Earnings Volatility And IPO Returns

The anomaly of high returns on the first day of IPO and long-term low returns always exists in the capital market.The existing literatures based on asymmetric information are the signal transmission hypothesis,reputation certification hypothesis,winner curse hypothesis,and partial price adjustment hypothesis.Literature based on information symmetry is litigation avoidance hypothesis.However,few papers consider issuing companies,underwriters and investors synthetically and study the influencing factors of IPO return from the perspective of risk and returns.This paper chooses 2441 A-share initial public offerings(IPOs)companies from 1991 to 2015 as initial samples.Based on the analysis of investors' risk aversion theory and resilience theory,the relationship between earnings volatility and IPO returns is empirically tested.The results show that the higher the earnings volatility,the higher the IPO returns.The analysis shows that earnings volatility not only reflects the past business risks of enterprises,but also increases the risk of investors using information.The higher the earnings volatility,the higher the risk compensation required by investors,and the higher the returns of IPO.The results of the intermediary effect test of information risk and business risk show that information risk plays a part in the intermediary effect of earnings volatility on IPO returns.The higher the earnings volatility,the higher the information risk investors face.Therefore,the higher the risk compensation required by investors,the higher the return of IPO.Although earnings volatility also significantly affects business risk,the intermediary effect of business risk in earnings volatility on IPO returns is not significant.This shows that the main reason why earnings volatility affects the return of IPO may be that it increases the information risk of investors.Therefore,investors demand higher risk compensation,so the return of IPO is higher.In addition,the results of further tests show that changes in the IPO system and types of investors will have an impact on the relationship between earnings volatility and IPO returns.The higher the volatility of earnings,the higher the long-term return of IPO.The enlightenment of this paper is that earnings volatility may affect investors'understanding of risk and judgment of information.Therefore,in the process of market-oriented reform of IPO,we should continue to focus on information disclosure,improve the level of information disclosure,and fully disclose information that may have an impact on investors' risk assessment.At the same time,we should gradually establish the reputation mechanism of underwriters,improve the rational degree and professional quality of investors,so as to better play the resource allocation function of the IPO market.