Aftermarket liquidity and performance of initial public offerings : evidence from Oslo Stock Exchange

Abstract

This thesis investigates abnormal returns in initial public offerings (IPOs) at the Oslo Stock Exchange during the time period of 2007 to 2018. By utilising four liquidity measures, we aim to identify the relationships between aftermarket liquidity and abnormal returns, both initially and long-run. Through our sample of 125 observations, we confirm the existence of the underpricing phenomenon and the long-run underperformance of IPOs in the Norwegian market. We find aftermarket liquidity to be positively related to underpricing. When sorting the issues by sentiment, based on the previous two-month returns, the positive relationship solidifies for hot sentiment markets. Hence, underpricing positively affecting aftermarket liquidity seems to be amplified during bullish trends. We find indications of a positive relationship between liquidity and long-run abnormal returns, the more illiquid the stock, the worse the performance, and vice versa. This contradicts the riskreturn trade-off, which states illiquidity as an attribute of risk. Therefore, we further examine the long-run issue returns by separating between marketplaces. Thus, we discover Oslo Axess, the junior exchange, to be the driver of the counter-intuitive results. We suggest this is a consequence of the speculative nature of Oslo Axess. For the Oslo Stock Exchange, the relationship subsides.