THE IMPACT OF FADS AND EARNING MANAGEMENT ON LONG RUN PERFORMANCE OF SRI LANKAN IPOS

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.