Int. Fin. Markets, Inst. and Money 27 (2013) 76–98 Contents lists available at ScienceDirect Journal of International Financial Markets, Institutions & Money journal homepage: www.elsevier.com/locate/intfin Why are stock exchange IPOs so underpriced and yet outperform in the long run?  Isaac Otchere a,∗ , George Owusu-Antwi b,1 , Sana Mohsni a,2 a Sprott School of Business, Carleton University, Ottawa, ON K1S 5B6, Canada b Nova Southeastern University, Huizenga School of Business, 3301 College Avenue, Fort Laudale, FL 33314, USA a r t i c l e i n f o Article history: Received 28 July 2012 Accepted 30 June 2013 Available online xxx Keywords: Stock exchange IPOs Self-listing Underpricing Performance JEL classification: G15 G32 a b s t r a c t We investigate the level of underpricing and the long-term stock market performance of financial exchange initial public offerings (IPOs) and find that, despite being more underpriced, the financial exchange IPOs significantly outperform the market indexes and a control sample of regular IPOs. Thus, contrary to the findings in prior studies, we find that stock exchange IPO underpricing is posi- tively related to the firm’s long-run stock returns. We argue, among others, that the lack of managerial ownership of shares in the stock exchange firms creates a situation where management is not con- strained to significantly underprice their initial issues to signal their firms’ prospects, because they do not directly bear the cost of leav- ing too much money on the table. Interestingly, both underpricing and long-run returns of stock exchange IPOs are related to proxies of the signaling hypothesis. On the basis of additional tests involv- ing the stock exchange IPOs and a sub-sample of regular IPOs that also outperformed the market in the long run, we are able to rule out the quasi-monopoly hypothesis as a possible explanation for the strong long-run performance of stock exchange IPOs. © 2013 Elsevier B.V. All rights reserved.  We thank an anonymous referee for providing very insightful comments on the paper. Wayne Lai Gaofeng and Hai Nguyen provided excellent research assistance. Comments from Ben Amoako-Adu and Hugh Colaco and participants at the 2011 Eastern Finance Association Conference and the Securities and Financial Markets Conference (Taiwan) are very much appreciated. All remaining errors are ours. ∗ Corresponding author. Tel.: +1 613 520 2600x2731; fax: +1 613 520 4427. E-mail addresses: isaac otchere@carleton.ca (I. Otchere), georgegowu@yahoo.com (G. Owusu-Antwi), sana mohsni@carleton.ca (S. Mohsni). 1 Tel.: +1 614 348 9736. 2 Tel.: +1 613 520 2600x2991; fax: +1 613 520 4427. 1042-4431/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.intfin.2013.06.007