International Journal of Humanities and Social Science Volume 7 • Number 11 • November 2017 201 Initial Public Offer Pricing and Stock Returns: A Critical Literature Review George Kungu Ph.D. Student School of Business University of Nairobi Nairobi, Kenya Dr. Cyrus Iraya Lecturer School of Business University of Nairobi Nairobi Campus, Kenya Abstract The widely perceived and primarily important achievement in a company’s life cycle is the Initial public offering otherwise known as IPO. This landmark achievement sanctions a company to gain entry to financial markets for supplemental capital compulsory to fund future magnification; while concurrently providing a venue for disposal of shares by investors. The study aimed at investigating the documented association of initial public offer pricing and stock returns. Empirical evidence suggests that IPOs have adverse eccentric returns over holding duration after the IPO issue date. From the empirical findings, it was noted that at the initial stage of trading, the pricing of Initial public offers at their fundamental value is unlikely to happen but ultimately the real value is mirrored in the IPOs pricing. The empirical review on the topic concludes that even though the assessment of the IPO is an important subject, only constricted extant research has addressed it. Findings revealed that within the context of developing countries with a number of theories being advanced to echo that IPO under pricing is an equilibrium phenomenon in an efficient capital market. Currently there is scarce literature proof to hypothesize to IPO pricing resolution is the central clarifying reason for long-run performance of stock returns. The present empirical studies on the link between IPO pricing and stock returns still present conflicting results, hence calls for more studies to be conducted on the topic in order to bring harmony to the work. Furthermore, most of the studies conducted on the topic have been on a global perspective and few empirical works exist in the developing economies. This is despite the importance of the topic to these economies. The paper recommends that as future scholars try to establish the effect of IPO pricing on stock returns, there should be an inclusion of an intervening variable as well as moderating variable. Further, there is a recommendation that apart from the intervening variables of firm characteristics reviewed in this paper, other variables could be used so as to compare the results. Furthermore, other moderating variables not reviewed in this paper can also be used. Keywords: Initial Public Offer, Stock Returns, Introduction Initial Public Offering is by and large amongst the primary significant financial resolution which steers scores of analyst to investigate the intentions why firms seek to go public (Ljungqvist, 2004). The procedure is normally used in order to raise finances from shareholders in the IPO (Brealey, 2011). IPO is a kind of offering in which shares of an organization are sold to institutional financiers and subsequently offered to the general public, in a securities market, for the first time. The IPO receives additional funds into the listed company to support its growth and development. In the course of the allocation of resources, offering price plays an important role; the efficient market hypothesis contends that capital markets are effective and as a result the price should be equivalent to the company's fundamental value and it will allocate the scarce financial resources to the optimal producers effectively. IPO prices digress from the company's fundamental value, resulting to the emergence of inefficient pricing (Wang & Song, 2013). IPO pricing is a global phenomenon and the argument over the pricing of initial public offerings has been vigorous.