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.
| Published in | International Journal of Business and Economics Research (Volume 3, Issue 2) |
| DOI | 10.11648/j.ijber.20140302.14 |
| Page(s) | 72-81 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2014. Published by Science Publishing Group |
Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory, Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price
| [1] | Baillie, R.T., and Bollerslev, T. (1991) Intra Day and Inter Day Volatility in Foreign Exchange rates, Review of Economic Studies 58, 565-585. |
| [2] | Baron, D. (1982) A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues, Journal of Finance 37, 955–976. |
| [3] | Bartram, S. M., Brown, G., and Stulz, R. M.,(2012) Why are U.S Stocks More Volatile? Journal of Finance LXVII, (4), 1329-1370. |
| [4] | Beaver, W., Lambert, R. and Morse, D. (1980) the Information Content of Security Prices, Journal of Accounting and Economics, March |
| [5] | Benveniste, L.M., and Spindt, P.A., (1989) How investment Bankers Determine the Offer Price and Allocation of New Issues, Journal of Financial Economics 24, 343–362. |
| [6] | Benveniste, L.M., and Wilhelm, W.J., (1990) A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments, Journal of Financial Economics 28, 173-207. |
| [7] | Bessembinder, H., Chan, K., and Seguin, P.J., (1996) An Empirical Examination of Information, Differences of Opinion, and Trading Activity, Journal of Financial Economics 40,105–134.464 The Journal of Finance. |
| [8] | Bodie, Z., Kane, A., Marcus, A. J., and Mohanty, P (2005) Investments, 6th edition, Tata McGraw-Hill Publishing Company, New Delhi. |
| [9] | Bollerslev, T., Engle, R.F., and Nelson, D.B., (1994) ARCH Models, in: Handbook of Econometrics, Edited by R.F. Engle and D.L. Mcfadden, Elsevier Science, 2959-3037. |
| [10] | Bradley, D.J., and Jordan, B.D., (2002) Partial Adjustment to Public Information and IPO Underpricing, Journal of Financial and Quantitative Analysis 37, 595–616. |
| [11] | Cheung, C.S. and Krinsky, I., (1994) Information Asymmetry and the Underpricing of Initial Public Offerings: Further Empirical Evidence, Journal of Business Finance and Accounting, 21 (5), 739-747. |
| [12] | Cornell, B. (1978) Using the Options Pricing Model to Measure the Uncertainty Producing Effect of Major Announcements, Financial Management 7, 54-59. |
| [13] | CSE Automated Trading Rules, 2012, www.cse.lk. |
| [14] | Derrien, F., (2005) IPO Pricing in “Hot” Market Conditions: Who leaves Money on the Table? Journal of Finance 60, 487-521. |
| [15] | Edelen, R.M., and Kadlec, G.B., (2005) Issuer Surplus and the Partial Adjustment of IPO Prices to Public Information, Journal of Financial Economics 77, 347-373. |
| [16] | Fama, E. F., (1965) the Behaviour of Stock Market Prices, Journal of Business 38 (1), 34-105. |
| [17] | Fama, E. F., (1968) Risk, Return and Equilibrium, Report No.6831, University of Chicago, Centre for Mathematical Studies in Business and Economics, June. |
| [18] | Fama, E. F , (1970) Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance 25, 383-417. |
| [19] | Gerity, M.S., and Mulherin, J.H. (1992) Trading Halts and Market Activity: An Analysis of Volume at the Open and Close, Journal of Finance 47, 1765-1784. |
| [20] | Glosten, L.R., Jagannathan, R., and Runkle, D., (1993) On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks, Journal of Finance 48, 1779-1801. |
| [21] | Hanley, K. W., (1993) the Under-pricing of Initial Public Offerings and the Partial Adjustment Phenomenon, Journal of Financial Economics 34, 231–250. |
| [22] | Harris, L. (1986) A transaction Data Study of Weekly and Intra-daily Patterns in Stock Returns, Journal of Financial Economics 16, 99-117. |
| [23] | Harvey, C.R., and Huang, R.D. (1991) Volatility in the Foreign Currency Futures Market, Review of Financial Studies 4, 543-569. |
| [24] | Harvey, C.R ., and Huang, R.D. (1992) Information Trading and Fixed Income Volatility, Unpublished Manuscript, Department of Finance, Duke University. |
| [25] | Islam, Md.A., Ali, R., and Ahmad, Z., (2010) An Empirical Investigation of the Underpricing of Initial Public Offerings in the Chittagong Stock Exchange, International Journal of Economics and Finance 2 (4), 36-46. |
| [26] | Jensen, M., (1968) the Performance of Mutual Funds in the Period 145-64, Journal of Finance 23, 389-416. |
| [27] | Jensen, M ., (1969) Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios, Journal of Business 42, 167-247. |
| [28] | Lintner, J., (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock portfolios and Capital Budgets, Review of Economics and Statistics, XLVII, 13-37. |
| [29] | Lo, A.W. (2007) Efficient Market Hypothesis, in L. Blume and S. Durlauf, the New Palgrave: A Dictionary of Economics, Second Edition, 2007. New York: Palgrave McMillan. |
| [30] | Loughran, T., and Ritter, J.R., (2002) Why don’t Issuers Get Upset About Leaving Money on the Table in IPOs? Review of Financial Studies 15, 413–443. |
| [31] | Loughran, T., and Ritter, J.R., (2004) why has IPO Underpricing Changed Over Time? Financial Management 33, 5–37. |
| [32] | Lowry, M., Officer, M.S., and Schwert, G.W., (2010) the Variability of IPO Initial Returns, Journal of Finance LXV (2), 425-465. |
| [33] | Lowry, M., and Schwert, G.W., (2004) is the IPO pricing process efficient? Journal of Financial, Economics 71, 3–26. |
| [34] | Machiraju, H.R., (2009) The Working of Stock Exchanges in India, 3rd edition, New Age International Publishers, New Delhi. |
| [35] | Magnus, F.J., and Fosu, O-T.E., (2006) Modelling and Forecasting Volatility of Returns on the Ghana Stock Exchange Using GARCH Models, American Journal of Applied Sciences 3 (10), 2042-2048. |
| [36] | Murray, J.E. (2008) Identifying, Separating, and Managing Asymmetric Information in Early 20c Health Insurance, http://www.gmu.edu/departments/economics/pboettke/workshop/spring08/Identifying%20and%20managing%20draft%20January%202008.pdf. |
| [37] | Myers, S.C., and Majluf, N.S., (1984) Corporate Financing and Investment Decisions When Firms have Information that Investors do not have, Journal of Financial Economics 13, 187-221. |
| [38] | Nelson, D.B., (1991) Conditional Heteroskedasticity in Asset Returns: A New Approach, Econometrica 59, 347-370. |
| [39] | Niederhoffer, V., and Osborne, M.F.M., (1966) Market Making and Reversal on the Stock Exchange, Journal of the American Statistical Association 61, 897-916. |
| [40] | Oluba, M., (2008) Nigeria: The Equity Market Crisis, Causes, and Solutions. Retrieved from: http://allafrica.com/stories/200811040483.html |
| [41] | Pastor, L., and Veronesi, P., (2005) Rational IPO Waves, Journal of Finance 60, 1713–1757. |
| [42] | Pastor, L., Taylor, L.A., and Veronesi, P., (2009) Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability, Review of Financial Studies 22, 3005–3046. |
| [43] | Purnanandam, A., Swaminathan, B., (2004) Are IPOs really underpriced? Review of Financial Studies 17, 811-848. |
| [44] | Ritter, J.R., (1984a) the “Hot Issue” Market of 1980, Journal of Business 57, 215–240. |
| [45] | Ritter, J.R., (1984b) Signalling and the Valuation of Unseasoned New Issues: A Comment, Journal of Finance 39, 1231–1237. |
| [46] | Ritter, J.R., (2003), Investment Banking and Securities Issuance, in: G.M. Constantinides, M. Harris, and R. Stulz (eds.), Handbook of the Economics of Finance, North Holland. |
| [47] | Rock, K., (1986) Why New Issues are Under-Priced, Journal of Financial Economics 15, 187–212. |
| [48] | Roll, R., (1968) The Efficient Market Model Applied to U.S. Treasury Bill Rates, Unpublished PhD Thesis, Graduate School of Business, University of Chicago. |
| [49] | Rubalcava, A. (2013) Are Financial Markets Efficient? Journal of Business and Financial Affairs 2(2), http://dx.doi.org/10.4172/2167-0234.1000e136. |
| [50] | Shiller, R.J. (2002) From Efficient Market Hypothesis to Behavioural Finance, Cowles Foundation Discussion Paper No. 1385, http://papers.ssrn.com/abstract_id=349660. |
| [51] | Scholes, M., (1969) A test of the Competitive Hypothesis: The Market for New Issues and Secondary Offerings, Unpublished PhD Thesis, Graduate School of Business, University of Chicago. |
| [52] | Securities and Exchange Commission Rules and Regulations (SECRR) as amended 2001, 2002, 2003, 2005, 2006, 2008, 2009, 2010, 2011 and 2012, Nigeria, www.sec.ng.org |
| [53] | SEC (2005) Public Offering and Sale of Securities, Securities and Exchange Commission Publication, Nigeria. |
| [54] | Sherman, A., and Titman, S., (2002) Building the IPO Order Book: Underpricing and Participation Limits with Costly Information, Journal of Financial Economics 65, 3-29. |
| [55] | Solomon, D.H., (2012) Selective Publicity and Stock Prices, Journal of Finance LXVII (2), 599-637. |
| [56] | Spatt, C., and Srivastava, S. (1991). Pre-play Communication, Participation Restrictions, and Efficiency in Initial Public Offerings, Carnegie-Mellon University, Graduate School of Industrial Administration, Reprint NO. 1415. |
| [57] | Wang, T.Y., Winton, A., and Yu, X (2010) Corporate Fraud and Business Conditions: Evidence from IPOs, Journal of Finance vol. IXV, No. 6, December. |
APA Style
P. M. C. Thilakarathne, Alex Augustus Ambore Bruce. (2014). Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis. International Journal of Business and Economics Research, 3(2), 72-81. https://doi.org/10.11648/j.ijber.20140302.14
ACS Style
P. M. C. Thilakarathne; Alex Augustus Ambore Bruce. Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis. Int. J. Bus. Econ. Res. 2014, 3(2), 72-81. doi: 10.11648/j.ijber.20140302.14
AMA Style
P. M. C. Thilakarathne, Alex Augustus Ambore Bruce. Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis. Int J Bus Econ Res. 2014;3(2):72-81. doi: 10.11648/j.ijber.20140302.14
Share This Article
Twitter
Linked In
Facebook
Copy
Download@article{10.11648/j.ijber.20140302.14,
author = {P. M. C. Thilakarathne and Alex Augustus Ambore Bruce},
title = {Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis},
journal = {International Journal of Business and Economics Research},
volume = {3},
number = {2},
pages = {72-81},
doi = {10.11648/j.ijber.20140302.14},
url = {https://doi.org/10.11648/j.ijber.20140302.14},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20140302.14},
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.},
year = {2014}
}
TY - JOUR T1 - Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis AU - P. M. C. Thilakarathne AU - Alex Augustus Ambore Bruce Y1 - 2014/04/30 PY - 2014 N1 - https://doi.org/10.11648/j.ijber.20140302.14 DO - 10.11648/j.ijber.20140302.14 T2 - International Journal of Business and Economics Research JF - International Journal of Business and Economics Research JO - International Journal of Business and Economics Research SP - 72 EP - 81 PB - Science Publishing Group SN - 2328-756X UR - https://doi.org/10.11648/j.ijber.20140302.14 AB - 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. VL - 3 IS - 2 ER -
Information
Email: