Abstract
The purpose of this study is to utilize the Three Stage Least Squares (3SLS) of the simultaneous equation estimation approach to revisit the possible cross relationship between IPO initial returns and aftermarket risk. A structural form equation system of IPO initial returns and aftermarket risk equations is estimated first to obtain the structural form coefficients. The analytically derived reduced form coefficients are then calculated to analyze the net effects of each exogenous variable on two endogenous variables. Major findings of this study are as follows. First, the signs of net effects of all exogenous variables on IPO initial returns and aftermarket risk are the same. In other words, any change in exogenous variables, IPO initial returns and IPO aftermarket risk will change in the same direction, i.e., the higher (lower) the IPO initial returns, the higher (lower) the IPO aftermarket risk. Second, the less the degree of corporate governance, the higher the IPO initial returns and aftermarket risk. Third, the higher the market risk or return before IPO, the higher the IPO initial returns and aftermarket risk.
Highlights
The abnormal returns of initial public offerings (IPO) or the so-called IPO initial returns have always been one of the most popular areas heavily studied by finance academics
The analytically derived reduced form coefficients are calculated to analyze the net effects of each exogenous variable on two endogenous variables
Any change in exogenous variables, IPO initial returns and IPO aftermarket risk will change in the same direction, i.e., the higher the IPO initial returns, the higher the IPO aftermarket risk
Summary
The abnormal returns of initial public offerings (IPO) or the so-called IPO initial returns have always been one of the most popular areas heavily studied by finance academics. Previous studies on the relationship between initial returns and aftermarket risk are all estimated and tested using single equation approach. According to the above-mentioned IPO-related empirical documents, there may exist a simultaneous relationship between IPO initial returns and aftermarket risk[1]. The purpose of this study is to utilize the Three Stage Least Squares (3SLS) of the simultaneous equation estimation method to analyze the simultaneous relationship between IPO initial returns and aftermarket risk. This study is the first attempt in literature to investigate the simultaneous relationship between IPO initial returns and aftermarket risk using a total of 637 IPO company data in Taiwan for the period 1997–2008. While most previous literature focused on IPO initial returns, this study turns more attention to IPO aftermarket risk. The net effects of exogenous variables on IPO initial returns and aftermarket risk are lastly presented
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