Initial and Long-Run IPO Returns in Central and Eastern Europe

ABSTRACT

This article provides original evidence on IPO underpricing and long-run underperformance in Central and Eastern Europe (CEE) and compares results to the European Union’s developed capital markets from 2000 to 2009. Using both index-adjusted and CAPM-adjusted returns, we find significant underpricing that is significantly higher than underpricing of comparable IPOs in the European Union’s developed capital markets. We show that the CEE’s initial IPO returns also exhibit significantly higher volatility. In line with the asymmetric information theory, we indicate that smaller IPOs in the CEE region have greater underpricing than the larger IPOs. Contrary to the literature, we unambiguously confirm long-run underperformance toward the benchmarks. In some model specifications, we also find that IPO long-run underperformance in the CEE region is less present than in the European Union’s developed capital markets.     

Greenness index: IPO performance and portfolio allocation

This study examines how the greenness of the firm affects the short- and long-term performance of IPOs. To measure the greenness of the firm, we develop the Greenness Index based on the emissions produced. We find that the greenness of the firms operating in services and financial sectors is higher than in other sectors. To examine the short- and long-run performance of IPOs, we classify our sample into high and low green firms. In the short-run, high green firms obtain a lower return than low green firms. However, high green firms perform better than low green firms in the long-run. This study also determines the factors that cause short- and long-run performance, and the results suggest that the firm’s greenness negatively influences initial returns and underperformance of IPOs. Finally, we develop a theoretical model in terms of the portfolio's allocation and assert that investors participate in high-green firms to optimize their portfolio.     

Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations

We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.     

Pension funds and IPO pricing. Evidence from a quasi-experiment

We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors' side, leads to changes in the IPO pricing and the subsequent stock's performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies' power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.     

Day-of-the-Week Effects in the Long-Run Performance of Initial Public Offerings

This study examines the influence of day-of-the-week patterns in security returns on long-run IPO underperformance. Comparisons are made between the IPOs in Ritter's [20] database, and a constructed set of matching firms based on SIC code and size, using NYSE, AMEX, and NASDAQ securities. It is found that virtually all of the IPO underperformance occurs on Mondays and Tuesdays and that the degree of underperformance significantly differs from other days. Thus, a common explanation may exist for the general day-of-the-week pattern in security returns and IPO long-run underperformance.     

DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.     

Signalling and the Long‐run Performance of Spanish Initial Public Offerings (IPOs)

Abstract:   Academic research into firms that have gone public has focused on the study of two anomalies: initial underpricing and long‐run underperformance. We analyse Spanish Initial Public Offerings to provide additional evidence on the long‐run performance of IPOs and its relationship with initial underpricing. Results reveal the existence of negative long‐run abnormal stock returns, in line with the international literature. Long‐run performance presents a positive relationship with underpricing and the volume of funds obtained in seasoned offerings, in consonance with the predictions of Allen and Faulhaber (1989) , Welch (1989) and Grinblatt and Hwang (1989) .     

Decisions of Initial Public Offering Review Committees: Causes and Consequences

We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firm's associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.     

Market Feedback,Investment Constraints,and Managerial Behavior

This paper examines the joint role of market feedback and investment constraints on managerial behavior. Using a sample of UK fixed price initial public offerings, we show that underperformance of share returns at the IPO significantly affects managerial investment decisions in the period after the offering. Firms with better investment opportunities and proportionately lower fixed (higher intangible) assets are more sensitive to negative market feedback. Over the longer term, the more responsive firms perform significantly better than their non‐responsive counterparts. The findings contribute to the debate on the informational advantage of managers over investors and present strong evidence that the market, on aggregate, can provide a superior assessment of a firm's opportunities. Managers who are able to respond to negative market feedback can significantly improve their firm's future prospects.     

Performance of Malaysian IPOs: Underwriters reputation and management earnings forecasts

This paper examines the financial performance of Malaysian initial public offerings (IPOs) during the period 1980–1995. The major focus of the study is on the role of management earnings forecasts and underwriters in the valuation of IPOs. The results suggest extremely high and statistically significant initial premiums and positive and statistically significant long-term returns up to 3 years after listing. The findings for long-term returns contradict the consensus of the IPO literature that documents a significant negative long-term performance. Our results indicate a negative association of upward bias in management earnings forecasts with IPOs' performance during the first 12 months after the IPOs.     

Exchange-traded funds,persistence in tracking errors and information dissemination

We estimate tracking errors from 26 exchange-traded funds (ETFs) utilizing three different methods and test their relative performance using Jensen's model. We find that tracking errors are significantly different from zero and display persistence. Based on Jensen's alpha, risk adjusted returns are significantly inferior to benchmark returns for all ETFs with two exceptions at conventional significance levels revealing that passive investment strategy does not outperform market returns. We then examine the degree to which frequently used factors such as expense ratio, dividends, exchange rate and spreads of trading prices may be underlying sources of tracking errors causing this underperformance. We find that the change in the exchange rate is a significant source of tracking errors. Our serial correlation test, runs test and panel regression analysis reveal that Asian markets display relatively greater persistence and therefore are less efficient in disseminating information and noisier in filtering the information contained in returns.     

Strategic networks,certification, and initial public offerings

This study investigates the certification effect of a firm's strategic alliance network on initial public offerings using a large data set involving 3860 IPO events from the U.S. IPO market. The results show that IPO firms with more direct alliance relationships and a more central position in the strategic network allow them to: (i) attract more prestigious underwriters and greater institutional interest; (ii) experience lower underwriting expenses, larger IPO offer sizes, and higher initial returns; and (iii) achieve superior long-term performance. Further, both the IPO firm and their strategic partners' network positions have prominent impacts on an IPO's initial issuing status and long-term performance. Our results suggest that an IPO firm's strategic alliance network serves as a useful indicator by which to determine the quality of the IPO firm.     

IPO first‐day returns: Skewness preference,investor sentiment and uncertainty underlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performed between 2002 and 2012, we find that IPOs with high initial returns have higher idiosyncratic skewness, turnover and momentum. This finding provides empirical evidence for investors' preference for stocks with lottery-like features and investor sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying factors.     

Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses

We use a new database to perform a comprehensive analysis of the mutual fund industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the underperformance of nonstock holdings, whereas 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high-turnover funds beat the Vanguard Index 500 fund on a net return basis. Our evidence supports the value of active mutual fund management.     

Value versus growth in IPOs: New evidence from Finland

This paper focuses on the underpricing and the short- and long-run performance of Finnish initial public offerings (IPOs). More specifically, we examine whether there are differences between the performance of value and growth stock IPOs in the Finnish stock market. Our results indicate that growth stock IPOs are slightly more underpriced and have marginally higher short-run returns. However, value stock IPOs are better long-run investments and provide higher returns during the first three years in the aftermarket. We also document that the apparent long-run underperformance of Finnish IPOs can be largely explained by size, book-to-market, and momentum effects.     

Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK

In contrast to the US practice, rights issues is the predominant method of raising additional equity capital in the London market. the UK evidence for the period 1980-1991 provides no support to the hypothesis that IPO firms deliberately underprice to signal their quality and facilitate subsequent seasoned equity offerings. the level of initial returns is related neither to the size of the issue nor to the price response at the announcement of a rights issue. the results demonstrate, however, that firms with higher first day returns are quicker in returning to the market for additional equity capital. There is also strong evidence to suggest that the announcement of a seasoned equity offering follows a period of significant rises in the stock prices of reissuing firms. Such gains are, however, dissipated quickly in the 18 months after the announcement of the seasoned equity offering. the level of underperformance is particularly pronounced for firms that raised relatively small subsequent amounts of capital in relation to funds raised at the initial offering. Thus, the paper documents a pattern of post-issue behaviour which is fundamentally similar for both unseasoned and seasoned equity offerings.     

Propensity score matching and abnormal performance after seasoned equity offerings

The long-run underperformance of stocks after seasoned equity offerings (SEOs) is a major challenge to the efficient market hypothesis. We reexamine the SEO underperformance anomaly using the propensity score matching method on a sample of around 2000 offerings between 1986 and 1998. While underperformance characterizes equal-weight and buy-and-hold returns if traditional matching methods are used, the underperformance is economically and statistically insignificant when we match issuers to non-issuers by propensity scores. Our results suggest that SEO underperformance manifests statistical inadequacies of traditional matching methods rather than an anomaly challenging the efficient market hypothesis.     

On Persistence in Mutual Fund Performance

Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Hendricks, Patel and Zeckhauser's (1993) “hot hands” result is mostly driven by the one-year momentum effect of Jegadeesh and Titman (1993) , but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.     

Initial Public Offerings in Australia 1994 to 1999, Recent Evidence of Underpricing and Underperformance

This paper analyses whether financial and non financial characteristics of Australian initial public offerings (IPOs) can explain observed underpricing and long term underperformance over the period 1994 to 1999. A number of previous Australian studies have investigated initial day underpricing and longer term underperformance of IPOs and this study updates those papers. We find that initial day underpricing can in part be explained by market sentiment, forecast dividend per share yields, underwriter options and share options. Our longer term analysis supports the finding of previous studies in that IPOs on average, underperform the market in the first year following their listing.     

IPO initial returns in China: Underpricing or overvaluation?

This paper separates the amount of IPO underpricing(primary market underpricing) and overvaluation(secondary market overvaluation) from the value of an IPO's initial return to evaluate the relative importance of these two factors and their main determinants. Using data on the IPOs of 948 Chinese firms, we find that average initial returns are 66% and that underpricing and overvaluation are between 14–22% and 44–53%, respectively, depending on the method used to assess firms' intrinsic values. In addition, while both the value of the initial return and the extent of overvaluation are significantly negatively related to post-IPO long-run stock performance, overvaluation can predict post-IPO performance better than the value of the initial return. Value uncertainty in IPOs is positively related to both underpricing and overvaluation, and both the underwriter's reputation and the existence of pricing regulation are positively related to underpricing. Investor sentiment has a positive effect on overvaluation but has no effect or a negative effect on underpricing. Overall, our results suggest that in China overvaluation accounts for a larger proportion of the initial return than underpricing,and that underpricing and overvaluation have different determinants.