Long-Run Operating Performance of Initial Public Offerings in Japanese Over-the-Counter Market (1991–2001): Evidence and Implications

Abstract

This paper implements a comprehensive study on the long run post-issue operating performance of more than 700 initially public offerings (IPOs) in the Japanese over-the-counter market (JASDAQ) from 1991 to 2001. Empirical results document dramatic and continuing operating underperformance that are robust to industry or mean reversion adjustment. The diagnostic tests for behavioral explanations further uncover the salient decline of market expectations by various measures over the post issuing years, as well as the upsurge in company expansion around the offering years followed by the striking dwindle soon afterwards. These findings jointly shed light on the systematic over-optimism of market investors and managers at the time of IPO events. The multiple regression analysis also demonstrates robust evidence that is favorable for the hypotheses of “Windows of Opportunity” and market timing. In contrast, we do not find that there are significant associations between changes in alternative insider ownership and the evolution of operating performance. We suggest the explanations based on the agency problem theory are not effective in explaining the long run operating underperformance of JASDAQ IPOs.

This is a preview of subscription content, access via your institution.

References

  1. Barber, B. M. and Lyon, J. D. (1996) Detecting abnormal operating performance: The empirical power and specification of test statistics, J. Financ. Econ. 41, 359–399.

    Article  Google Scholar 

  2. Bradley, D. et al. (2001) Venture capital and IPO lockup expirations: An empirical analysis, J. Financ. Research 24, 465–492.

    Google Scholar 

  3. Brav, A. and Gompers, P. A. (1997) Myth or reality? The long-run underperformance of initial public offerings: Evidence from venture and non-venture capital-backed companies, J. Financ. 52, 1791–1821.

    Google Scholar 

  4. Brennan, M. J. and Franks, J. (1997). Underpricing, ownership and control in initial public offerings of equity securities in the UK, J. Financ. Econ. 45, 391–413.

    Article  Google Scholar 

  5. Cai, J. and Wei, K. C. J. (1997) The investment and operating performance of Japanese initial offerings, Pacific-Basin Financ. J. 5, 389–417.

    Article  Google Scholar 

  6. Chan, K., Wang, J., and Wei, K. C. J. (2003) Underpricing and long-term performance of IPOs in China, J. Corporate Financ. 183, 1–22.

    Google Scholar 

  7. Clarke, J., Dunbar, C., and Kahle, K. (2002) The long-run performance of secondary equity issues: a test of the window of opportunity hypothesis?, J. Business.

  8. Daniel, K., Hirshleifer, D. and Subrahmanyam, A. (1998) Investor Psychology and security market under- and over-reactions, J. Financ. 53, 1839–1886.

    Article  Google Scholar 

  9. De Bondt, W. F. M. and Thaler, R. (1985) Does the stock market overreact?, J. Financ. 40, 793–805.

    Google Scholar 

  10. Fama, E. F. and French, K. (1993) Common risk factors in the returns on bonds and stocks, J. Financ. Econ. 33, 3–56.

    Article  Google Scholar 

  11. Fama, E. F. and French, K. R. (1995) Size and book-to-market factors in earnings and returns, J. Financ. 50, 131–155.

    Google Scholar 

  12. Field, L.C. and Hanka, G. (2001) The expiration of IPO share lockups, J. Financ. 56, 471–500.

    Article  Google Scholar 

  13. Gompers, P. and Lerner, J. (2001) The really long-term performance of initial public offerings: The pre-Nasdaq evidence, Working paper, Harvard Business School.

  14. Helwege, J. and Liang, N. (2001) Initial public offerings in hot and cold markets, Working paper, Ohio State University.

  15. Holthausen, R. and Larcker, D. (1996) The financial performance of reverse leveraged buyouts, J. Financ. Econ. 42, 293–332.

    Article  Google Scholar 

  16. Jain, B.A. and Kini, O. (1994) The post-issue operating performance of IPO firms, J. Financ. 49, 1699–1726.

    Google Scholar 

  17. Jenkinson, T. and Ljungqvist, A. (2001) Going Public: The Theory and Evidence on How Companies Raise Equity Finance, 2nd edn., Oxford University Press, Oxford, UK.

    Google Scholar 

  18. Jensen, M. and Meckling, W. (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure, J. Financ. Econ. 3, 305–360.

    Article  Google Scholar 

  19. Jinza, Y. (1995) Price Formation on Japanese OTC Markets. Securities Analyst J., March 2–12. (in Japanese).

  20. Kang, J. K. and Shivdasani, A. (1999) Alternative mechanisms for corporate governance in Japan: An analysis of independent and bank-affiliated firms, Pacific-Basin Financ. J. 7, 1–22.

    Article  Google Scholar 

  21. Kaplan, S. N. and Minton, B. A. (1994) Appointments of outsiders to Japanese boards: Determinants and implications for managers, J. Financ. Econ. 36, 225–258.

    Article  Google Scholar 

  22. Kutsuna, K., Cowling, M. and Westhead, P. (2000) The short-run performance of JASDAQ companies and venture capital involvement before and after flotation, Venture Capital 2, 1–25.

    Article  Google Scholar 

  23. Kutsuna, K., Okamura, H. and Cowling, M. (2002) Ownership structure pre- and post-IPOs and the operating performance of JASDAQ companies, Pacific-Basin Financ. J. 10, 163–181.

    Article  Google Scholar 

  24. Lakonishok, J., Shleifer, A. and Vishny, R. (1994) Contrarian investment, extrapolation, and risk, J. Financ. 49, 1541–1578.

    Google Scholar 

  25. Loughran, T. and Ritter, J. R. (1997) The operating performance of firms conducting seasoned equity offerings, J. Financ. 52, 1823–1850.

    Google Scholar 

  26. Loughran, T. and Ritter, J. R. (2002) “Why don’t issuers get upset about leaving money on the Table in IPOs?”, Rev. Financ. Stud. 15(2), 413–443.

    Article  Google Scholar 

  27. Mikkelson, W. H., Partch, M. M. and Shah, K. (1997) Ownership and operating performance of companies that go public, J. Financ. Econ. 44, 281–307.

    Article  Google Scholar 

  28. Miller, E. M. (1977) Risk, uncertainty, and divergence of opinion, J. Financ. 32, 1151–1168.

    Google Scholar 

  29. Morck, R. and Nakamua, M. (1999) Banks and corporate control in Japan. J. Financ. 54, 319–339.

    Article  Google Scholar 

  30. Prowse, S. D. (1992) The structure of corporate ownership in Japan. J. Financ. 47, 1121–1140.

    Google Scholar 

  31. Ritter, J. R. (1991) The long-run performance of initial public offerings. J. Financ. 46, 3–27.

    Google Scholar 

  32. Ritter, J. and Welch, I. (2002) A review of IPO activity, pricing, and allocation. J. Financ. 57, 1795–1828.

    Article  Google Scholar 

  33. Schultz, P. H. (2000) The timing of initial public offerings, Working paper, University of Notre Dame.

  34. Teoh, S. H., Welch, I. and Wong, T. J. (1998a) Earnings management and the long-run market performance of initial public offerings. J. Financ. 53, 1935–1974.

    Article  Google Scholar 

  35. Teoh, S. H., Welch, I. and Wong, T. J. (1998b) Earnings management and the underperformance of seasoned equity offerings, J. Financ. Econ. 50, 63–99.

    Article  Google Scholar 

  36. Wruck, K. (1989) Equity ownership concentration and firm value: Evidence from private equity financings, J. Financ. Econ. 23, 3–28.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Daying Yan.

Additional information

JEL Classification Code: G30, G31, D80, D84

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Yan, D., Cai, J. Long-Run Operating Performance of Initial Public Offerings in Japanese Over-the-Counter Market (1991–2001): Evidence and Implications. Asia-Pacific Finan Markets 10, 239–274 (2003). https://doi.org/10.1007/s10690-005-6020-2

Download citation

Key words

  • initial public offerings
  • market timing
  • operating performance
  • ownership structure
  • windows of opportunities