3 - The effect of IPO characteristics on long-run performance of Taiwan's IPOs: Evidence from efficiently learning markets

Abstract

The long-run performance puzzle of initial public offering (IPO) has been well documented in numerous studies. It is known that IPOs experience long-run underperformance in the USA and Germany, while IPOs experience overperformance in some emerging markets. Emerging markets typically encounter more rigorous regulations and are considered less efficient than US markets. This chapter investigates the new issue puzzle in emerging markets with the example of Taiwan's IPOs. Two market efficiency hypotheses are employed in this study to investigate the long-run performance puzzle of initial public offerings (IPOs) in Taiwan: the efficient markets hypothesis (EMH) and the hypothesis of an efficiently learning market (ELM). The latent true prices behind the price limits is stimulated and the IPO expected returns using a Fama–French three-factor model under ELM is measured. The results show that IPO investors in Taiwan learn rationally from market information and that the IPO long-run performance puzzle is dissipated under an efficiently learning market. The results also show that the long-run performance of Taiwan's IPOs is significantly driven by IPO underpricing and the waiting time to issue subsequent offerings. The IPO method, hot-issue period, or industry do not impact on IPO long-run performance under the ELM.