Investment behaviours and IPO returns: evidence from Taiwan

Abstract

This article uses Buy-Sell Imbalance (BSI) as an indicator of investment behaviour to analyse the correlation between investor trading behaviours and returns of Initial Public Offerings (IPOs). After controlling for variables, such as market excess return, the size factor, and the book-to-market factor and momentum factor, this article finds that if IPOs are more popular to individual investors when issuing, the short-term returns are higher. In contrast, there is little sign that institutional investors exhibit such effect. In Taiwan's stock market where individual investors are the dominant players, the investment behaviours of individual investors exhibit certain influences on IPO share prices. This article also divides the IPO samples into two groups, one group favoured by investors and the other not at the time of issue. The result shows that IPOs favoured by individual investors have significantly lower long-term returns after 1 year of their listings, while IPOs favoured by institutional investors have different results. The two groups show no significant differences in average operational performances; therefore, this article suggests that the price correction of overly optimistic individual investors is the reason for the poorer long-term returns of IPOs favoured by individual investors.

Keywords:

• IPOs
• returns of IPOs
• investment behaviours
• behaviour finance

JEL Classification::

• G19
• P34

Notes

¹ Some papers explain the IPO underpricing phenomenon from other aspects, such as flotation methods (Peng and Wang, 2007), underwriter retention rate (Chen et al., 2007) and venture capitalists (Yacine and Rob, 2012). This article uses investment behaviours to illustrate returns of IPOs because Ritter and Welch (2002) argued that nonrational explanations play a larger role in the future research agenda of IPOs.

² Institutional investors do not have trading records on four IPOs during the first 5 days of issue, therefore, the sample numbers of institutional BSI are 88.

³ Due to a lack of financial reporting for four companies in the sample pool, there are 88 samples for the analysis of operating performances.

⁴ Before regression analysis, this article performs collinearity tests for all the explanatory variables with variation inflation values to ensure the absence of collinearity in regressions.

⁵  is adjusted according to the 1-month fixed-term deposit quoted by First Commercial Bank.