1. FIMA Research Center, University of Hawai'i 1 Long-Term Underperformance of New Issues: Is Earnings Management the Villain? S. Ghon Rhee K. J. Luke Distinguished Professor Of International Finance and Banking University of Hawai ‘ i

2. FIMA Research Center, University of Hawai'i 2 Two Major Anomalies: The New Issues Market 1.Short-Term Underpricing Internet Bubble Period (1999-2000) a.Average first trading day return 1999:72%and 2000:56% b.182 out of 803 IPOs: First trading day return of 100% or higher 2. Long-Term Underperformance a.US IPO firms overvalued by about 50% relative to its industry peers in 1980-1997. b.Only 12 out of 323 internet IPOs in 1999-2000: Trading above their offer price as of early 2001.

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6. 6 Long-Term Operating Performance of IPO and SEO Firms Industry-adjusted operating return on assets: Usually peak prior to the offering Industry-adjusted operating return on assets: Usually peak prior to the offering Industry-adjusted asset turnover and other long-term performance measures: Deteriorate over time after the offering Industry-adjusted asset turnover and other long-term performance measures: Deteriorate over time after the offering IPO and SEO firms expand their assets faster than their sales overtime….. Investment in negative NPV projects? IPO and SEO firms expand their assets faster than their sales overtime….. Investment in negative NPV projects?

7. FIMA Research Center, University of Hawai'i 7 Which Anomaly Deserves More Attention? Long-term underperformance is a more serious issue a.Due to Welfare Implications for Investors b.Short-Term Underpricing is a one-day phenomenon and can be corrected to some degree

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10. 10 What Explains Long-Term Underperformance? IPO and SEO firms exhibit unusually large and significant gains in operating performance one year prior to the offer date IPO and SEO firms exhibit unusually large and significant gains in operating performance one year prior to the offer date SEO firms exhibit superb stock performance in the year prior to the offering SEO firms exhibit superb stock performance in the year prior to the offering >>>>>> Earnings Management which mislead investors to be over optimistic about the issuer’s prospects

11. FIMA Research Center, University of Hawai'i 11 Distribution of Scaled Earnings (Whole Sample)

12. FIMA Research Center, University of Hawai'i 12 Distribution of Scaled Earnings (Large Size Quintile)

13. FIMA Research Center, University of Hawai'i 13 Distribution of Scaled Earnings (Small Size Quintile)

14. FIMA Research Center, University of Hawai'i 14 Country Classification by Earnings Opacity Measure Rank 5 (Most Opaque): Rank 5 (Most Opaque): India, Indonesia, Japan, Korea, Greece Rank 4: Rank 4: Malaysia, Pakistan, Singapore, Taiwan, Turkey, S. Africa Rank 3: Rank 3: Hong Kong, Thailand, Austria, Finland, Germany, Ireland, Netherlands Rank 2: Australia, Denmark, France, Sweden, Switzerland, United Kingdom Rank 1 (Least Opaque): Rank 1 (Least Opaque): Belgium, Canada, Norway, Portugal, United States Belgium, Canada, Norway, Portugal, United States Source: Bhattacharya, Daouk, and Welker(2002)

15. FIMA Research Center, University of Hawai'i 15 How to Minimize Long-Term Underperformance of IPO and SEO Firms? Better Financial Disclosure Better Financial Disclosure Improved Accounting Reporting System Improved Accounting Reporting System Monitoring over Underwriting Activities Monitoring over Underwriting Activities Corporate Governance Corporate Governance Investor Education Investor Education

16. Thank You!