SHORT-RUN PRICE PERFORMANCE OF IPOS AND CORPORATE GOVERNANCE PRACTICES: EVIDENCE FROM A FRONTIER MARKET

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Abstract

The short-run price performance of Initial Public Offerings (IPOs) indicates that the prices are often underpriced which is widely documented as a universal phenomenon. Corporate governance refers to the set of systems, principles and processes by which a company is governed. Establishing good corporate governance system in an IPO company makes good decisions which attract more outside investors. Therefore, this study examines whether there is any impact of corporate governance practices on short-run price performance of Sri Lankan IPOs. Study examined 44 fixed price IPOs which were listed on the Colombo Stock Exchange (CSE) during the period of 2003 – January to 2015- December. The study found that Sri Lankan IPOs underprice by 30% on AR, which is statistically significant at 5% level. Further, it found that block holder ownership (ownership concentration), CEO duality and existence of the non-executive directors in the board are positively related to the short-run underpricing, which are statistically significant at 5%. But, the board size has a significant negative impact on underpricing. These relationships are in line with the international literature which confirms that the corporate governance practices have significant impact on short-run price performance of IPOs in Sri Lanka. These findings also support the agency and signaling theories.

Keywords: Underpricing, Sri Lankan IPOs, Corporate Governance

JEL Classification: G12, G14, G32

Received: 11.07.2017

Accepted: 07.02.2018

Published: 22.02.2018

How to cite this paper: Samarakoon, SMRK, & Perera, KLW (2018). Short-run price performance of IPOs and corporate governance practices: Evidence from a frontier market. Corporate Governance and Sustainability Review, 2(1), 34-42. https://doi.org/10.22495/cgsrv2i1p3