6 - The size effect of firms going public on the Spanish capital market

Abstract

This chapter analyzes whether, for the Spanish market, the return of the companies that go public differs according to their size. It analyzes the initial and long-term stock returns, and also the performance of the companies. The database for the study comprises all the firms that went public on the Madrid Stock Exchange between 1985 and 1997. The analysis shows the existence of a size effect on the initial return offered by these companies and on the financial performance of the firms, as larger firms show a greater initial return to investors. The results also provide evidence that the deterioration in the performance of the firm during the period following the issue affects all firms, though this effect is stronger for smaller companies. The results seem to be consistent with the idea of underpricing as a sign of the value of the firm. As for long-term market returns, larger Spanish firms that go public are the ones that obtain better long-term performance. However, this result is not significant for all the benchmarks used. Firms that underprice more (larger firms) perform better after going public.