Abstract:
Prior research related to Initial Public Offerings (IPOs) have
documented that market fads and earning management of IPO firms
play a crucial role in explaining the long-run performance of IPOs.
The market fads reflect the overoptimistic behavior of the IPO
investors based on the high earnings at the very first day of IPOs.
Also, IPO firms may manage their earnings using accounting accrual
adjustments to show higher earnings than actual cash flows to
attract more investors to their IPOs. This study investigates the
impact of market fads and earning management on long-run
performance of Sri Lankan IPOs using 50 new equity issues taken
place in the Colombo Stock Exchange between 2004 and 2018. To
examine the long-run IPO performance, buy-and-hold returns
(BHRs) and buy-and-hold abnormal returns (BHARs) were
calculated on a monthly basis employing equally-weighted and
value-weighted schemes. The findings show that Sri Lankan IPOs
underperform in the long-run based on calculated schemes and
findings are in line with market fads hypothesis. However, this
study does not find any evidence to confirm that Sri Lankan IPOs
opportunistically manage their earnings.
