Why are Stock Exchange IPOs So Underpriced and Yet Outperform in the Long Run?

48 Pages Posted: 14 Sep 2013

See all articles by Isaac K. Otchere

Isaac K. Otchere

Carleton University - Sprott School of Business

Sana Mohsni

Carleton University - Sprott School of Business

George Owusu-Antwi

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship

Date Written: June 12, 2013

Abstract

We investigate the level of underpricing and the long-term stock market performance of financial exchange initial public offerings (IPOs) and find that, despite being more underpriced, the financial exchange IPOs significantly outperform the market indexes and a control sample of regular IPOs. Thus, contrary to the findings in prior studies, we find that stock exchange IPO underpricing is positively related to the firm’s long-run stock returns. We argue, among others, that the lack of managerial ownership of shares in the stock exchange firms creates a situation where management is not constrained to significantly underprice their initial issues to signal their firms’ prospects, because they do not directly bear the cost of leaving too much money on the table. Interestingly, both underpricing and long-run returns of stock exchange IPOs are related to proxies of signaling hypothesis. On the basis of additional tests involving the stock exchange IPOs and a sub-sample of regular IPOs that also outperformed the market in the long run, we are able to rule out the quasi-monopoly hypothesis as a possible explanation for the strong long-run performance of stock exchange IPOs.

Keywords: Stock exchange IPOs, self-listing, underpricing, performance, signaling

JEL Classification: G15, G32

Suggested Citation

Otchere, Isaac K. and Mohsni, Sana and Owusu-Antwi, George, Why are Stock Exchange IPOs So Underpriced and Yet Outperform in the Long Run? (June 12, 2013). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2305368

Isaac K. Otchere (Contact Author)

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada
(613) 520-2600 ext 2731 (Phone)
(613) 520-4427 (Fax)

Sana Mohsni

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
810 Dunton Tower
Ottawa, Ontario K1S SB6
Canada

George Owusu-Antwi

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship ( email )

Ft. Lauderdale, FL 33314
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
171
Abstract Views
1,535
Rank
323,669
PlumX Metrics