ABSTRACT
The signaling hypothesis (Welch 1989) suggests that high-quality issuers underprice their stocks to reveal signals about quality to investors and then undertake a subsequent financing through SEOs. Companies with high quality will then show high operating and market performance. Ritter (1991) argued that underwriters systematically set IPO prices too low in order to increase demand for IPO stocks. Hence, stocks with high initial return tend to have low long-term performance. This study aims to test whether there are differences in Operating Performance and Long-Term Market Performance of stocks with different level of underpricing, as well as to examine the relationship between underpricing with the probability of conducting SEOs and the long-term market performance of IPO. Results indicate that there are no differences in operating and long-term market performance of companies with high and low underpricing. The implication of this is that underpricing cannot be attributed to the signaling of a better issuer’s quality.
