Short and Long Term Anomalies in Initial Public Offerings

Regardless of the method for pricing, many studies both in developed and emerging markets show that the IPOs are underpriced. This first anomaly in the IPO markets has puzzled researchers since 1970s and there is a huge amount of studies on this subject. Another anomaly in the IPO market is generally defined as the "hot issue" markets implies that there are cycles in terms of volume and number. The third anomaly in the IPO markets is known as the long run underperformance. Long run underperformance is usually proven by using 3 years cumulative market adjusted returns after the IPO. But some studies indicate that the long run underperformance can go up to six years. Why do the IPOs systematically underperform the market? Although there are some other theories for the long run underperformance, one of the most important one indicates that the initial pricing of the IPO causes this anomaly. So, the first anomaly is a part of the answer of the third one or in other words the factors behind the performance of the future periods may lie back to the IPO process 3 or more years ago.