Short-Run Price Performance of IPOs and Corporate Governance Practices : Evidence from a Frontier Market

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. This phenomenon was first documented in the finance literature by Stoll and Curley (1970), Logue (1973) and Ibbotson (1975). To test the underpricing phenomenon, most researchers used the first listing day average return (Chan, Wang & Wei 2004; Chang et al. 2008; Dimovski & Brooks 2005; Finn & Higham 1988; Ibbotson, Sindelar & Ritter 1994; Lee, Taylor & Walter 1996; Loughran & Schultz 2006; Moshirian, Ng & Wu 2010; Omran 2005; Ritter 1987). 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 the short-run price performance of Sri Lankan IPOs. The 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 a significant impact on the short-run price performance of IPOs in Sri Lanka. This findings also support the agency and signaling theories