Abstract:
IPO long run underperformance is a widely debated anomaly in corporate finance literature. Present
study inquires whether above anomaly exists even after pricing for well known risk factors constructed
based on size as well as illiquidity. This study proposed a new illiquidity based four factor asset pricing
model and tested it using Sri Lankan initial public offering (IPO) stocks in inter war period and post war
period. Proposed model was compared with Carhart (1997) four factor model. Both ordinary least square
regression and weighted least square regression have been used to test Carhart’s model and proposed model
in Sri Lankan context. It is found that long run IPO underperformance anomaly existed even after pricing
for the illiquidity premium. Further two models perform very similarly and it is not fair to say one is
superior to the other.
