1 / 16

Long-Term Underperformance of New Issues: Is Earnings Management the Villain?

Long-Term Underperformance of New Issues: Is Earnings Management the Villain?. S. Ghon Rhee K. J. Luke Distinguished Professor Of International Finance and Banking University of Hawai ‘ i. Two Major Anomalies: The New Issues Market. 1. Short-Term Underpricing

shelby
Download Presentation

Long-Term Underperformance of New Issues: Is Earnings Management the Villain?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Long-Term Underperformance of New Issues: Is Earnings Management the Villain? S. Ghon Rhee K. J. Luke Distinguished Professor Of International Finance and Banking University of Hawai‘i

  2. Two Major Anomalies: The New Issues Market 1. Short-Term Underpricing Internet Bubble Period (1999-2000) a. Average first trading day return 1999: 72% and 2000: 56% b. 182 out of 803 IPOs: First trading day return of 100% or higher 2. Long-Term Underperformance a. US IPO firms overvalued by about 50% relative to its industry peers in 1980-1997. b. Only 12 out of 323 internet IPOs in 1999-2000: Trading above their offer price as of early 2001.

  3. Long-Term Operating Performance of IPO and SEO Firms • Industry-adjusted operating return on assets: Usually peak prior to the offering • Industry-adjusted asset turnover and other long-term performance measures: Deteriorate over time after the offering • IPO and SEO firms expand their assets faster than their sales overtime…..Investment in negative NPV projects?

  4. Which Anomaly Deserves More Attention? Long-term underperformance is a more serious issue a. Due to Welfare Implications for Investors b. Short-Term Underpricing is a one-day phenomenon and can be corrected to some degree

  5. What Explains Long-Term Underperformance? • IPO and SEO firms exhibit unusually large and significant gains in operating performance one year prior to the offer date • SEO firms exhibit superb stock performance in the year prior to the offering >>>>>> Earnings Management which mislead investors to be over optimistic about the issuer’s prospects

  6. Distribution of Scaled Earnings(Whole Sample)

  7. Distribution of Scaled Earnings(Large Size Quintile)

  8. Distribution of Scaled Earnings(Small Size Quintile)

  9. Country Classification by Earnings Opacity Measure Rank 5 (Most Opaque): India, Indonesia, Japan, Korea, Greece Rank 4: Malaysia, Pakistan, Singapore, Taiwan, Turkey, S. Africa Rank 3: Hong Kong, Thailand, Austria, Finland, Germany, Ireland, Netherlands Rank 2: Australia, Denmark, France, Sweden, Switzerland, United Kingdom Rank 1 (Least Opaque): Belgium, Canada, Norway, Portugal, United States Source: Bhattacharya, Daouk, and Welker(2002)

  10. How to Minimize Long-Term Underperformance of IPO and SEO Firms? • Better Financial Disclosure • Improved Accounting Reporting System • Monitoring over Underwriting Activities • Corporate Governance • Investor Education

  11. Thank You!

More Related