International Journal of Business and Economics Research, 2014
We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Au... more We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS have significantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfil the Random Walk Hypothesis (Kendall, 1953, RWH) as a requirement for weak form of market efficiency. However, desp...
Securities investors in the 21 st century seem to change trend of investment for fear of the effe... more Securities investors in the 21 st century seem to change trend of investment for fear of the effects of the global financial crises and executive fraud scandals which accounts for the quick fall in the value of shares and other investment securities in the Nigerian Capital market. Informed investors are of the view that the primary aim of their investment is to help create more wealth and advance their grip on corporate control yet these have not been realistic because of these crises hence the diversion from securities investment business to property ownerships. These have accosted most investors to resort to alternative investments, most especially the properties such as land and buildings. The paper substantiates the nature of regrets of most investors of securities and their sudden shift to investment properties and the effects such will have on the consolidation and growth of the Nigerian Capital Market. Structured questions were asked 47 randomly selected investors in some sel...
The wider scope of the economy in most cases subjects every movement of economic activities to fo... more The wider scope of the economy in most cases subjects every movement of economic activities to follow its direction and dictates. In such case, the operation of the macroeconomic factors cobwebs the independence of other economic properties to their tides. We examine in sequence, the first-day, monthly and yearly initial returns volatility of IPOs of the Nigerian stock Exchange (NSE) and the Colombo Stock Exchange (CSE) with sample of 166 and 144IPO stocks, respectively, in the light of shocks exerted by economic-wide/firm-specific variables. IPOs initial returns is conveyed as a function of the selected variables and used to observe the relationship and influence of the macroeconomic/firm-specific factors and further determination of the volatility and shocks via the GARCH and VAR models. The result is robust such that macroeconomic/firm-specific variables primarily exert shocks and generate volatile IPO returns in first-day, monthly and yearly trades. In that sense, we find that i...
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issu... more Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far as a real efficient market cannot exist except in a world of utopia. Evidences from the previous studies show that one reason or the other must be achieved or committed to get the IPO stocks marketed at the instance of the issue which subsequently keep influencing the same stocks even in the secondary market over a very long period of time even though at a minimum volatile rate but not completely eliminated. This is what we regard as stocks performance imperfection.
I try to make a brief comment and to draw attention to the Laws of Absolute and Comparative Advan... more I try to make a brief comment and to draw attention to the Laws of Absolute and Comparative Advantage and their obsolescence in today’s economic theory because of the age-long damage they have impacted on many economies via economic advisers and the contending problems developing nations are currently battling to surmount. It is unnecessary for a country to skew its expertise towards a particular or few production areas because it want to gain absolute advantage over other countries in that area and so neglect other potential areas (that could have made up for subsistence needs) by deploying all resources to the absolute advantage area thereby facing a long-run in-balance in meeting demands of other sectors. I suggest in this commentary that, the only way to develop productive sectors is to go by the Law of General or Near-Self-reliance Advantage.
Early Returns of Initial Public Offerings (IPOs) face unwarranted bubbles and crashes which are a... more Early Returns of Initial Public Offerings (IPOs) face unwarranted bubbles and crashes which are associated with the price of the IPO stocks and are believed to be product of macroeconomic and firm-specific variables that act within and outside the circumference of the issuing firm. Thus, the researcher is poised to tackle two questions; (1) what are the causes and degree of volatility of IPOs initial returns in Nigeria and Sri Lanka; and (2) can perceived corporate fraud tendency (i.e. under-pricing/overpricing) during and after the IPOs constitute a factor for IPOs initial returns volatility? IPOs initial returns is used as a function of Exchange, inflation, interest, broad money supply, price of other stocks, dividend per share, volume rates and the fraud tendency variables. The Ordinary Least Square is invoked along with advance methodological approach such as the Vector Autoregression and Generalized Autoregressive Conditional Heteroskedasticity models to capture the returns volatility, stylized facts and shocks on the IPOs initial returns. The study make use of 158 and 139 equity IPOs from 1987-2012 and 1988-2012 for the Nigerian Stock Exchange (NSE) and Colombo Stock Exchange (CSE), respectively, for the first-day observation, while 5,452 & 4,944 and 469 & 385 satisfy for the monthly and yearly observations, respectively. The results are robust and show substantial impact of the variables on IPOs initial return volatility in both markets given rise to very persistent degree of volatility clustering of 132% and 141% in the first-day for the NSE and CSE, respectively. On monthly result, the NSE tend to experience 75% volatility with leverage effect of 20% and average returns of 205.78% and fraud volatility clustering of 245.5% indicating lower volatility compared to first-day; while in the CSE, volatility increase during the month to 307.82% with lower average initial returns of 65.64% and fraud volatility of 151.35%. The result also show that the yearly volatility rate in the NSE amounts to 128.48% with average initial return of 17.84% and fraud leverage effect of 34.59%. Likewise the situation in the CSE also behaves like the first-day with volatility of 5.44% and average returns of 147.22%. The result is consistent with the conceptual framework formulated and establishes that the initial returns of IPOs in the emerging markets of Nigeria and Sri Lanka suffer from the effect of macroeconomic, firm-specific and corporate fraud variables, thereby increasing the IPO stocks returns volatility. However, inflation rate, interest rate, exchange rate, broad money supply, under-pricing and overpricing have more impacting and generally determines the volatility rate of IPOs initial returns than the other factors such as price of other stocks, volumes ratio and dividend per share. Key Words: IPOs, Volatility, Returns, NSE, CSE, Corporate Fraud, and Macroeconomic variables.
The wider scope of the economy in most cases subjects every movement of economic activities to fo... more The wider scope of the economy in most cases subjects every movement of economic activities to follow its direction and dictates. In such case, the operation of the macroeconomic factors cobwebs the independence of other economic properties to their tides. We examine in sequence, the first-day, monthly and yearly initial returns volatility of IPOs of the Nigerian stock Exchange (NSE) and the Colombo Stock Exchange (CSE) with sample of 166 and 144IPO stocks, respectively, in the light of shocks exerted by economic-wide/firm-specific variables. IPOs initial returns is conveyed as a function of the selected variables and used to observe the relationship and influence of the macroeconomic/firm-specific factors and further determination of the volatility and shocks via the GARCH and VAR models. The result is robust such that macroeconomic/firm-specific variables primarily exert shocks and generate volatile IPO returns in first-day, monthly and yearly trades. In that sense, we find that investors in NSE display character of risk-taking against their CSE counterparts who are highly risk-averse but not withstanding, volatility rate is very high for both markets during the yearly evaluation but relatively lower for the NSE during the first-day and monthly trades. On other hand, volatility is more persistent over a long-run period in CSE whereas it dies out in the short-run on the NSE.
The Capital Market Securities investment has grown to be the most popular investment opportunity ... more The Capital Market Securities investment has grown to be the most popular investment opportunity world-wide. The market often has opened the floor for interaction between the issuers and buyers of securities. Choices could be made available for informed investors to invest in various investment options which could be debt securities such as bonds/debentures and derivatives; ownership securities (equity) such as common stocks; and/or debt-equity security such as preferred stocks...
We examine the initial returns volatility of initial public offering by determining: ... more We examine the initial returns volatility of initial public offering by determining: (1) whether mispricing actually takes place during and after IPOs in Nigeria and Sri Lanka; (2) whether the mispricing (overpricing or underpricing) could constitute corporate fraud tendencies since data to measure fraud in emerging markets of Nigeria and Sri Lanka is secretive and unattainable. We use dummy proxies from 1987-2012 and 1988-2012 for the Nigerian Stock Exchange and the Colombo Stock Exchange, respectively. The OLS and GARCH models show that fraud tendency via underpricing and overpricing is very prominent and highly pronounced in the Nigerian and the Sri Lankan markets as they seriously cause volatile returns during the first-day, monthly and yearly trading of the IPOs probably to satisfy the ego of corporate agents for “money left on the table” and/or “promise for future banking business”.
Abstract: We examine and model the performance of Initial Public Offerings (IPOs) with the adven... more Abstract: We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS havesignificantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfilthe Random Walk Hypothesis (Kendall, 1953, RWH) asa requirement for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks traded between the years 2000 to 2012 consisting of35,979 monthly observations; these prices are those of IPOs trading after the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are significantly auto-correlated. This result does notsupport the RWH to satisfy for the weak market efficiency. Keywords: Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory, Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price
Abstract
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subseq... more Abstract Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far as a real efficient market cannot exist except in a world of utopia. Evidences from the previous studies show that one reason or the other must be achieved or committed to get the IPO stocks marketed at the instance of the issue which subsequently keep influencing the same stocks even in the secondary market over a very long period of time even though at a minimum volatile rate but not completely eliminated. This is what we regard as stocks performance imperfection.
International Journal of Business and Economics Research, 2014
We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Au... more We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS have significantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfil the Random Walk Hypothesis (Kendall, 1953, RWH) as a requirement for weak form of market efficiency. However, desp...
Securities investors in the 21 st century seem to change trend of investment for fear of the effe... more Securities investors in the 21 st century seem to change trend of investment for fear of the effects of the global financial crises and executive fraud scandals which accounts for the quick fall in the value of shares and other investment securities in the Nigerian Capital market. Informed investors are of the view that the primary aim of their investment is to help create more wealth and advance their grip on corporate control yet these have not been realistic because of these crises hence the diversion from securities investment business to property ownerships. These have accosted most investors to resort to alternative investments, most especially the properties such as land and buildings. The paper substantiates the nature of regrets of most investors of securities and their sudden shift to investment properties and the effects such will have on the consolidation and growth of the Nigerian Capital Market. Structured questions were asked 47 randomly selected investors in some sel...
The wider scope of the economy in most cases subjects every movement of economic activities to fo... more The wider scope of the economy in most cases subjects every movement of economic activities to follow its direction and dictates. In such case, the operation of the macroeconomic factors cobwebs the independence of other economic properties to their tides. We examine in sequence, the first-day, monthly and yearly initial returns volatility of IPOs of the Nigerian stock Exchange (NSE) and the Colombo Stock Exchange (CSE) with sample of 166 and 144IPO stocks, respectively, in the light of shocks exerted by economic-wide/firm-specific variables. IPOs initial returns is conveyed as a function of the selected variables and used to observe the relationship and influence of the macroeconomic/firm-specific factors and further determination of the volatility and shocks via the GARCH and VAR models. The result is robust such that macroeconomic/firm-specific variables primarily exert shocks and generate volatile IPO returns in first-day, monthly and yearly trades. In that sense, we find that i...
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issu... more Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far as a real efficient market cannot exist except in a world of utopia. Evidences from the previous studies show that one reason or the other must be achieved or committed to get the IPO stocks marketed at the instance of the issue which subsequently keep influencing the same stocks even in the secondary market over a very long period of time even though at a minimum volatile rate but not completely eliminated. This is what we regard as stocks performance imperfection.
I try to make a brief comment and to draw attention to the Laws of Absolute and Comparative Advan... more I try to make a brief comment and to draw attention to the Laws of Absolute and Comparative Advantage and their obsolescence in today’s economic theory because of the age-long damage they have impacted on many economies via economic advisers and the contending problems developing nations are currently battling to surmount. It is unnecessary for a country to skew its expertise towards a particular or few production areas because it want to gain absolute advantage over other countries in that area and so neglect other potential areas (that could have made up for subsistence needs) by deploying all resources to the absolute advantage area thereby facing a long-run in-balance in meeting demands of other sectors. I suggest in this commentary that, the only way to develop productive sectors is to go by the Law of General or Near-Self-reliance Advantage.
Early Returns of Initial Public Offerings (IPOs) face unwarranted bubbles and crashes which are a... more Early Returns of Initial Public Offerings (IPOs) face unwarranted bubbles and crashes which are associated with the price of the IPO stocks and are believed to be product of macroeconomic and firm-specific variables that act within and outside the circumference of the issuing firm. Thus, the researcher is poised to tackle two questions; (1) what are the causes and degree of volatility of IPOs initial returns in Nigeria and Sri Lanka; and (2) can perceived corporate fraud tendency (i.e. under-pricing/overpricing) during and after the IPOs constitute a factor for IPOs initial returns volatility? IPOs initial returns is used as a function of Exchange, inflation, interest, broad money supply, price of other stocks, dividend per share, volume rates and the fraud tendency variables. The Ordinary Least Square is invoked along with advance methodological approach such as the Vector Autoregression and Generalized Autoregressive Conditional Heteroskedasticity models to capture the returns volatility, stylized facts and shocks on the IPOs initial returns. The study make use of 158 and 139 equity IPOs from 1987-2012 and 1988-2012 for the Nigerian Stock Exchange (NSE) and Colombo Stock Exchange (CSE), respectively, for the first-day observation, while 5,452 & 4,944 and 469 & 385 satisfy for the monthly and yearly observations, respectively. The results are robust and show substantial impact of the variables on IPOs initial return volatility in both markets given rise to very persistent degree of volatility clustering of 132% and 141% in the first-day for the NSE and CSE, respectively. On monthly result, the NSE tend to experience 75% volatility with leverage effect of 20% and average returns of 205.78% and fraud volatility clustering of 245.5% indicating lower volatility compared to first-day; while in the CSE, volatility increase during the month to 307.82% with lower average initial returns of 65.64% and fraud volatility of 151.35%. The result also show that the yearly volatility rate in the NSE amounts to 128.48% with average initial return of 17.84% and fraud leverage effect of 34.59%. Likewise the situation in the CSE also behaves like the first-day with volatility of 5.44% and average returns of 147.22%. The result is consistent with the conceptual framework formulated and establishes that the initial returns of IPOs in the emerging markets of Nigeria and Sri Lanka suffer from the effect of macroeconomic, firm-specific and corporate fraud variables, thereby increasing the IPO stocks returns volatility. However, inflation rate, interest rate, exchange rate, broad money supply, under-pricing and overpricing have more impacting and generally determines the volatility rate of IPOs initial returns than the other factors such as price of other stocks, volumes ratio and dividend per share. Key Words: IPOs, Volatility, Returns, NSE, CSE, Corporate Fraud, and Macroeconomic variables.
The wider scope of the economy in most cases subjects every movement of economic activities to fo... more The wider scope of the economy in most cases subjects every movement of economic activities to follow its direction and dictates. In such case, the operation of the macroeconomic factors cobwebs the independence of other economic properties to their tides. We examine in sequence, the first-day, monthly and yearly initial returns volatility of IPOs of the Nigerian stock Exchange (NSE) and the Colombo Stock Exchange (CSE) with sample of 166 and 144IPO stocks, respectively, in the light of shocks exerted by economic-wide/firm-specific variables. IPOs initial returns is conveyed as a function of the selected variables and used to observe the relationship and influence of the macroeconomic/firm-specific factors and further determination of the volatility and shocks via the GARCH and VAR models. The result is robust such that macroeconomic/firm-specific variables primarily exert shocks and generate volatile IPO returns in first-day, monthly and yearly trades. In that sense, we find that investors in NSE display character of risk-taking against their CSE counterparts who are highly risk-averse but not withstanding, volatility rate is very high for both markets during the yearly evaluation but relatively lower for the NSE during the first-day and monthly trades. On other hand, volatility is more persistent over a long-run period in CSE whereas it dies out in the short-run on the NSE.
The Capital Market Securities investment has grown to be the most popular investment opportunity ... more The Capital Market Securities investment has grown to be the most popular investment opportunity world-wide. The market often has opened the floor for interaction between the issuers and buyers of securities. Choices could be made available for informed investors to invest in various investment options which could be debt securities such as bonds/debentures and derivatives; ownership securities (equity) such as common stocks; and/or debt-equity security such as preferred stocks...
We examine the initial returns volatility of initial public offering by determining: ... more We examine the initial returns volatility of initial public offering by determining: (1) whether mispricing actually takes place during and after IPOs in Nigeria and Sri Lanka; (2) whether the mispricing (overpricing or underpricing) could constitute corporate fraud tendencies since data to measure fraud in emerging markets of Nigeria and Sri Lanka is secretive and unattainable. We use dummy proxies from 1987-2012 and 1988-2012 for the Nigerian Stock Exchange and the Colombo Stock Exchange, respectively. The OLS and GARCH models show that fraud tendency via underpricing and overpricing is very prominent and highly pronounced in the Nigerian and the Sri Lankan markets as they seriously cause volatile returns during the first-day, monthly and yearly trading of the IPOs probably to satisfy the ego of corporate agents for “money left on the table” and/or “promise for future banking business”.
Abstract: We examine and model the performance of Initial Public Offerings (IPOs) with the adven... more Abstract: We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS havesignificantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfilthe Random Walk Hypothesis (Kendall, 1953, RWH) asa requirement for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks traded between the years 2000 to 2012 consisting of35,979 monthly observations; these prices are those of IPOs trading after the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are significantly auto-correlated. This result does notsupport the RWH to satisfy for the weak market efficiency. Keywords: Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory, Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price
Abstract
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subseq... more Abstract Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far as a real efficient market cannot exist except in a world of utopia. Evidences from the previous studies show that one reason or the other must be achieved or committed to get the IPO stocks marketed at the instance of the issue which subsequently keep influencing the same stocks even in the secondary market over a very long period of time even though at a minimum volatile rate but not completely eliminated. This is what we regard as stocks performance imperfection.
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their obsolescence in today’s economic theory because of the age-long damage they have impacted on many economies
via economic advisers and the contending problems developing nations are currently battling to surmount. It is
unnecessary for a country to skew its expertise towards a particular or few production areas because it want to gain
absolute advantage over other countries in that area and so neglect other potential areas (that could have made up for
subsistence needs) by deploying all resources to the absolute advantage area thereby facing a long-run in-balance in
meeting demands of other sectors. I suggest in this commentary that, the only way to develop productive sectors is to go
by the Law of General or Near-Self-reliance Advantage.
Key Words: IPOs, Volatility, Returns, NSE, CSE, Corporate Fraud, and Macroeconomic variables.
and/or “promise for future banking business”.
Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price
determination and encoding such information to existing and potential investors for IPOs has significantly improved with
related efficiency as most of the IPOs issued during the period after the introduction of the ATS havesignificantly attracted
more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This
could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock
prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available
information as the EMH suggests and does not fulfilthe Random Walk Hypothesis (Kendall, 1953, RWH) asa requirement
for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability
to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced
or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to
define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each
IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks
traded between the years 2000 to 2012 consisting of35,979 monthly observations; these prices are those of IPOs trading after
the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are
significantly auto-correlated. This result does notsupport the RWH to satisfy for the weak market efficiency.
Keywords: Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory,
Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a
favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far
as a real efficient market cannot exist except in a world of utopia. Evidences from the previous
studies show that one reason or the other must be achieved or committed to get the IPO stocks
marketed at the instance of the issue which subsequently keep influencing the same stocks even in
the secondary market over a very long period of time even though at a minimum volatile rate but
not completely eliminated. This is what we regard as stocks performance imperfection.
their obsolescence in today’s economic theory because of the age-long damage they have impacted on many economies
via economic advisers and the contending problems developing nations are currently battling to surmount. It is
unnecessary for a country to skew its expertise towards a particular or few production areas because it want to gain
absolute advantage over other countries in that area and so neglect other potential areas (that could have made up for
subsistence needs) by deploying all resources to the absolute advantage area thereby facing a long-run in-balance in
meeting demands of other sectors. I suggest in this commentary that, the only way to develop productive sectors is to go
by the Law of General or Near-Self-reliance Advantage.
Key Words: IPOs, Volatility, Returns, NSE, CSE, Corporate Fraud, and Macroeconomic variables.
and/or “promise for future banking business”.
Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price
determination and encoding such information to existing and potential investors for IPOs has significantly improved with
related efficiency as most of the IPOs issued during the period after the introduction of the ATS havesignificantly attracted
more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This
could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock
prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available
information as the EMH suggests and does not fulfilthe Random Walk Hypothesis (Kendall, 1953, RWH) asa requirement
for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability
to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced
or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to
define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each
IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks
traded between the years 2000 to 2012 consisting of35,979 monthly observations; these prices are those of IPOs trading after
the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are
significantly auto-correlated. This result does notsupport the RWH to satisfy for the weak market efficiency.
Keywords: Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory,
Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price
Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a
favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far
as a real efficient market cannot exist except in a world of utopia. Evidences from the previous
studies show that one reason or the other must be achieved or committed to get the IPO stocks
marketed at the instance of the issue which subsequently keep influencing the same stocks even in
the secondary market over a very long period of time even though at a minimum volatile rate but
not completely eliminated. This is what we regard as stocks performance imperfection.