Abstract
This study investigates the long-run pricing performance of 90 IPOs listed on the Karachi Stock Exchange from 1995 to 2010. This study finds evidence that IPOs show signs of underpricing and underperform over three years after listing; however, the observed pattern of underperformance is not always statistically significant. The equal-weighted buy-and-hold abnormal returns and calendar-time analysis confirm the significance of the IPO underperformance over the three year period after listing on the exchange. Extreme bounds analysis is used to test the sensitivity and robustness of twenty six explanatory variables in determining the IPO underperformance. The results reveal that the robust predictors of IPO underperformance include underpricing, financial leverage, age of the firm and oversubscription for buy-and-hold return calculations and underpricing, hot activity period, post issue promoters’ holding, issue proceeds and aftermarket risk level for cumulative abnormal return calculations. Moreover, the fads hypothesis and the window of opportunity hypothesis are applied to explain long-run IPO performance.
Highlights
A cursory review of the literature related to IPO pricing and performance has typically focused on two generic time horizons: (A) Short-term and (B) Long-term
To investigate the determinants of long-term underperformance, the 36-month equal-weighted Buy-and–Hold Abnormal Returns (BHAR) is used as the dependent variable while the age of the firm (Age), oversubscription (Sub), proportion of shares offered (PSO) and Industry (Technology and Communication and Textiles) are considered as the Q-variables
The results show that the FinLev is the only significant factor from the X-variables which indicates that higher financial leverage will distort the financial health of the firm
Summary
A cursory review of the literature related to IPO pricing and performance has typically focused on two generic time horizons: (A) Short-term and (B) Long-term. Researchers have attempted to estimate the long-term post-IPO performance using event- and calendar-time methodologies, but their findings are inconclusive [e.g., Agarwal, et al (2008); Loughran and Ritter (1995); Omran (2005)]. The empirical evidence, in terms of long-run IPO performance, seems to be less concrete when compared against studies of shorter-term abnormal performance and the reasons for this are as follows: (a) long-term pricing behaviour causes researchers to have reservations about aftermarket efficiency [Ritter (1991)]; (b) to exploit the underpricing and performance, investors would have to rely on actively trading Strategies; and (c) there a substantial variations in the results of the underpricing if researchers use different methodologies to detect abnormal performance. Considering above areas of concern, there has been a long standing debate about the magnitude of the long-term abnormal performance in the IPO research
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