The Impact of Trading Limit Regulation Changes on IPO Underpricing: Examining the Saudi Stock Market (Tadawul)

Abstract

This study examines the underpricing of initial public offerings (IPOs) in Saudi Arabia's main stock market by comparing two distinct regulatory periods. The first period, from 2014 to 2019, was characterised by a 10% daily price fluctuation limit for all stocks, including newly listed ones, implemented in 2013. This 10% limit replaced the previous unrestricted fluctuation policy and was applied to the market as a whole, not just for a limited time post-listing. The second period, from 2020 to 2023, followed a regulatory change that increased this limit to 30%, specifically for newly listed stocks during their first three trading days, while maintaining the 10% limit for other stocks and for newly listed stocks after the initial three-day period. Using a sample of 57 IPOs across both periods, we calculate initial returns and market-adjusted abnormal returns for the first three trading days after being listed on the market. We then employ a regression analysis to investigate the determinants of these returns. Our findings reveal a significant increase in first-day average returns in the post-period, from 5.51% to 15.81%. The regression results indicate that this increase is particularly pronounced in the non-consumer sector, with a 13.8 percentage point rise in initial returns, while consumer-sector IPOs show no significant change. Moreover, traditional determinants of underpricing, such as firm age and the number of subscribers (individuals), appear to have diminished in importance in the post-period. This study contributes to the understanding of how regulatory changes can impact IPO pricing dynamics in an emerging market and highlights the evolving nature of Saudi Arabia's stock market.