From Optimism to Reality: Behavioral Biases and IPO Long-Term Performance in Emerging Market

Abstract

While traditional theories attribute initial public offerings (IPO) anomalies to information asymmetry and risk, behavioral finance research emphasizes the role of behavioral bias in explaining both IPO underpricing and long-term reversals. This study investigates the long-term performance of IPOs in an emerging market, focusing on investor behavioral bias. Given that emerging markets are typically characterized by higher volatility and limited information transparency. Thailand provides an ideal context to examine how irrational behavior shapes post-IPO outcomes. Using 243 IPOs issues between 2010 and 2016, this study evaluates IPO long-term performance over one-, three- and five-year horizon using cumulative abnormal returns (CAR), buy-and-hold abnormal return (BHAR) and risk-adjusted models based on the CAPM and Fama-French Five factor model. The results consistently reveal significant long-term underperformance with negative abnormal returns that intensify as the investment horizon lengthens—particularly 36- and 60- month horizons. These findings are robust across firm size and offer size subsamples, confirming that both small and large IPOs experience persistent post-listing declines. Even after controlling systematic risk factors, the negative abnormal return remains statistically significant, indicating that these patterns cannot be explained by rational risk compensation alone. The findings support behavioral bias in emerging markets. Based on representative bias, investors are over-optimism and overconfidence on newly issued IPOs. This drive initial overvaluation and subsequent price corrections. This study contributes to behavioral asset pricing by showing that IPO mispricing is not purely risk-based but also driven by psychological factors, highlighting the need for improved investor education and greater transparency in emerging markets.