AGENCY THEORY RELATED EXPLANATIONS FOR INITIAL PUBLIC OFFERING ANOMALIES
There are two well-known anomalies about initial public offering companies; abnormal initial returns to outside investors and long-term underperformance. These two well-documented anomalies are still unsolved puzzles which attract great attention in corporate finance research. This leads to generation of many possible explanations with different hypotheses. Beside many other theories and perspectives, agency theory related explanations for these anomalies is a flourishing and fruitful area for further research. In this paper, it is aimed to construct the links between agency theory and initial public offering anomalies by analyzing the related empirical and theoretical studies.
The agency theory perspective often explains the anomaly about abnormal initial returns to outside investors with asymmetric information with the major assumption that information asymmetry exists between the initial public offerings team, underwriters, and external investors that may create agency costs and lead to underpricing when the initial offer price is less than the first-day closing price of the initial public offerings shares. From the agency theory perspective, the long-term underperformance anomaly is explained by agency problems created after the change of ownership mode.
Keywords: initial public offerings, financial performance, agency theory, corporate finance
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