Initial Returns And Aftermarket Performance Of Initial Public Offerings(IPOs)

Initial Public Offerings(IPOs)underpricing is one of the most widely documented anomalies in the literature on financial economics.Most of the previous studies on IPO initial returns and aftermarket performance has been conducted on developed economies,quite a few studies have focused on emerging markets.Many theoretical models are introduced in previous studies to describe the behavior of IPO initial returns.The most reasonable explanations for the phenomenon of underpricing is based on the information asymmetry theories,mostly in the form of share price ex-ante uncertainty.This research examines the initial IPO performance and the aftermarket IPO performance on the emerging market using data of IPOs listed in the Colombo Stock Exchange(CSE)in Sri Lanka for the period 1991-2017.The main objectives include;to provide insights of the underpricing(first trading day)of IPOs,to find out the determinants of underpricing in the light of asymmetric information and signaling theories,and to provide insights of the aftermarket IPO performance.This study builds and sheds further insight into the current literature in different aspects.First,the recent dataset has been used to uncover the initial and aftermarket price performance.Second,this study gives new updated evidence to worldwide literature by using a recent and detailed sample with a comprehensive analysis from an emerging market.Third,the effects of more than ten independent variables on returns are analyzed together in an emerging market CSE,which is subject to political instability but high growth prospects.Fourth,since there has been a lack of consensus on the application of the right method to evaluate the long-run performance,both Cumulative Abnormal Average Returns(CAARs)and Buy and Hold Abnormal Returns(BHRs)have been employed in this study.The outcomes will convey a full understanding of current trends for IPOs in Sri Lanka.Last,the findings of this study will deliver some meaningful insights into many parties.The results indicate that the level of underpricing is also observed in CSE.In this study initially,148 IPO firms are analyzed and found that on average initial returns are 47%underpriced and apart from that 32 IPOs are overpriced in between 17-18%.The Stepwise Multiple Regression and Feasible Generalized Least Squares(FGLS)results found that offer risk,investor sentiment,firm size,and hot issue periods are having a significant relationship between initial returns.The age of IPO firms,listed board,and the time-lag variables are not statistically related to IPO initial returns in the CSE.The results are consistent with the prediction of ex-ante uncertainty,windows of opportunity and investor sentiment hypotheses.Overall,the results indicate that in Sri Lanka underpricing records for a higher percentage of the initial returns than the overpricing.Aftermarket price performance for IPOs is evaluated by using two different methodologies,and the sample is reduced to 144 IPOs to cover three years after the listing.Cumulative Abnormal(market adjusted)Average Returns(CAAR)and Buy-and-Hold market-adjusted Return(BHR)for 36 months from the first trading day.AARs and CAARs are always lower than 1%.Averagely abnormal returns are negative in the short run,and long run gradually abnormal returns are becoming positive.In the long run,IPOs are outperforming with positive BHRs.Especially in 3 years’ time horizon 12.46%average BHRs for the full sample and 13.16%for the sample which excluded delisted firms.Following previous studies,multiple regression model and cross-sectional analysis are used to investigate the relationships between aftermarket returns and twelve independent variables.Results indicated that initial returns are having a long run significant negative relationship with all BHRs.Market volatility and aftermarket returns are negatively related,and privatized IPOs showed a significant positive relationship with one-year aftermarket returns.Hot issue period IPOs are positively related with first trading month aftermarket returns.Similarly,plantation sector IPOs are showing a positive and significant relationship in short run BHRs.Aftermarket returns are positively related with investor sentiment across the all regression models.Besides,the long-run performance of IPOs is positively related with an annual volume of listings based on the firm went to the public but it not significant.The results are consistent with the divergence of opinion hypothesis,and previous international studies.Overall,the results indicate that in Sri Lanka IPO aftermarket returns are positive in the long run and well performed in three years period of time.There is a generalized conviction among the investors that "IPOs must be subscribed",numbers of stockholders equally expect to reap out substantial gains from the IPO’s first trading day.Being a characteristic of Sri Lankan stock market,complementary studies can be developed for other emerging exchanges to explore the relevance of day trading as a strategy for taking advantage of the market condition on the IPO’s first trading day.Stockholders are consequently suggested to hold their subscriptions of IPO shares for a long-time frame,usually exceeding two years.