Why Does Underperformance of IPOs in the Long-Run Become Debatable? A Theoretical Review

Posted: 23 Feb 2015

See all articles by Wasantha Perera

Wasantha Perera

University of Sri Jayewardenepura

Date Written: February 22, 2015

Abstract

Prior studies have examined IPO market performance in two different periods — short run and long run — in terms of two phenomena: the underpricing or short-run market phenomenon and the underperformance or long-run market phenomenon. To find out the possible theoretical reasons for the underperformance phenomenon, this study reviews the past literature on the long-run market performance of IPOs. The evidence on long-run underperformance of IPOs is not as widespread as that of short-run underpricing of IPOs. Some researchers have found that IPOs underperform marginally or have no abnormal performance in the long run; thus, they do not reject the market efficiency hypothesis in the long run. Others have reported that IPOs overperform or do not underperform in the long-run market. Still others have argued that underperformance disappears when different performance measures or methodologies are used. The rest have found that IPOs underperform considerably in the long-run IPO market. However, the long-run underperformance of IPOs is a debatable issue among financial researchers because of their studies’ conflicting results and controversial findings.

Keywords: IPO, long-run market phenomenon, efficiency hypothesis, performance measures

Suggested Citation

Perera, Wasantha, Why Does Underperformance of IPOs in the Long-Run Become Debatable? A Theoretical Review (February 22, 2015). Available at SSRN: https://ssrn.com/abstract=2568281

Wasantha Perera (Contact Author)

University of Sri Jayewardenepura ( email )

Nugegoda
Gandodawila
Gangodawila, Nugegoda 10250
Sri Lanka

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