Underpricing and expected returns for individual and institutional investors: the case of Italy

This paper analyses the initial returns of Italian IPOs made during the 1995-2001 period in order to calculate the initial profitability of both retail investors and institutional investors who subscribe all the initial public offers and sell them on the first listing day. We point out that although initial returns are significantly positive, after taking into account rationing and application costs, the expected profits of retail investors are not significantly different from the risk-free rate of return. Furthermore, expected returns for institutional investors are significantly higher than the risk-free rate of return.