Is IPOs trading enhanced with the advent of automated trading system? A look at the efficient market hypothesis

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 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, 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 of 35,979 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 not support 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

IPO Stocks Performance Imperfection: A Review of Models and Empirical Works

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.

IPO Stocks Performance Imperfection: A Review of Models and Empirical Works.pdf
Keywords:IPOs; Stocks Performance Imperfection; Price Swings (Volatility); Efficient Market