IPO’s Long-Run Performance: Hot Market versus Earnings Management

Tsai-Yin Lin,Chia-Yi Lin,Jerry Yu

doi:10.3390/jrfm14030132

Tsai-Yin Lin, Chia-Yi Lin + Show 1 more

Open Access

https://doi.org/10.3390/jrfm14030132

Copy DOI

Abstract

One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to the IPO’s long-run underperformance. Our results show that although both hot market and earnings management play a role in explaining IPO’s long-run performance in their own rights, earnings management no longer exhibits significant explanatory power when the IPOs are issued in the cold market. While the IPOs that are issued in the hot market still tend to underperform in the long run even if the firms do not engage in earnings management. Our findings are consistent with the literature related to the information asymmetry in IPO market. And, because the information asymmetry is more severe in hot market condition, IPOs issued in hot market tend to exhibit poorer returns than those issued in cold market.

Highlights

Numerous studies have documented the long-run underperformance of the issuers of initial public offerings (IPOs)
IPOs issued in the hot market condition still tend to underperform their peers in the long run even if the managers do not engage in earnings management
Our results show that both may lead to IPO’s long-run underperformance, hot market plays a more dominant role than earnings management in explaining why IPOs underperform in the long run

Summary

Introduction

Numerous studies have documented the long-run underperformance of the issuers of initial public offerings (IPOs). Ritter (1991) documents that the IPO firms have significantly underperformed the non-IPO firms with similar size and industry over a threeyear period following the initial offering. Other studies find the similar phenomenon (Levis 1993; Loughran et al 1994; Firth 1997). Many researchers have attempted to explain this IPO’s long-run underperformance phenomenon. Some point out that investors’ heterogeneous expectations, in particular investors’ over-confidence and over-optimistic beliefs, can lead to the clustering of IPOs in a certain period. People tend to call it the “hot market”

Objectives

Results

Conclusion