IPO’s Long-Run Performance: Hot Market versus Earnings Management

Tsai-Yin Lin, Jerry Yu and Chia-Yi Lin
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Tsai-Yin Lin: Department of Financial Management, National Kaohsiung University of Science and Technology, Kaohsiung 81148, Taiwan
Jerry Yu: Department of Finance and Economics, University of Baltimore, 1420 N. Charles Street, Baltimore, MD 21201, USA
Chia-Yi Lin: Walsin Lihwa Corporation, Taipei F5 114, Taiwan

JRFM, 2021, vol. 14, issue 3, 1-16

Abstract: One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to the IPO’s long-run underperformance. Our results show that although both hot market and earnings management play a role in explaining IPO’s long-run performance in their own rights, earnings management no longer exhibits significant explanatory power when the IPOs are issued in the cold market. While the IPOs that are issued in the hot market still tend to underperform in the long run even if the firms do not engage in earnings management. Our findings are consistent with the literature related to the information asymmetry in IPO market. And, because the information asymmetry is more severe in hot market condition, IPOs issued in hot market tend to exhibit poorer returns than those issued in cold market.

Keywords: IPO; information asymmetry; hot market; cold market; earnings management; IPO’s long-run underperformance (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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