Initial and long-term performance of IPOs. Does growth opportunity of issuing firm matter?

We analyze the long-term stock performance of Chinese initial public offerings (IPOs) between the years of 2000 and 2007. The results reveal that firms with political connections experience better long-term stock performance. Our results suggest that the abolition of the Issuance Quota System and Channel Restriction System has a negative influence on the long-term performance of IPOs. This evidence is consistent with the view that local government officials are likely to select politically connected companies to go public.

Political connections and the long-term stock performance of Chinese IPOs

Determinants of the long-term performance of initial public offerings (IPOs) in the port industry

This paper examines the three-year long run performance of Initial Public Offerings (IPOs) in the Chinese stock markets from 2002 to 2012. We find that private firm IPO long-term returns are significantly higher than those of non-private firms, measured by both cumulative abnormal returns (CARs) and buy-and-hold abnormal returns (BHARs). Furthermore, the long-term performance of IPOs in the Chinese stock markets seems to have a significant upward tendency after the Non-tradable share (NTS) reform launched in 2005. However, private firm IPO long-run outperformance has experienced a diminishing increase after the NTS reform. This result indicates that state-owned enterprises turn to be more market-oriented after the NTS reform.

The objective of this chapter is to provide an update to the literature on initial public offering (IPO) performance and issuance focusing explicitly on the methodological approaches used to conduct these analyses and to develop a more general approach to evaluating aggregate IPO issuance and performance. Traditionally, empirical studies of IPO performance have been critically dependent on the general methodology that researchers use to adjust the individual IPO’s returns to account for market performance and the time horizon of the study; however, more recent studies have examined the patterns of returns that IPOs emit, in general, sometimes prior to performance adjustments. In the US market, for instance, changes in the regulatory regime as a result of the introduction of the JOB’s Act and events such as the financial collapse have led to a period of relatively benign issuance associated with IPOs. This has recently led to new questions about the true relationship between the volume of IPO issuance and performance. Historically, we have assumed that hot and cold market cycles affect performance; however, recently the methodology used to capture whether markets are indeed hot or cold has been questioned. In addition, there has been a renaissance of late as researchers critically examine the validity of research projects that claim to identify hot and cold markets or identify cyclicality in the performance of IPO. The research has evolved from a segmentation of a population of IPO returns into quartiles or terciles and referring to the segments of these populations hot and cold, to Markov two and three state regime-shifting models, to more recent applications of event specific and spline regression models; researchers have been working to uncover what actually causes the IPO markets to move and the cyclical nature of IPO performance and issuance seems to indicate that the current state of research on IPOs needs some restructuring and clarification. This chapter has important implications for financial markets participants, portfolio managers, investment bankers, regulatory bodies, and business owners. Furthermore, this review chapter can aid in the setting of benchmarks for the valuation of IPOs, help investors, business owners, and the managers of businesses to understand the relationship between IPO performance and issuance so that they are better positioned to make wise investment decisions when purchasing IPOs or when issuing their IPOs and enable researchers to think more critically about developing their models of IPO issuance and performance.

This paper assesses the comparative impact of the 2007 global financial crisis on the short and long-term performance of initial public offerings (IPOs) in the Asian-Pacific emerging markets of Thailand, China, South Korea, and Malaysia. Our results indicate that the short-term performance or underpricing of Thai IPOs increased from 19% to 44% between the pre-crisis and post-crisis periods. IPOs in each of the three other emerging markets experienced a reduction in underpricing after the financial crisis. While our results are consistent with previous IPO research, the degree of underpricing in each emerging market exceeded the levels found in studies of IPOs in developed countries. In terms of the long-term performance of IPOs, our results suggest that IPOs in Thailand, China, and South Korea performed better in the post-crisis period, while Malaysian IPOs performed worse. Our overall findings suggest that the 2007 financial crisis affected IPO performance and economic growth in each of the markets studied.

This study objective compares the underwriter reputation, measured by a different method, in explaining Initial Public Offering (IPO) performance. The reputation is measured based on underwriter IPO frequency and deal value. The underwriter's reputation is then ranked and categorized into quartiles. We use cross-section regression methods to test the effect of different underwriter reputation measurement methods on IPO performance. The dependent variable is short-term and long-term IPO performance. The independent variable is four underwriter reputation categories represented by three-level dummy variables. We found that only underwriter reputation measured by IPO frequency can explain IPO performance. The findings suggest IPO frequency help underwriter understand the market condition and value IPO more accurately. Firms that want to reduce the cost of IPO underpricing should choose underwriters with a higher IPO frequency.

This paper investigates the long-term stock price performance of initial public offering (IPO) firms in Germany that were previously owned by private equity (PE) funds. A sample of 138 PE-backed IPOs (33 buyout- and 105 venture-backed) and 383 non-PE-backed IPOs between 1990 and 2007 is analysed for the long-term performance of these offerings. The analysis suggests that PE-backed IPOs outperform the stock market over the three-year term. On a risk-adjusted basis, returns are positive over a five-year post-IPO period. Within the PE-backed sample, venture capital-backed IPOs outperform buyout-backed offerings.

<p><em>This paper investigates the overall market performance of Initial Public Offerings (IPOs) in Germany, by analyzing the short and long run performance of IPOs, utilizing the data from 2000-2013. Furthermore the study aims to distinguish and compare the performance of sponsor backed IPOs to non-sponsor backed IPOs, by placing a special focus on the value creating abilities of financial sponsors. The examined data set consists of 286 IPOs out of which 46 can be considered as IPOs which were backed by financial sponsor. The study suggests that, on average, IPOs significantly underperform their benchmarks. Furthermore, the evidence implies significant differences across the IPO groups with regard to performance and operational indicators. The multivariate regression shows that in the long run, private equity firms outperform their counterparts, signified by greater buy-and hold abnormal returns respectively recorded within the three-year period after the IPO. </em></p>

Private equity (PE) is one of the important sources of financing. The certification hypothesis associated with PE investment influences the performance during the process of going public. The listing day performance of initial public offerings (IPO) is significantly influenced by various financial intermediaries involved in the IPO process due to certification effect associated with their reputation. In this study we try to evaluate certification and grandstanding hypothesis associated with PE investors in IPO market. Our empirical results refute certification hypothesis since the PE investment does influence the IPO performance. However, the ownership stake of PE investment has negative impact on the first day of IPO performance. This supports grandstanding hypothesis where the ownership stake and the urge of PE investors in liquidating the stake determines the IPO performance. The insignificant ownership stake held by private equity investors is a consequence of regulatory constraint. The insignificant impact on long-term IPO performance is also due to insignificant ownership stake retained after IPO. In addition, it is also observed that business group affiliated firms have lower degree of IPO underpricing. The overall performance of IPO follows 'U' shape curve indicating positive performance in the short term and long-term.

This paper is motivated by the apparent belief that IPOs are underpriced on the initial listing day and thereafter underperforms compared to the market benchmark. While evaluation of the listing day performance seems straightforward on surface, it actually invokes several complications for the subsequent performance measurement. This paper focuses on the evaluation of price performance of IPOs up to a period of 36 months including the listing day. It also examines the usefulness of IPO characteristics at the time of issue to seek an explanation for the post-issue price performance. The paper presents fresh evidence on IPO performance, i.e., short-run underpricing and long-run underperformance for 92 Indian IPOs issued during the period 2002–2006. It is reported that on an average the Indian IPOs are underpriced to the tune of 46.55 per cent on the listing day (listing day return vis-à-vis issue price) compared to the market index. Another contribution of this paper is the evaluation of the long-run post-issue price performance of Indian IPOs. The long-run performance of IPOs up to a period of 36 months are measured by using the two most promising evaluation techniques, i.e., wealth relative (WR) and buy-and-hold abnormal rate of return (BHAR), both being adjusted with market index, CNX-Nifty. Further, the results evidence that the underperformance is most pronounced during the initial year of trading, i.e., up to 12 months from the listing date followed by over�performance. To get possible explanations for long-run underperformance for Indian IPOs, factors like underpricing rate (listing day return), offer size, leverage at IPO date, ex-ante uncertainty, timing of issue, age of IPO firm, rate of subscription, promoter groups retention, and price-to-book value (as proxy for growth) are considered. Evidence is found, that initial day return, offer size, leverage at IPO date, ex-ante uncertainty, and timing of issue are statistically significant in influencing underperformance. However, there is no evidence favourable to the age of the IPO firm, rate of subscription, promoter group's retention, and price-to-book value impact on the long-run underperformance. The empirical results suggest that the investors who are investing in IPOs through direct subscription are earning a positive market-adjusted return throughout the period of study. But investors who have bought shares on the IPO listing day are earning negative returns up to 12 months from the listing date and expect to earn positive market-adjusted return thereafter. For future research, we suggest the extension of this analysis for additional explanatory variables including issue fundamental characteristics of IPO firms. The scope of the research study could even be improved by extending the time period of study prior to 2002.

The informativeness of financial reports has been of a great importance to both investors and academics. Earnings are crucial for evaluating future prospects and determining company value, especially around milestone events such as initial public offerings (IPO). If investors are misled by manipulated earnings, they could pay too high a price and suffer losses in the long-term when prices adjust to real value. We provide new evidence on the relationship between earnings management and the long-term performance of IPOs as we test the issue with a methodology that has not been applied so far for issues in Poland. We use a set of proxies of earnings management and test the long-term IPO performance under several factor models (CAPM, and three extensions of the Fama-French model). Aggressive IPOs perform very poorly later and earn severe negative stock returns up to three years after going public. The difference in returns in accrual quantiles is statistically significant in almost half of methodology settings. The results seem to suggest that investors might not be able to discount pre-IPO abnormal accruals and could be overoptimistic. Once the true earnings performance is revealed over time, the market makes downward price corrections.

PurposeThis study aims to investigate the effect of shariah status on initial public offering (IPO) underpricing, long-term performance and relationship between short-term and long-term IPO performance, and attempt to gain an insight into the nature of shariah IPO underpricing: a signal or an overreaction.Design/methodology/approachThis study uses IPOs during 1990–2018 from Indonesia. This study uses clustered regressions to address clustering phenomenon in IPO. To investigate long-term performance, this study uses cumulative returns, cumulative abnormal returns and Fama–French three factor regressions. This study also runs cross-sectional regressions on the relationship between short and long-term performances.FindingsThis study finds that shariah status reduces lowers non-trading returns (return from offer to open prices), suggesting that shariah status may reduce information asymmetry and compensation. This study finds that both shariah and non-shariah IPOs underperform the benchmarks, with shariah IPOs underperform more. Further analysis shows a negative relationship between initial return and long-term performance for both shariah and non-shariah IPOs, whereas the negative relationship is stronger for shariah IPOs. The results indicate that shariah compliance help reduce information asymmetry; however, shariah compliance does not necessarily signal quality. Instead, shariah compliance seems to induce investor sentiment, resulting in underperformance and reversal patterns in the long run.Research limitations/implicationsThe results have various implications. Issuers may use shariah screening to lower underpricing. Investors may manage their investment horizons to mitigate IPO underperformance. Future research is needed to understand the nature of short and long-term performance of shariah IPO across countries. The use of ex-ante shariah definition becomes our limitation. This study also does not use buy and hold return to investigate long-term performance.Practical implicationsThe results have various implications. Issuers may use shariah screening to lower underpricing. The results show that sharia certification may play an important role in the IPO process. However, sharia status induces individual investors, leading to more overreaction in the long term. Thus, companies need to balance between sharia certification and overreaction in the long term. Investors may manage their investment horizons to mitigate IPO underperformance.Originality/valueThis paper extends studies on the effect of shariah status on IPO performance using Indonesia data. Using non-trading returns, this study provides sharper analysis on the underpricing study. This study shows that shariah status leads to an overreaction, instead of a signal for quality.

Initial Public Offerings (IPOs) have long been considered a crucial step in a company'sgrowth trajectory. IPOs offer an opportunity for companies to raise capital and expand theirbusiness operations. However, the success of an IPO is not guaranteed, and several factorscan impact its performance in the stock market. This study seeks to explore the factors thatcan affect IPO performance from an analytical perspective. The economic conditionsprevailing at the time of an IPO can have a significant impact on its performance. Factorssuch as inflation, interest rates, and GDP growth can influence investor sentiment and, inturn, impact IPO performance. Similarly, industry-specific factors such as competition,technological changes, and regulatory changes can also impact IPO performance. Companyspecific factors such as financial performance, management quality, and growth potential canalso play a critical role in determining IPO success. Furthermore, the regulatory environmentsurrounding IPOs, including legal and compliance requirements, can affect investor sentimentand the success of an IPO. Through an analytical approach, this study aims to identify andanalyse the critical factors that can impact IPO performance in the stock market. The researchcan provide valuable insights into the underlying mechanisms driving IPO performance andcan be useful for investors, issuers, and policymakers in making informed decisions regardingIPO investments and regulations.

The objective of this study is to investigate the long-term (one to three year) performance of initial public offerings (IPOs) for sharia-compliant companies listed on the Malaysian Stock Exchange (MSE) for the period from 2006 till 2010. This study examines why some IPOs companies have a positive, and some IPOs companies have a negative long-term cumulative abnormal return (CAR). KLCI index is used as a benchmark for measuring long-term performance of IPOs for sharia-compliant companies. The empirical results show that the long-term performances for sharia-compliant companies are performed better (16.81 percent) than their benchmark for CAR equal-weight and the result for CAR value-weight show a slightly outperformed their benchmark (-0.07 percent). The results also indicate that CAR for equal-weight and value-weight of IPOs for sharia-compliant companies are significantly higher over performing by 14.58 percent and 4.11 percent respectively in the year 2006. While the results in 2007 (-1.34 percent) and 2008 (-3.43 percent) for value–weight are underperformed. This study also found that the underpricing, offer price, offer size, market type, trading/service industry, consumer product industry, property industry and REIT industry were statistically significant.