Short Run and Long Run Performance of IPO’s Returns in the case of Pakistan

Abstract

This empirical study investigates the phenomenon of initial public offerings (IPOs) in Pakistan's financial markets, specifically focusing on the performance of IPOs in the short and long term. Using the concept of Cumulative Abnormal Returns (CAR), the study sheds light on the returns experienced by investors who participate in IPOs, comparing them against market benchmarks. The findings of the study reveal a consistent pattern of underperformance of IPOs, both in the short run and the long run, in the context of Pakistan's financial landscape. This underperformance is indicative of IPO underpricing, whereby the initial market price of IPO shares tends to be lower than their intrinsic value, leading to an initial excess return for investors who participate in the IPO process. These results are in line with prior research conducted in other countries around the world, indicating that the phenomenon of IPO underpricing is not unique to Pakistan but is rather a pervasive trend observed in various financial markets globally. The study contributes to the existing literature in corporate finance by providing empirical evidence of IPO underpricing specifically within the context of Pakistan's financial markets. By documenting and analyzing the performance of IPOs in Pakistan, the study offers valuable insights for investors, financial regulators, and market participants. Understanding the dynamics of IPO underpricing can inform investment strategies, risk management practices, and regulatory interventions aimed at fostering transparency, efficiency, and fairness in the IPO process. The findings of this study underscore the importance of rigorous empirical research in uncovering patterns and trends in financial markets, contributing to a deeper understanding of the dynamics that drive investor behavior and market outcomes.