Post-issue operating performance of firms listing on the JSE

Abstract

Various studies conducted in the United States (US) have documented several anomalies with initial public offerings (IPOs). Ibbotson (1975) and Ritter (1984, 1991) document short-run underpricing, cyclical hot issue markets and long-run underperformance. These findings are not peculiar to the US. Long run IPO underperformance is documented in the United Kingdom (UK) (Levis, 1993), and Brazil (Aggarwal, Leal and Hernandez, 1993). In South Africa research on IPO performance on the Johannesburg Securities Exchange (JSE) has produced mixed results (Lawson, 1996 and M'kombe and Ward, 2002). These contradictory findings indicate that the long run performance of IPOs varies over time and long-run returns are sensitive to the sample period and methodology used (Ritter and Welch, 2002 and Brav, 2000). This study examines the change in operating performance of 391 firms that listed on the JSE between 1990 and 2003. Using a fixed-effects panel data regression model, factors such as the changes in profitability, investment and growth, tax, leverage and cost of credit are examined over a three year period. Profitability of IPO firms declines significantly in the third year after listing. In addition, tax payments increase permanently and significantly. These results are consistent with findings by Pagano, Panetta and Zingales (1998) and Jain and Kini (1994). Moreover, they are also consistent with M'kombe and Ward (2002)'s results of long-run underperformance of South African IPOs and Ritter (1991) and Loughran and Ritter (1995)'s discovery of long-run IPO underperformance in the US. Similar to Ritter's (1991) results, IPO volume in the South African market fluctuates. The highest concentration of IPOs occurred during the technology fuelled bull market of 1998 and 1999 whereas the lowest concentration occurred during the global recession of 2001 to 2003.