Corporate Fraud Tendencies Versus Initial Public Offerings (IPOs) Initial Returns Volatility

Abstract

We examine the initial returns volatility of initial public offering by determining: (1) whether mispricing actually takes place during and after IPOs in Nigeria and Sri Lanka; (2) whether the mispricing (overpricing or underpricing) could constitute corporate fraud tendencies since data to measure fraud in emerging markets of Nigeria and Sri Lanka is secretive and unattainable. We use dummy proxies from 1987-2012 and 1988-2012 for the Nigerian Stock Exchange and the Colombo Stock Exchange, respectively. The OLS and GARCH models show that fraud tendency via underpricing and overpricing is very prominent and highly pronounced in the Nigerian and the Sri Lankan markets as they seriously cause volatile returns during the first-day, monthly and yearly trading of the IPOs probably to satisfy the ego of corporate agents for “money left on the table” and/or “promise for future banking business”.