An Investigation of IPO Long Run Underperformance of Sri Lankan Firms

Abstract

In an Initial public offering (IPO), company ownership will be transferred to public from few private shareholders which mean the right to share the profits also moved to broadened ownership base . Even though it can be found extensive literature in foreign equity markets, IPO is a least studied phenomenon in Sri Lankan context. Samarakoon (2010) and Peter (2007) are the two published studies in this area with respect to the Colombo Stock Exchange (CSE). Number of IPOs reported in CSE increased significantly, immediately after May 2009 where Island’s three decade long war ended (9 and 13 IPOs reported in respectively in 2010 and 2011 compared to 2 IPOs each in 2008 and 2009 which are war affected years). There are three main anomalies associated with IPOs are IPO underpricing, IPO long run price underperformance and IPO operating underperformance. IPO underpricing is pricing the IPO share below its intrinsic value by IPO firm itself and long run price underperformance is that IPO share is trading below the respective benchmarks over long period of time. Operating underperformance is the depiction of poor operating and financial performance by IPO firms. This research abstract focuses on IPO long run underperformance in CSE due to limited number of published papers in this area.