Underperformance Of Initial Public Offerings Research Articles

A COMPARATIVE ANALYSIS OF MACHINE LEARNING ALGORITHMS FOR IPO UNDERPERFORMANCE PREDICTION

Initial Public Offerings (IPOs) are a popular way for companies to raise capital and enter the public markets. However, many IPOs underperform and fail to meet the expectations of investors. In this research paper, we explore the use of different machine learning models, namely AdaBoost, Random Forest, Logistic Regression, ANN and SVM, for predicting IPO underperformance. We collect and pre-process a dataset of IPOs from the past few years, and use it to train and evaluate the performance of each model. Our results show that Artificial Neural Network model is better suited for predicting IPO underperformance. Additionally, our analysis provides insights into the factors that contribute to underperformance and highlights the importance of certain features in predicting IPO performance. Our research provides valuable information for investors and financial analysts interested in predicting the performance of IPOs and mitigating the risks associated with IPO investments. We have tested machine learning models, namely AdaBoost, Random Forest, Logistic Regression, ANN and SVM. After Comparing the accuracy of all the models, we arrived at the conclusion that ANN model performed the best with an accuracy of 68.11%.

Optimism, divergence of investors’ opinions, and the long-run underperformance of IPOs

The long-run underperformance of initial public offerings (IPOs) suggests that aftermarket prices are overvalued. According to the theory of heterogeneous beliefs and short-sale constraints, the aftermarket price of IPOs is overvalued; in addition, their performance deteriorates when the mean level of optimism and degree of divergence of investors’ opinions increase. I examine this phenomenon by estimating the mean and divergence of investor opinion distribution by focusing on Japanese auction-method IPOs. According to the results, both optimism and divergence cause the overvaluation of IPO’s first-day market price; however, only the mean level of optimism is statistically significant in explaining post-IPO underperformance.

The Post-IPO Performance in the PRC

The long-run underperformance of IPOs (Initial Public Offerings) is one of the three “New Issues Puzzles” It indicates that if investors buy IPOs and hold for more than three years they will get negative abnormal returns It is necessary to examine the long-run performance of IPOs in China because it benefits how to enhance the efficiency of IPOs market and provides insight of emerging market This paper empirically examines the performance for three years after listing of 76 Shanghai Stock Exchange IPOs form 2002 to 2007, the matched company as the benchmark, the matched company comes from the same industry and similar circulated stock value with listed companies. First it computes the long-run excess returns of the IPOs with types of models. Then it examines whether the underperformance has statistical significance or not. After that, it analyzes the relationship between the variables and long-run performance of IPOs.
 
 Research documents that the IPOs significantly underperformed the matched companies. The cumulative abnormal returns over the three years listing are -0.18446. The buy and hold abnormal returns over three years after listing are-0.01284. At last, using the cross-sectional analysis to analyze the factors that affect the long-run performance of IPOs, the regression result shows that EPS is the basic reason; the intrinsic value, issue characteristics and the investors’ sentiment (overoptimistic) are the main reason for long-run performance of IPOs.
 
 This paper analyzes the reason of this phenomenon, then from the reason puts forward relevant suggestions: firstly, improving the information disclosure; secondly, evaluating the rational investors; thirdly, strengthening market supervision.

Long Run Performance of Initial Public Offerings (IPOs) in Pakistan

This study is aimed to analyze long run performance of initial public offerings (IPOs) in Pakistan by taking the sample of 15 firms for the period of 2006 to 2011. We took secondary data for our research from KSE, SBP, and Brecorder. Stock returns of IPO firms are considered as dependent variables and firm size, firm age, profitability and leverage ratios are considered as explanatory variables for the long run performance of IPOs. Previous literature on IPOs indicates that IPOs underperform in the long run. Firm’s size and profitability have some significant positive correlation with the IPOs long run performance. All the findings of this research paper depend upon the background of the different industry sectors, the perspective of the study and sample distribution. And the Leverage ratio and Age of the firms are negatively correlated with the long run performance of the IPOs.

Investor sentiment extracted from internet stock message boards and IPO puzzles

High initial returns and long-run underperformance of initial public offerings (IPOs) represent puzzles in corporate finance. We investigate how investor sentiment affects these puzzles. Investor sentiment on each issuing firm's pre-IPO is extracted from Yahoo! Japan Finance message boards using text mining and a support vector machine classification. Message data on 654 Japanese IPOs from 2001 to 2010 are used to measure investor attention and sentiment. We find that high investor attention and bullish investor sentiment positively affect IPO offer prices and initial returns, leading to subsequent price declines. This suggests that excessive investor optimism can partially explain the IPO puzzles.

Determinants of Long-run Performance of Initial Public Offerings: Evidence from India

The article examines the long-run performance of 377 initial public offerings (IPOs) made by Indian companies during the period 2005–2015. The objectives of the article are to analyze whether Indian IPOs underperform or outperform the broad market in the long run and to identify the key determinants of their long-run performance. The results show that the Indian IPOs outperform the broad market initially followed by significant underperformance in the long run. The IPOs listed on the main board during 2005–2015 yielded average initial excess returns (IERs) of about 22 per cent. However, 37 per cent of the IPOs provided negative IERs. The IPOs underperformed the broad market generating –57.33 per cent buy-and-hold abnormal return (BHAR) over 36 months after listing. Only 38 out of 377 IPOs (10 per cent) outperformed the benchmark index over a 36-month holding period. The important issue characteristics that influence the long-run performance of IPOs in India are the type of issuer (government-owned or private), lead manager prestige (LMP), promoter holding and the issue size.

Optimistic Investors and Long-Run Performance of IPOs: Testing the Theory of Heterogeneous Beliefs and Short-Sale Constraints

This study tests speculative bubble theory, which assumes investors’ heterogeneous beliefs and short-sale constraints, as a potential explanation for the long-run underperformance of initial public offerings (IPOs). The prediction of speculative bubble theory is difficult to test directly because of the unobservability of the distribution of investors' opinions. This study thus focuses on Japanese auction-method IPOs and estimates the distribution of investors' beliefs. It finds that both the level of optimism and the divergence of investors' opinions cause the overvaluation of the first-day market price, but that the former has more explanatory power for post-IPO underperformance.

The Aftermarket Performance of Initial Public Offerings in Pakistan

This paper estimates the aftermarket performance of initial public offerings (IPOs) listed on the Karachi Stock Exchange. The evidence confirms that IPOs generate statistically significant abnormal returns in the short run, which indicates that underwriters initially underprice IPOs when analyzed using a short time horizon. However, when using longer time horizons to estimate abnormal performance, the results indicate that IPOs underperform in the long-run. There is an apparent dislocation between the initial valuation set by underwriters and the premium paid by the market for these new issues. The market sentiment that causes this temporary disequilibrium eventually fades and the market reprices the newly issued shares. We conduct an extreme bounds analysis to test the sensitivity and robustness of 16 explanatory variables in determining the long-term performance of unseasoned newly issued shares. The results indicate that the long-term investment ratio, industry affiliation, market-adjusted abnormal returns, financial leverage, return on assets, IPO activity period, the aftermarket risk level of unseasoned issues, and the post-issue promoter’s holdings variables significantly affect IPOs’ aftermarket performance. Theoretically, the overreaction hypothesis, ex-ante uncertainty hypothesis and window-of-opportunity hypothesis best explain IPOs’ aftermarket performance in this study.

Do initial reserves signal long-term IPO stock performance?

AbstractThis research examines the long-run Initial Public Offerings (IPO) stock performance of a large Chinese sample, and in particular the relationship between initial reserves (capital reserves and revenue reserves immediately after the IPO) and long-run IPO stock performance. In general, Chinese IPOs do not underperform the market/industry benchmarks, but they significantly underperform their size-matched industry peers. More importantly, Chinese IPO firms tend to issue a large amount of bonus shares (also called as a ‘capitalization issue’, i.e. capitalization of the reserves) after the IPO. Consistent with bonus share signaling hypothesis, Chinese IPO firms exhibit increased operating/stock performance subsequent to bonus issues. Interestingly, the size of the initial reserves is positively associated with long-run IPO stock performance. This research adds another piece of empirical evidence to the literature whether IPOs underperform in the long run, by confirming that the choice of performance me...

The underpricing and long-run underperformance of initial public offerings: evidence from Vietnam

We examine a sample of listed firms in Vietnam Stock Market from January 2005 to July 2012 to find evidence for initial public offering (IPO) underpricing and long-run underperformance. The study employs market-adjusted measures and cross-sectional analysis. The results show that the degree of underpricing measured by the two alternative methods is 38% and 49%, respectively. We find no evidence for long-run underperformance in time horizons of 12, 24 and 36 months. Furthermore, the study documents that oversubscription rate and reserve price are negatively correlated to the level of underpricing. Market factor has a weak impact. Other factors such as firm size, listing delay, age and post-IPO state-ownership level have no relationship with underpricing. Our finding for impact of reserve price contributes to literature about determinants of underpricing in an auction mechanism. This implies managers should prudently take it into consideration before proceeding with an IPO. The results also suggest a strategy which invests in IPO stocks having low oversubscription rate and low reserve price can overperform the market.

Post-IPO Underperformance and the Cross-Section of Stock Returns on the Polish Market

In this paper we propose a new cross-sectional asset pricing model employing a Young-minus-Old (OMY) factor, which accounts for long-run post-IPO underperformance. The OMY factor might be also seen as a measure of market sentiment. We test the model using stock returns from the Warsaw Stock Exchange, second most active IPO market in Europe after London, in the period from April 2001 to January 2014. We form portfolios double-sorted on size and age and attempt to explain their returns with the new model and also the traditional, well-established models such as CAPM and the Fama-French three-factor model. The CAPM and F-F models are rejected, while our model explains the returns well. Additionally, wedeliver fresh out-of-sample evidence for the long-term underperformance of initial public offerings in Poland. The anomaly is particularly strong among the small companies.

Kondycja finansowa spółek dokonujących IPO: znaczenie wielkości i zyskowności

The study investigates the price behavior after initial public offerings (IPOs) listed on the Warsaw Stock Exchange from 2004 to 2009. It focuses on possible explanations for the IPO phenomenon within the context of Poland and provides evidence on the relation between both the company size and profitability and the aftermarket price performance. The study aims to answer three questions. First, whether we could observe the short-term underpricing and the long­ term underperformance of Polish IPOs, including the financial crisis period. Second, if the IPO anomalies did exist, whether they were distinct for the size and profitability subsamples. Finally, the change of the profitability was investigated for size subsamples from before to after going public.A lower level of the underpricing and three-year underperformance was reported in comparison to the previous WSE studies. The pre‐issue company size influences the IPO underpricing with the higher level of returns for smaller companies. Concerning the long-term performance, the opposite relation between size and buy‐and‐hold abnormal returns was found. It was also found that the higher the pre‐issue profitability, the higher the underpricing. Large companies experience a better profitability improvement in the pre‐IPO period with the profitability ratios getting worse not so rapidly after the flotation.

Value versus growth in IPOs: New evidence from Finland

This paper focuses on the underpricing and the short- and long-run performance of Finnish initial public offerings (IPOs). More specifically, we examine whether there are differences between the performance of value and growth stock IPOs in the Finnish stock market. Our results indicate that growth stock IPOs are slightly more underpriced and have marginally higher short-run returns. However, value stock IPOs are better long-run investments and provide higher returns during the first three years in the aftermarket. We also document that the apparent long-run underperformance of Finnish IPOs can be largely explained by size, book-to-market, and momentum effects.

Value versus Growth in IPOs: New Evidence from Finland

This paper focuses on the underpricing and the short- and long-run performance of Finnish initial public offerings (IPOs). More specifically, we examine whether there are differences between the performance of value and growth stock IPOs in the Finnish stock market. Our results indicate that growth stock IPOs are slightly more underpriced and have marginally higher short-run returns. However, value stock IPOs are better long-run investments and provide higher returns during the first three years in the aftermarket. We also document that the apparent long-run under-performance of Finnish IPOs can be largely explained by size, book-to-market, and momentum effects.

The Underpricing and Long-Run Underperformance of Initial Public Offerings: Evidence from Vietnam

We examine a sample of 69 listed firms in Vietnamese stock market from January 2005 to July 2012 to find evidence for Initial Public Offering (IPO) underpricing. The results show that the degree of underpricing measured by the two alternative methods is 38% and 49%, respectively. We find no evidence for long-run underperformance in time horizons of 12, 24 and 36 months. Furthermore, the study documents that oversubscription rate and reserve price are negatively correlated to the level of underpricing. Market factor has a weak impact. Other factors such as firm size, listing delay, age and post-IPO state-ownership level have no relationship with underpricing. The results suggest a strategy which invests in IPO stocks having low oversubscription rate and low reserve price can overperform the market.

The Desire to Acquire and IPO Long-Run Underperformance

AbstractWe analyze 3,547 initial public offerings (IPOs) from 1985 through 2003 to determine the impact of acquisition activity on long-run stock performance. The results show that IPOs that acquire within a year of going public significantly underperform for 1- through 5-year holding periods following the 1st year, whereas nonacquiring IPOs do not significantly underperform over these time frames. For example, the mean 3-year style-adjusted abnormal return is – 15.6% for acquirers and 5.9% for nonacquirers. Our cross-sectional and calendar-time results suggest that the acquisition activity of newly public firms plays an important and previously unrecognized role in the long-run underperformance of IPOs.

Do venture capitalists reduce underpricing and underperformance of IPOs?

The purpose of this article is to assess the effect of venture capitalists at Initial Public Offerings (IPOs). In so doing, a sample of Venture Capital (VC)-backed firms was compared with a sample of non-VC-backed firms. Consistent with the prevailing belief that venture capitalists reduce uncertainty at the offering, VC-backed IPOs are found to be less underpriced than non-VC-backed IPOs. Moreover, in multivariate analyses, venture capitalists affect negatively the degree of underpricing. Unlike previous studies, we control for the new listing and rebalancing biases in the analysis of the long term performance by comparing the IPO returns to carefully constructed size matched portfolios. Based on the calendar time and the event time approaches, the results show that both samples are underperforming the carefully constructed reference portfolios in the long term. The analysis also shows that the VC-backed IPOs do not outperform the non-VC-backed IPOs. The overall difference between both sets of IPOs is al...

The asteroid cometh: Whether IPO ‘underpricing’ is being exploited by hedge funds

Underperformance of initial public offerings (IPOs) – a minuscule return following initial period of drastic appreciation after their issuance – is one of the remaining mysteries of quantitative finance. The size of the implied underpricing of new issues arguably should attract many a hedge fund to participate. On the contrary, the fraction of hedge funds investing in IPOs is rather small; their longevity is short and their performance decent, but hardly spectacular. In this article, I use a Markov growth-collapse model to explain the phenomenon of the finite growth of an asset, which may exhibit explosive returns punctuated by a rare devastating event. The proposed reason for the fact that hedge funds investing in IPOs never achieve the performance implied by alleged astronomical IPO underpricing is that one especially large and unsuccessful investment can obliterate the bulk of the gains.

An empirical investigation of Yankee stock offerings

This paper examines the operating and investment performance of 100 foreign firms that conduct their initial public offerings (IPOs) in the U.S. (Yankee stock offerings). The uniqueness of these firms is that the U.S. IPOs are their first public equity issue in any market, including the home market. We find significant improvement in the operating performance subsequent to these U.S. IPO events and firms from countries with poor investor protection benefit more. Compared to various benchmarks, unlike the significant underperformance of IPOs documented in many countries, these firms show no significant abnormal long-run stock market performance after 1, 3, or 5 years of seasoning. The findings are consistent with signaling and selective entry hypotheses.

The Wealth Effect of Demutualization: Evidence From the U.S. Property‐Liability and Life Insurance Industries

AbstractThis study examines the wealth effect of demutualization initial public offerings (IPOs) by investigating underpricing and postconversion long‐run stock performance. Our results suggest that there is more “money left on the table” for demutualized insurers than for non‐demutualized insurers. We show that higher underpricing for demutualized firms can be explained by greater market demand, market sentiment, and the size of the offering. Further, contrary to previous research reporting an average underperformance of industrial IPOs, we show that demutualization IPOs outperform non‐IPO firms with comparable size and book‐to‐market ratios and non‐demutualized insurers. We present evidence that the outperformance in stock returns is mainly attributable to improvement in post‐demutualization operating performance and demand at the time of the IPOs. The combined results of underpricing and long‐term performance suggest that the wealth of policyholders who choose stock rather than cash or policy credits is not harmed by demutualization. Stockholders who purchase demutualized company shares either during or after the IPO have earned superior returns. Our findings are consistent with the efficiency improvement hypothesis.