Determinants of Post IPO Stock Performance

The paper focuses on theoretical and empirical analysis of determinants of post-IPO stock performance on short run (return during first trading day – primary area of interest of the study) and long run. With regard to short term, the theoretical part of the paper analyzes and divides existing explanations on IPO underpricing into 3 main groups (each of them includes sub-groups as well): behavioral theories, institutional theories, asymmetry of information & uncertainty theories. The empirical analysis covers firms that made their placement on largest US stock exchanges. The results show that 68% of companies under consideration ended up first day of trading with stock price higher than offer price and the average value of first day return was 33%. The regression analysis shows that the following traits of companies significantly increases underpricing: placement during hot issue and bullish markets, stronger financial performance, general corporate purposes as main use of proceeds. While these traits of firms significantly reduce underpricing: higher retention ratio, larger syndicate size, greater amount of gross proceeds, older age, involvement of prestigious underwriter. With regard to long term, the theoretical part of the paper analyzes and divides existing explanations on IPO underpricing into 3 main groups (each of them includes sub-groups as well): behavioral theories, methodological theories, asymmetry of information theories. The empirical results show that during one year and two years IPO companies may experience negative abnormal returns, while on greater (and farthest) time horizons the abnormal returns are statistically insignificant from zero. Moreover, changes in financial performance and initial underpricing of issuing companies have higher explanatory power during first periods after going public, while on later time horizons their explanatory power deteriorated as other factors become more relevant in returns estimations.