DSE
and CSE for the period 19952005. All the data used in this study are
secondary data gathered from: Prospectuses, DSE and CSE Daily Diaries,
DSE, CSE and SEC websites, and Annual Report of listed Companies.
The population of this study includes all listed companies in the DSE and
CSE during the sample period. IPOs were categorized as dual listed com-
panies, companies listed with only DSE, and companies that are listed with
CSE only. This study includes IPO issuers in all sectors such as Financial
sector that include Bank, Insurance and Investment; Manufacturing sector
89
that include Cement, Engineering, Ceramics, Food and Allied products, Jute,
Paper and Printing, Pharmaceuticals and Chemicals, Tannery Industry and
Textiles. Finally Service & miscellaneous that include Fuel and Power, IT,
Services and Real Estates, and Miscellaneous. The objective of this study
is to gauge the new issue stock price behavior in IPO firms that are dual
listed.
Bangladesh capital market is unique with an interesting characteristic
where dual listing is allowed meaning an IPO can be listed into DSE and
CSE simultaneously. Therefore it will be interesting to see whether the
phenomenon contributes to the persistent higher degree of underpricing.
The law of one price states that if equivalent investment opportunities
trade simultaneously in different competitive markets, then they must trade
for the same price in both markets (Bark and DeMarzo, 2010). Therefore
the following hypothesis is proposed:
H1: There are no significant differences between dual listed companies
and those listed with DSE and CSE in respect to underpricing.
Empirical studies have found evidence that the underpricing for IPOs of
financial institutions is related to proxies for asymmetric information. Offer
size (Megginson & Weiss, 1991; and Chang et al., 2008), age of the firm
(Muscarella & Vetsuypens, 1989; Barry & Brown, 1985; Megginson & Weiss,
1991; Logue, 1973; Mc Donald & Fisher, 1972; Balwinder Singh and Mittal,
2003; Allen, D.E. et al., 2008; and Merikas et al., 2009), offering prices
(Chang, E. 2008), reputation of underwriters (Merikas et al., 2009) and the
volatility of the post-offer return (Ritter, 1984, Chang et al, 2008) have all
been associated with IPO underpricing. Recently, Taufil Mohd (2007),
conducted empirical tests on the relationship between regulations and under-
pricing using 546 initial public offerings on the Kuala Lumpur Stock
Exchange from 1990 to 2002 and finds that the length of time from price
setting to listing date is negatively related to underpricing. In addition to
these factors, it is expected that size of the firm (as there is no division of
main board and second board in Bangladesh) and the type of industry (as
there is evidence of sectoral dominance among the listed firms) to be posi-
tively related to underpricing. Therefore the following hypothesis is proposed
in respect to dual listed IPOs:
H2: Age of the firm, size of the offer, size of the firm, timing of the
offer and type of the industry are significantly related to underpricing.
H2a: There is a positive relationship between age of firms and degree of
underpricing.
H2b: There is a negative relationship between the size of offer and the
level of underpricing.

90
H2c: There is a positive relationship between timing of offer and degree
of underpricing.
H2d: There is a negative relationship between the size of firm and the
level of underpricing.
H2e: There is a significant difference between IPOs in different industry
and degree of underpricing.

IPOs were categorized based on their place of listings. The first group
consists IPOs that are listed with DSE, the second group consists IPOs that
are listed with CSE only. Finally IPOs that are listed with DSE and CSE
simultaneously are in 3rd group. A comparison of the level of underpricing
were undertaken to find out whether dual listings contribute to higher
degree of underpricing. Additionally, one way ANOVA were used to find
out whether there are any significant differences between dual listed com-
panies and companies listed with DSE and CSE only in respect to under-
pricing.
Multiple regressions were employed to find out factors that significantly
affect underpricing of dual listed IPOs in the Bangladesh capital market.
Multiple regression analysis was chosen to test hypotheses related to
determinants of underpricing as done by Allen et al. (2008).
The model is described below:
UND = 0 +1AOF + 2SOF+ 3SOFF +4 TIME+5TYPE +
where
UND = Underpricing/Overpricing
AOF = Age of the firm
SOF = Size of the firm
SOFF = Size of the offer
TIME = Timing of the offer
and
TYPE = Type of industry

Age of firm is computed from the date of incorporation to the date of IPO
(David, 2002). The company size is measured by using the net assets of
the company in the year of IPO as done by Khurshid, Mudambi and
Georgen (1999). Timing of offer was measured by Balwinder Singh and
RK Mittal (2003) and Taufil Mohd (2007) as the time taken from the date
of listing to the offer date.

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5. Results

The sample data consists of companies that are listed on DSE and CSE
between the periods of 1995 to 2005. Table 3 presents the sample profile
of dual listed companies in the sample period. There were 172 dual listed
companies in the sample period. Table 3 presents yearly and industry basis
dual listed companies. The highest number of dual listed companies was
from the Financial Sector and the year 1995.

Table 3 Dual Listed Companies (19952005)

Total
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005
Financial 13 09 02 01 00 04 03 00 04 08 06 50
Manufacturing 05 11 03 02 02 01 00 02 01 00 00 27
Foods 03 05 02 02 00 01 03 02 00 00 00 18
Paper and 00 01 01 00 02 01 01 00 00 00 00 06
Printing
Pharmaceuti- 06 03 02 00 00 00 01 01 01 00 01 15
cals and
Chemicals
Tannery and 11 12 04 00 03 01 02 02 00 01 00 36
Textiles
Services and 06 04 02 00 01 00 02 01 02 01 01 20
Miscellaneous
Total 44 45 16 05 08 08 12 08 08 10 08 172

Among dual listed companies 160 (93.02%) IPOs were underpriced and
12 (6.97%) IPOs were overpriced. The level of underpricing among dual
listed IPOs was 458.90 and the level of overpricing was 17.33%. Table 4
presents the level of underpricing/overpricing among dual listed IPOs in
the Bangladesh Capital Market.

Table 4 IPO Underpricing/Overpricing among dual listed companies

Underpricing
Mean Level
Companies
Number of

Maximum

Minimum
Deviation
Standard
of

Underpricing 160 458.90 1204.26 11900 .00

Overpricing 12 -17.33 12.37 -2.00 -40.00

Total 172 425.68 1167.60 11900 -40.00

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5.1 Underpricing Among Companies Listed Only In DSE

There were 11 companies listed with Dhaka Stock Exchange that are not
listed with CSE. Among them nine IPOs were underpriced and two were
overpriced. The level of underpricing recorded 58.60% and the level of
overpricing among two IPOs was 34.08. Table 5 presents the level of
underpricing/overpricing among the IPOs that only listed into the Dhaka
Stock Exchange.

Table 5 IPO Underpricing among companies listed only in DSE

Underpricing
Mean Level
Companies
Number of

Maximum

Minimum
Deviation
Standard
of
Underpricing 09 58.61 67.17 200.25 .64

Overpicing 02 -34.08 20.20 -19.80 -48.37

Total 11 41.75 71.11 200.25 -48.37

5.2 Underpricing among Companies Listed Only In CSE

There were eight companies listed with Chittagong Stock Exchange that are
not listed with DSE. Among them five IPOs were underpriced and three
were overpriced. The level of underpricing recorded 34% and the level of
overpricing among three IPOs was 25%. Table 6 presents the level of
underpricing/overpricing among the IPOs that only listed into the Dhaka
Stock Exchange.

Table 6 IPO Underpricing among companies listed only in CSE

Underpricing
Mean Level
Companies
Number of

Maximum

Minimum
Deviation
Standard
of

Underpricing 05 34.00 27.24 72.00 8.00

Overpicing 03 -25.00 21.79 -10.00 -50.00

Total 08 11.87 38.63 72.00 -50.00

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5.3 Price differences among Dual listed IPOs between DSE and CSE

The following section presents the price differentials among dual listed
companies between DSE and CSE. The highest mean difference of price
recorded in the manufacturing sector (53.47% with a standard deviation of
45.76).

Table 7 Mean of price differentials among dual Listed IPOs of DSE and CSE

Maximum price

Maximum price
differences at

differences at
differentials
Mean Price
Companies
Number of

Deviation
Standard
Industry

CSE

DSE
Financial 48 2.71 45.76 257.50 99.00

Manufacturing 27 53.47 189.28 918.34 208.00

Food and Allied Products 18 14.39 46.63 161.41 33.45

Paper and Printing 06 46.58 120.35 289.00 34.33

Pharmaceutical and
15 5.75 53.42 61.36 185.30
Chemicals
Tannery and Textiles 36 .93 32.48 60.25 169.00

Services and Misc. 19 8.03 17.07 55.00 14.33

Total 172 12.82 86.84 918.34 208.00

The maximum price difference at CSE was 918.34 while it was 208 at DSE
in the Manufacturing sector. Table 7 presents the mean of price differences
among dual listed IPOs in the Dhaka and Chittagong Stock Exchange. The
lowest mean price differences between DSE and CSE among dual listed
companies were recorded in the Tannery and Textiles Sector (.93%) with
a standard deviation of 32.48.
Price observations for dual listing companies for one, two, three, four,
and five days after trading opens, for one and two weeks, and for one, two,
three, four, five, six, nine until 12 months were then analyzed. It can be
seen in Figure 5.6 below that arbitrage opportunities never ceased during
the sampling period. Price differences were maintained until the end of the
year.

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Figure 5.6 Differences of price observations from day1 to end of the year

The law of one price states that if equivalent investment opportunities

trade simultaneously in different competitive markets, and then they must
trade for the same price in both markets (Bark, J. and DeMarzo, P., 2010).
In the case of Bangladesh capital market, dual listing of IPOs provides an
arbitrage opportunity. This means that a specific share has two different
prices in the two stock exchanges at one time in the same country. There-
fore investors will race to take advantage of it. Those investors who spot
the opportunity first and who can trade quickly will have the ability to
exploit it. This implies that the market is not efficient. The study extended
analysis by following dual listed securities price observations up to one
year to find out whether the arbitrage opportunities are never ceased and
find that arbitrage opportunities prevailed up to one year. Therefore it can
be concluded that the One price theory does not hold true in a dual listing
phenomenon. The differences between market participants could one of
the plausible reasons for this. The participants at CSE at mostly based at
Chittagong belt which is economically advanced as compared to other parts
of the country. This inference is consistent with Chui and Kwok (1998)
whereby they concluded that differences between market participants and
mechanism of information transformation were significant factors of price
differences between A-share and B-share market for China IPO.

5.4 Effect of Dual Listing on Underpricing

One way ANOVA was used to find out whether dual listed companies
significantly differ from those that are listed with DSE and CSE respectively
in respect to underpricing. Result shows that F-value was large and significant
at 5% (Sig F = 0.041) significance level. This indicates that there are
significant differences between IPOs of dual listed companies and those
companies listed with DSE and CSE only in respect to the level of under-

95
pricing in the context of Bangladesh capital market. Therefore hypothesis
1 was not substantiated.

5.5 Determinants of Underpricing of Dual Listed Securities

Pearson correlation was used to find out the correlations among offer size,
size of the company, years of operation before listing, timing of offer and
sector, and level of underpricing of the dual listed IPOs in the Bangladesh
Capital market. Correlations analysis revealed that year in operation before
listing and offer size are positively correlated with the level of underpricing
at 1% significance level. However, offer size is negatively correlated at 1%
significance level. The industry type and time of offer did not show any
correlations with the level of underpricing. Among the independent variables
timing of offer, offer size, company size and years in operation are cor-
related with industry type. All other independent variables did not show any
significant correlations among themselves. Though independent variables
shows correlations but none of the P-value was more than .60. This indicates
that variables are not highly correlated and hence there is no multicollenearity
problem in the model. After having tested the correlations, multiple re-
gressions were employed to find out determinants of underpricing of dual
listed IPOs.
Multiple Regression analysis was then used to find out whether offer
size, size of the company, years of operation before listing, timing of offer
and sector have any significant effect on the degree of underpricing among
dual listed IPOs. Table 8 presents the results of regression analysis.

Table 8 Results of Regression Analysis

Factors Beta T-Ratio Sig t
Years of Operations before listing .191 2.215 .028
Offer Size -.274 -3.859 .000
Size of the company .193 2.424 .017
Timing of offer .053 .742 .459
Dummy_fin .397 4.647 .000
Dummy_manu -.093 -1.080 .282
Dummy_food .061 .809 .420
Dummy_paper .060 .698 .486
Dummy_pharmaceuticals -.132 -1.323 .188
Dummy_textiles .005 .639 .524
R Square = 32.5%
Adjusted R Square = 27.9%
F = 7.162, Sig F = .000
Condition Index = 6.991

96
Based on the regression analysis results, offer size is found to be significant
with a negative beta at 1% significance level (sig t = .000). This indicates
that offer size has significant negative effect on the degree of underpring for
dual listed IPOs. Therefore hypothesis 2b on dual listed IPOs is substantiated.
Size of the company is found to be significant at 5% significance level
(Sig t = .017) with a positive beta. This means that size of the company
positively influences the degree of underpricing for dual listed IPOs. There-
fore Hypothesis 2d is accepted. Year of operation before listing is found to
be significant at 5% significance level (Sig t= .028) with a positive beta. This
indicates that age of the firm is positively related to degree of underpricing
for dual listed IPOs. Therefore hypotheses 2a is substantiated. Dummy
variables were created for sectors that companies are dual listed because it
was a categorical variable. Six dummies were created for dual listed stocks.
Regression analysis results show that only finance sector has significant
positive relations with degree of underpricing for dual listed sticks. There-
fore hypothesis 2e is partially substantiated. Timing of offer is found to have
no significant effect on the degree of underpricing for dual listed IPOs.
Therefore hypothesis 2c was not substantiated.

6. Conclusion

The degree of underpricing in the Bangladesh capital market is rather high

compared to that of other Asian and advanced stock markets. Islam (1999)
documented that the average initial returns is 116.01 percent with a standard
deviation of 261.94 percent during the period of 1994-1999. Hoque and
Musa (2002) find that during the period between 1994 and 2001, the IPOs
of DSE was largely underpriced at 285.21 percent. At the same period the
degree of underpricing in Malaysia was 46.44% (Islam and Yeap 2009),
Singapore and Turkey were 31.4% and 13.6% respectively (Laughran et
al., 2000), India was 96.56% (Balwilder Singh and RK Mittal, 2003) and
in US market was 22% (Lowry et al., 2006). Our findings are consistent with
earlier findings of Hoque and Musa (2002) and Islam (1999). Findings of
this study confirmed that the high degree of underpricing is still persistent
in the Bangladesh Capital Market despite attempts being made by Securities
and Exchange Commission of Bangladesh to reduce it. This study also con-
firmed that dual listing significantly affects underpricing of initial public
offerings. The dual listed IPOs recorded underpricing of 458.90 percent as
compared to 58.60 percent and 34 percent for those listed with DSE and
CSE respectively. The high degree of underpricing is due to the fixed
pricing of IPOs. IPOs have to be priced at Tk10, Tk100 or Tk1000 only.
The fair price of an IPO could be TK500. But due to the fixed pricing of
IPOs, it has to be priced Tk100 or Tk1000. Consequently the IPOs tend to

97
be underpriced. As for dual listed IPOs, when an IPO is getting listed with
CSE the price of that IPO is already known at DSE. Therefore alert investors
may already forecast the first day price at CSE. Thus the fixed pricing in
one hand and the dual listing on the other hand lead to the higher degree of
underpricing of IPOs in Bangladesh Capital Market. Based on our findings,
it is recommended that the Securities Exchange Commission may need to
review the existing fixed pricing of initial public offerings. The viable
option would be to adopt the book building method in pricing the IPOs.
There is also an urgency to carefully review (without political consideration)
whether there is a need of having two Stock Exchanges in a relatively small
and developing economy such as Bangladesh.

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MD. Aminul Islam, Ruhani Ali, Zamri Ahmad

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