20
Ritter (1991) believes that the phenomenon
of underpricing
that has been
widely
documented
all
over
the
world
seems
to
be
a short
run
trend.
Some
investor
can
be
very
optimistic
on
the
shares
that
will
be
issued,
and
will
take
use of this opportunity
for an initial return (Ritter,
1991).
When firms
go public
and
potential
investors
are very
optimistic
with
the shares
this
will create
overreaction
towards
the
shares.
This
overreaction
will
create
a
strong
short-
term
momentum, which
will
increase
the
demand
of
the
shares,
hence
increasing the market price, which will yield high
initial return.
2.1.4 Long Run Performance of IPOs
Since
the
underpricing
of
IPOs
seems
to
be
in
the
initial
return
phase,
therefore
it appears
to
be a short-run
phenomenon. There
are
some
reasons
that
investigating
long-run performance
is
interesting.
In
IPO, if
it
generates an
initial
return,
investor’s
investment
are
usually
short
terms,
but
most
investors
are
looking
for
a
long-term
investment. Therefore,
there
is
an
active
trading
which
might
drive
the
prices
up
in
the
long
run;
some
investors
might
be
able
to produce
a superior
return
depending
on their trading
strategies
(Ritter,
1991).
Shiller’s
(1990)
believes
that
equity
market
and
IPO
market
are
subjected
to
trends
and investor’s
optimism,
which
may affect
the market
price of the shares.
From
this
statement,
the
efficiency
of
the
information
in
IPO
market
could
be
questioned (Ritter, 1991). Thirdly we
could see
how many IPOs that
were
offered
during
a
particular
year,
if
there
is
high
volume
of
new
IPO
that
has a
poor
long
run
performance,
the
issuer
might
have
chosen
the
correct
timing
of
offering
new
shares
to the
public.
Issuers
might
see
this
as
“window
of
opportunity”
to gain capital during that particular year (Ritter, 1991).
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