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Performance of IPO stocks is determined by the returns on a firm’s IPOs and other subsequent issues. Returns are derived from the price swings (volatility) as compared to the offer price so that a favourable swing indicates favourable returns and vice-versa. In the light of this, we review models and empirical works that try to explain these swings and their consequence on the IPOs performance to hypothesize that IPO stocks performance swing (return volatility) is inevitable as far as a real efficient market cannot exist except in a world of utopia. Evidences from the previous studies show that one reason or the other must be achieved or committed to get the IPO stocks marketed at the instance of the issue which subsequently keep influencing the same stocks even in the secondary market over a very long period of time even though at a minimum volatile rate but not completely eliminated. This is what we regard as stocks performance imperfection.

It will interest readers and capital market experts to know that IPO stocks performance assessment is and must always be favourable or unfavourable as long as there are externalities on the market for stocks. This is why stocks perform splendidly well, then experience dangerously price swings, then bubbles and finally crash. A wealth creating IPO stocks and other means of stocks issue should guarantee ideal returns as a form of security for investment over a long period of time if not for the entire life time of the stocks. By and large, an ideal and utopia scenario for a perfect stocks performance should be one that its returns fully reflect in its stable price. This assertion however, may not have or will never exist in real life practice.

We therefore, review theoretical and empirical breakthroughs on stocks performance whose imperfection has in most cases been attributed to either initial underpricing of IPOs, risks of macroeconomic factors or misinformation and fraud. In order words, the literatures build the pathway for our assumption that only an imperfect stocks performance can exist in this contemporary world of today’s capital markets. From the literatures perused in this paper, we hypothesize that perfect stocks performance is in no way attainable in the capital market because of extraneous factors that seem impossible to erode so that only imperfection is the accommodating and manageable element to contend with. We also conclude that there is imperfect stocks return performance owing to the fact that the “Law of One Price” which states that “if two assets are equivalent in all economically relevant respects, then they should have the same market price” tend to be violated almost at all times. This is an indication of capital market irrationality. Stoll and Curly [

Suffice to say that, the models and empirical works are discussed based on the performance of IPO stocks whose observations are attributed to underpricing of IPO stocks followed by the risk of macroeconomic factors and finally the misinformation and fraud influences. In this context therefore, we objectively seek to establish the fact that IPO stocks will continue to perform imperfectly in the face of all identified factors and model equations as long as the returns will always in most cases auto-correlate and lack independent of each other in a stochastic way, simply because these factor variables are constantly manipulated to cause returns variance.

The remainder of the paper is comprised of two sections. Section 2 discusses the imperfect stocks performance hypotheses which are grouped under five subsections; Subsection 2.1 presents the takes on the Random Walk Hypothesis while Subsection 2.2 takes on the Capital Asset Pricing Model (CAPM), the Arbitrage Pricing theory (APT) and the Autoregressive Conditional Heteroskedasticity (ARCH) Models. The IPO underpricing hypothesis is examined in Subsection 2.3; the macroeconomic factors hypotheses in Subsection 2.4 and the misinformation and fraud tendency hypotheses in Subsection 2.5. Finally, we conclude the paper in Section 3.

Our proposition of the imperfect IPO stocks returns is not consistent with the Kendall’s [_{t} at time t, and continues to walk indefinitely with gradual drifts farther and farther away from the bar where he drank. This is not the like manner with which IPO stock prices behave from the first day so that today’s stock price is equal to yesterday’s stock price plus a random shock, Gujarati et al., [

and

The RWH was further popularized in 1973 by Malkiel [

In the early treatments of the efficient markets hypothesis (EMH), the statement that the current price of a security “fully reflects” available information was assumed to imply that successive price changes (or more usually, successive one-period returns) are independent. In addition, it was usually assumed that successive changes (or returns) are identically distributed, Fama [

So that the mean

In this model, the conditional and marginal probability distributions of an independent random variable are identical, that is, equal to zero. Although, the density function must be the same for all, yet it can ex ante returns in the model below to obtain the expected version:

On establishing these relationships, the EMH went ahead to dilute this into what is called the “fair game” model which states that the conditions of market equilibrium can be stated in terms of expected returns but says little about stochastic process generating returns. So that the new fair game has a serial covariance of zero to make the tests relevant for the expected return models, such that:

Note that the f is densities function while the

It is in this light that the Elliot and Richardson [

They classified the waves into two-impulsive wave formation (1, 3, 5) and the corrective wave (2, 4). These are difference between trend (impulsive wave) and a correction (sideways price movement with overlapping waves). E-R distinguished nine wave degrees, ranging from two centuries to hourly. These wave degrees are, grand super-cycle, super-cycle, cycle, primary, intermediate, minor, minute, minuettes, and sub-minuette. In theory, the numbers of waves’ degrees are infinite, while it is difficult to spot more than four or five wave degrees in real practice. The application of the E-R Wave principle can only be possible by identifying the number of patterns/sub-patterns since the assumption is that a minimum of three waves will occur always, no matter what happens. Hence if investors concentrate on the 3^{rd} wave, either in an impulsive or corrective wave^{1}, there will be a strong probability of making a profit. This principle expects the same pattern to evolve over and over again, to enable the investor forecast the markets^{2}. This indicates that variations of returns are inevitable as long as the market waves will never stop, hence, the need for underwriters/analysts to do thorough work of identifying the market variables that breed return volatility via the waves put forward by the theory.

The Wave theory supports the application of the multifactor APT (Arbitrage Pricing Theory) and the GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models since the causes of waves cannot be less than three given the contending factors in the stock market.

Ross’ [

where the beta is calculated as the covariance of asset return i and its market return divided by the variance of the market return.

And thus having the inability to identify in practice the factors responsible for shocks in stocks expected returns, the APT came into limelight to redefine mathematically a factor (s) equation that can accommodate conflicting determinants of stocks returns. But even with that, it as well provides little guidance concerning what factors (sources of risk) ought to result in risk premiums, Bodie et al., [

But because the APT is designed to accommodate multiple factors, Equation (11) can be rewritten as

where _{ }is the expected return on stock t, the _{t }representing the idiosyncratic variables defined as the error term. However, the model holds that, the

The limitations of the APT in the area of factors identification and rate of variability of returns on assets pave way for the Autoregressive Conditional Heteroskedasticity (ARCH) models. This is because of the high rate of risk and uncertainty in the modern capital markets when considering their econometric time series which of course demanded a thorough study into their time varying variances and covariance. Engle [

where

The ARCH (q) model is deficient because it omits and fails to account for a relevant regressor and non-linearity or serial correlation; it also omits the constant but subtracts the estimate of the unconditional variance

where

However, because the GARCH also could not capture in clarity the effect of good and bad news affecting stocks performance, the Exponential GARCH (EGARCH) and the Threshold GARCH (TGARCH) came on board to capture the asymmetric shocks to the conditional variance. Nelson [

The y captures the asymmetric effect so that the conditional variance is always positive even if the parameter values are negative. Furthermore the Threshold GARCH of Glosten, Jagannathan and Runkle [

It is obvious to not that the IPO stocks performance and generally equity stocks returns have consistently undergone series of studies to determine the ex ante and post ante returns yet, the volatility persist and locks in the stock market. The GARCH models are so many but all of them have not being able to eliminate as well as device appropriate methods to predict the IPO stocks returns with all certainty having known the factor-causes of volatility. In fact, it is expedient to also not that, the ɛ_{t} is never at any point zero even if idiosyncratic variables are introduced in the regression, indicating a non-exhaustive variable determination. The several studies on IPOs using mostly the models above have indicated several of the factors responsible for the variability of the returns performance but the variability still persist and in most cases shows autocorrelation which means, the return series are never independent of each other.

Most of the theoretical research on IPOs focuses on explaining IPOs performance imperfection via underpricing and overpricing which lead to volatility of the stocks returns. Underpricing could be “a large positive gain to a new issue (relative to its offer price) immediately after listing”, Chan et al., [

Furthermore, Logue [

Ross [

A study of the South African stocks market by Chinzara [

Ross et al. [

Olweny and Omondi [

Interest rate reduces or increases the attractiveness of investment opportunities^{3}. By and large, it will be needless for investor to go for an investment asset if the rate of interest is very high, knowing that it has all the capabilities to reduce the present value of future cash flows and vice-versa. This is so because; interest rate determines the interest payments on investment assets. Hence they are key determinants of business investment expenditures. The primary function of interest rate is to assist the mobilization of financial resources and ensure efficient utilization of same in the promotion of growth and development, Ngugi & Kabubo, [

Since interest rate promotes economic growth and development, it therefore, implies that it has positive impact on IPO stock returns, Chen et al., [

There is a very great inter-woven relationship between interest rate and financial risk. For instance, Ross, Westerfield and Jordan [

This made the S&L industries business very complicated and loosing, because long-term mortgage borrowers stocked to their low-interest payments while the short-term depositors removed their funds^{4}. The S&L were forced to borrow more short-term funds at high interest rates believing to correct the trend but instead ended-up into higher default rates which was very unfamiliar to the S&Ls. The clear note here is that, investors in most cases deposit their excess funds in anticipation for better investment opportunities, so that whenever, investment assets prove highly investable, they rush for it because of the interest rate associated.

Walsh [

When an economy is heated up, it results into high inflation rate. That is when the general price level tends to experience simultaneous increases rendering purchasing power almost worthless to acquire the same value of assets it originally could acquire. An economy becomes highly heated up, if the demand for consumption outstrips productivity. In a study of the Nigerian stock market, Yaya and Shittu [

These results concur with Fisher’s effect in international stock market. Fisher [^{5} asserts that the nominal interest rate consists of a real rate plus the expected inflation rate. He stated that expected real rate of the economy is determined by the real factors such as productivity of capital and time preference of savers and is independent of the expected inflation rate. If Fisher effect holds, then there is no change in inflation and nominal stock returns since stock returns are allowed to hedge for inflation. Although, some opposed to Fisher’s proposition, and claimed that the real rates of common stock return and expected inflation rates are independent and that nominal stock returns vary in one-to-one correspondence with expected inflation, yet the proposition is largely utilized by most financial economists.

It is observed by Bradley and Jordan [

This means that prior to the IPO of a firm, the behaviour of prices of existing stock prices have very great impact on the new firm’s value and the offer price of its IPOs. The knowledge acquired on the prices of other existing stocks is a product of adequate information that trickles down the lain to help determine the worth of the issuing firm and other related firms’ stocks that have almost the same capacity and value.

The release of macroeconomic news or periods of heavy trading by the central bank could escalate fixed income and foreign exchange volatilities which in-turn affect stocks returns volatility, Harvey & Huang, [^{6} of stock and foreign exchange trading than during the middle of the day. The issue size of IPOs is typically small and the underwriters, often facing excess demand, ration new issues to their regular clients, who constitute a small subset of potential investors, Benveniste & Spindt, [

Povel, Singh and Winton [

According to Bodie et al. [

Information need is always inadequate despite the level of information sharing. Solomon [

It is evident that IPOs performance imperfection persists in all stocks markets whether they are offered via the traditional firm-commitment offering or auction. This is because even in markets like Japan where most IPOs are offered via auction still experience some sort of returns volatility even though at a very minimal level compared to what is obtainable in the US and other markets, most of whose offerings are through the traditional firm-commitment offering. This means that the auction method of IPO offering has not been able to eliminate the IPOs initial returns volatility and inconsistencies despite the lower or absence of mispricing during and after the offer. Furthermore, most studies (Fisher, [

We therefore advocate that the IPO stocks performance is and will always be imperfect as long as the systematic and firm-specific variables have not been completely identified, or somewhat manipulated, to create more idiosyncratic shocks until they are really identified in totality; we are not yet good at it. The error term of all the models usually gives a value for unidentified shocks yet unknown and therefore needs further intensive research focusing on developed and emerging stock markets otherwise we still operate an imperfect IPO stocks returns performance, all things being equal.