Theories

Relate to Research

Agency Theory

Reduction in management ownership may increase the agency problem and agency cost that leads to declining operating performance.

Manager/agent are engage to perform some service on behalf of owner which involves delegating some decision-making authority to the agent. The agency theory considers the impact of the change in ownership structure on the performance of firms after the IPO

The Windows of opportunity Theory

When the stock market rises, investors tend to be over optimistic and have high expectations about the returns of the stocks. This over-optimism creates a unique opportunity for the owners of firms, and for insiders, to achieve a higher price for the shares this finding could explain the decline in operating performance.

Earnings management hypothesis

IPO companies manipulate their financial statements with a view to attracting investors and this “window-dressing” technique is not useful in the long run because, once investors know the true value of the firm, prices fall and unusually good performance level that cannot be sustained over time