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Underpricing and the Long-Run Underperformance of IPOs
Pindroch, Michal ; Musílek, Petr (advisor) ; Witzany, Jiří (referee)
When companies go public, the shares they sell tend to be underpriced, and thus exhibit a significant price jump on the first day of trading. As a result, IPO investors materialize significant first-day returns. In the long-run, however, relative to some benchmark, investors appear to lose out by continuing to hold the stocks of firms that have recently gone public. These IPO phenomena are subject of the following study. The thesis addresses two main objectives. First, it systematically surveys relevant empirical evidence and theories that have been proposed to explain IPO underpricing and long-run underperformance. In addition, both anomalies are studied form the viewpoints of two competing finance theories: efficient market hypothesis and behavioral finance. Theories of underpricing are grouped within two broad categories: asymmetric information based models and behavioral theories. While asymmetric information based models assume that one of the IPO transaction parties knows more than others, and that these information frictions give rise to underpricing, behavioral explanations, on the other hand, assume the presence of irrational investors who are the prime cause of underpricing. Theories of poor long-term performance are based on behavioral finance perspective only, where "investor sentiment" plays the main role. On the contrary, proponents of market efficiency strongly argue that the notion of systematic IPOs long-run underperformance is spurious. Secondly, the thesis empirically examines the presence of underpricing and the long-performance of IPOs in European NYSE Euronext markets. In general, the results undoubtedly show that IPOs in the sample are moderately underpriced on average. However, the assessment of IPOs long-run performance provides contentious findings and probably requires further research.
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