Long-Run Performance of Initial Public Offerings (IPOs) in the Spanish Capital Market

Abstract

Academic research into firms that have gone public has been focused on the study of two anomalies: initial underpricing and long-run underperformance. The first aim of this study is to analyse all the Spanish Initial Public Offerings(IPOs) during the period 1987-1997, with a sample consisting of 56 firms, in order to provide additional evidence on the long-run performance of IPOs. Nevertheless, since several works have reported the existence of a relationship between the two anomalies of the IPOs –shortrun underpricing and long-run underperformance– we have also analysed the initial returns of the IPOs. There is considerable variation in the measures of abnormal returns and the statistical tests that empirical researchers use to detect long-run abnormal stock returns. In fact, several recent works –for example, Barber and Lyon (1997) and Lyon et al. (1999)have revealed that the method for calculating returns influences both the magnitude of the measured abnormal return as well as the size and power of the statistical tests. In our study, following these works, we have used different methods, in order to examine the robustness of the long-run performance of the IPOs regarding various specifications of the model: buy-and-hold returns (BHR), calendar-time portfolios and the Fama and French three-factor model. In buy-and-hold returns and calendar-time portfolios, we have used different benchmarks: a value-weighted market index (IGBM), an equal-weighted market index, size and/or book-to-market portfolios, as well as a control firm selected in terms of the above criteria. The results of the study show that the existence of long-run underperformance for the Spanish IPOs depends on the methodology used. Thus, there exists long-run underperformance when buy-and-hold returns are used and not when mean calendar-time returns (monthly) are employed. This result is in line with the evidence presented by Brav et al. (2000) in reference to the fact that the use of BHRs tends to magnify the long-run underperformance of IPOs. The study of the influence of the IPO prospectus information on the long-run performance of the firm is the second objective of this work. We analyse whether investors can use this information to distinguish firms with good or bad long-run performance. The results show that neither the characteristics of the IPO –size of the issue, the underwriter s reputation– nor those of the firm in the year prior to going public –size, return on assets– have a statistically significant influence on the stock return of the firm three or five years after going public. On the other hand, the percentage of stocks retained in the offer, the initial underpricing of the IPO and the number of seasoned equity offerings (SEOs) made since going public to the end of the study period are variables that are directly related to the long-run performance of the IPOs. This result confirms the signalling hypothesis for the explanation of the initial underpricing and the long-run underperformance of IPOs in the Spanish capital market.