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

Abstract

Prior studies have examined Initial Public Offering (IPO) market performance in two different periods-short run and long run-in terms of two phenomena: the under pricing 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 under pricing of IPOs. The previous researchers have explained long-run performance using behavioral theories, methodological issues and short-run under pricing theories. 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 over perform 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