Long-run Performance Of IPOs Research Articles

Long-Run IPO Performance and the Role of Venture Capital

Long-Run IPO Performance and the Role of Venture Capital

Disaggregated IPO returns, economic uncertainty and the long-run performance of SME IPOs

PurposeSmall and medium enterprises (SMEs) play a crucial role in national economies worldwide, generating employment and contributing to innovation. This study tries to investigate the performance of the newly started IPO platform for the SMEs in India through a two-staged framework developed to measure pre-market and post-market underpricing separately and the impact of economic policy uncertainty (EPU) on the IPO returns using the EPU index which is based on newspaper coverage frequency. Further, the long-run performance of SME IPOs and the factors affecting the same have also been analyzed. The two-staged framework is helpful in capturing the impact of different factors separately on the two distinctive markets and providing effective investment strategies to the investors.Design/methodology/approachA sample of 384 SME IPOs issued during 2012–2018 has been analyzed using robust regression analysis.FindingsThe study highlights the fact that there are differences in the factors affecting pre-market and post-market underpricing and reports that investors subscription rate, issue expenses, lead manager reputation and EPU are positively associated, whereas the age of the firm is negatively associated with the pre-market underpricing, and lead manager reputation positively impacts the post-market underpricing whereas issue premium and pre-market underpricing are negatively associated. Pre-market underpricing subsumes all the impact of EPU (publicly available information) in it, hence providing credence to the semi-strong market hypothesis of the Efficient Market Hypothesis (EMH). The long-run performance of SME IPOs increases with time, and lead manager reputation, pre-market and post-market underpricing are positively related to the one-year return whereas issue size, turnover and issue expense are negatively related.Originality/valueThis paper is believed to be the first attempt to analyze the performance of SME IPOs by disaggregating IPO underpricing. The findings of this study will have a great insight for the investors and policymakers.

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.

Patent growth and the long-run performance of VC-backed IPOs

This study analyzes the impact of venture capital (VC)-backed IPO firms’ patent growth during the period of VC investment on the long-run performance of stock returns, using data on the China A-share market between 2003 and 2013. The baseline results indicate that VC-backed firms that have generated successful patent filings during the investment period of VCs exhibit superior post-IPO performance compared to other VC-backed firms and non-VC-backed firms in the long run. These results continue to hold under several robustness checks. Overall, we provide a clear, crucial mechanism showing that venture capital improves the long-run performance of IPOs by increasing the number of granted patents of portfolio firms; that is, technological innovation is the major contributing factor to the long-run performance of VC-backed IPOs.

Is the Whole More Than the Sum of Its Parts? Underpricing and Long-Run IPO Performance

We use the estimate of an IPO’s intrinsic value derived from its initial price range and the degree to which the overallotment option is exercised to decompose IPO underpricing into a Market Inefficiency and an Underwriter Bias component. The former reflects the difference between the closing price on the first day of trading and the intrinsic price and the latter the difference between the intrinsic price and the offer price. We show that although an investment strategy that goes long on undervalued and short on overvalued IPOs based on underpricing does not result in any significant return profitability, a similar strategy based on Underwriter Bias (Market Inefficiency) earns statistically and economically significant returns of 28% (15%) over the three-year period following the IPO. Multivariate results indicate that Underwriter Bias is strongly positively related to future returns but Market Inefficiency does not exhibit significant incremental information content. Our results are robust to numerous sensitivity analyses, including different model specification and different measures of long-run returns. We conclude that the inability of prior research to document a relation between IPO underpricing and future return performance can be explained by the counteracting effects of the two components of underpricing and that the IPO’s future long-run return performance can be predicted by the deviation of the intrinsic value from the offer price.

A Note on Brazilian IPOs Performance in the Long Run

Abstract This note examines the long-run performance of Brazilian IPOs based on a sample of 143 firms that went public between 2004 and 2013. There is no evidence that IPOs underperform the market in the 60 months after going public. An investor would have to put 12.6% more money in an investment that mimics the index than in the IPOs to achieve the same terminal wealth level five years later. IPOs with the highest initial returns have the worst aftermarket performance and there is mixed evidence that larger IPOs underperform the smaller IPOs in the five years subsequent to the offerings.

Net deferred tax assets and the long-run performance of Initial Public Offerings

On average, firms’ going public severely underperform compared to the market, a phenomenon which is widely known in the literature as IPO underperformance. Though there is no generally accepted theory on the reasons, information asymmetries and the scarcity of information on the issuers is generally considered to contribute to the phenomenon. Accounting data provided by issuers in the offering prospectuses is mostly backward-looking information that is of limited use in forming expectations of future performance. This problem becomes even more pressing, given the increasing fraction of loss firms among IPOs. Net deferred tax assets (NDTA), however, are a balance sheet item that can be expected to include forward-looking information on future earnings. Reporting under IFRS, firms may recognize NDTA only to the extent, that positive income will be available in future periods. We, therefore, expect NDTA to be positively associated with the long-run performance of IPOs. Investigating a sample of firms going public in Germany between 2005 and 2015, we find that NDTA are positively associated with long-run stock price performance. The association is particularly strong among loss firms. Our findings are relevant especially to investors, who regularly have difficulties valuing loss firms. We show that firms which recognized NDTA perform much better in the aftermarket than those that do not have NDTA on the balance sheet. The most important lesson to be learned is that IPO firms that did not recognize NDTA will likely be very poor investments.

Pre-IPO growth, venture capital, and the long-run performance of IPOs

This paper analyzes the relationship between pre-IPO growth and the post-IPO long-run performance for venture capital (VC)-backed firms. Our results show that the effect of pre-IPO growth on post-IPO long-run performance is positive, but is attenuated by venture capital in a matched sample. Focusing on VC-backed IPO firms, we find an inverted-U relationship between pre-IPO growth and post-IPO long-run performance. In addition, our baseline results continue to hold in a variety of settings, including post-IPO profitability performance and ownership divisions of venture capital. We explore one underlying interpretation through which post-IPO long-run performance exhibits a reversal when pre-IPO growth increases to a saturation point: VC-backed firms tend to engage in accounting fraud due to the incentives from some opportunistic VCs to take firms public earlier.

The short and long-run performance of Shariah-compliant IPOs on Tadawul

We examine the short- and long-run financial performance of Sharia-compliant IPO companies in Saudi Arabia for the period between 2000 and 2017. While the literature on the short-run performance is more consistent in presenting evidence of underpricing (see T. Loughran, Ritter, and Rydqvist, 1994), the evidence for long-run performance have been rather mixed and inconclusive (T. Loughran & Ritter, 1995) between under-and-over-performance outcome. Intrigued by where Saudi Arabia may be positioned on this continuum our analysis indicates that Sharia-compliant IPOs on Tadawul are underpricing with abnormal initial returns of 79.23%. For the long-run performance, our analysis indicates that investors could earn positive and significant market-adjusted BHAR of 14.67% if IPO shares were held over the eighteen-month period following the listing date using the EWI as a market benchmark. The present study would benefit foreign investors and market regulators who are trying to understand the market behaviour in an emerging market.

Market timing and pseudo market timing: an empirical examination of IPOs in India

PurposeThe purpose of this paper is to examine the impact of market timing and pseudo market timing on equity issuance decisions of IPOs in an emerging economy – India. Indian new issues market provides a perfect setting to test market timing against pseudo market timing due to two reasons. First, the US literature shows that most underpriced IPOs are highly overvalued and in India, the authors have the evidence of underpricing of IPOs. But whether Indian IPOs are overvalued or not it is yet to be tested. Second, majority of IPOs were issued in India only after the 1991 economic reforms which may signal the evidence for pseudo market timing hypothesis.Design/methodology/approachThe authors use direct test to examine the impact of market timing and pseudo market timing variables on the IPO activity. The direct tests of market timing and pseudo market timing hypotheses are based on the positive relation of market timing variables and market conditions variables with IPO activity. The authors examine the long-run performance of IPOs by using the calendar-time regression approach to test market timing against pseudo market timing. This serves as indirect test of market timing and pseudo market timing. Evidence of market timing using indirect test shows that there is a decline in the long-run stock performance of IPOs.FindingsThe results show that in India, firms issue equity not just due to market conditions but they also issue equity in order to time the market. The results of market timing are also supported by the calendar-time approach results. However, the authors find that the evidence of market timing is stronger for hot issue markets as compared to cold issue markets.Originality/valueThis is the first study to comprehensively examine market timing and pseudo market timing using direct and indirect tests for an emerging market context.

Do IPOs in Cold Markets Provide Better Returns

Significant listing day returns for IPOs is a phenomenon that is observed when companies go public. Using a larger timeframe (1999-2014), we attempt to determine the long-run performance of underpriced IPOs issued in an emerging economy such as India during the hot and cold IPO markets for 36-months. The results indicate that IPOs perform significantly better when issued during cold markets. We find that the distribution of returns is the same across cold and hot markets at specific periods during the 36-month period of study.

A Study on the Long-Run Performance of Initial Public Offerings in India

This paper examines the long run performance of 438 initial public offerings in India that got listed on the Bombay Stock Exchange from 1992 to 2001. It further attempts to identify the factors explaining the long-run performance of IPO firms. The cumulative abnormal return at the end of fifth year is 184.64% which is very high in contrast with the returns observed in the developed countries. Substantial variations have been observed across firms belonging to different age groups and industries. Variations in performance of IPO firms is also evident when firms are segmented according to their initial returns, issue price and issue size. Initial returns, issue size and market conditions primarily explain variations in long run performance of Indian IPOs.

Earnings management before IPOs: Are institutional investors misled?

Abstract Leveraging the unique detailed bid data of institutional investors during the IPO process in China, we investigate how investors, especially institutional investors, react to the issuing firm’s pre-IPO earnings management (EM). Our findings suggest that institutional investors’ bid prices are negatively correlated with pre-IPO EM. The results are more pronounced for accrual-based EM than real EM. The findings are robust to a battery of different bid prices. We also document that retail investor oversubscription ratio is negatively or not associated with pre-IPO accrual-based EM. However, such oversubscription ratio is positively correlated with pre-IPO real EM. Additional results show that IPO offer prices (relative to the proposed IPO price range) are negatively correlated with pre-IPO EM, suggesting that institutional investors’ ability to recognize EM pressures IPO issuing firms into setting a lower offer price. Lastly, we find that, the long-run IPO performance is mostly unrelated to EM, which is different from what the literature depicts.

The role of internationalization on the IPO performance of service firms: Examination of initial returns, long-run returns, and survivability

This study examines the effect of internationalization on the initial and long-run IPO performance of service firms. The study discusses that pre-IPO internationalization of service firms contributes to the explanation of long-discussed IPO underpricing phenomenon, and underperformance of IPOs in the long-run. Sample of the study includes 1822 IPO issues conducted by US service firms between 1980 and 2009. Findings of the study suggest that international service firms leave less money on table in their IPOs compared to domestic service firms by providing significantly lower first day returns to their investors on their first day of public trading. Moreover, our findings provide evidence that 3-year cumulative abnormal returns and 3-year buy-and-hold returns of international service firms are significantly higher than domestic service firms, and international service firms outperform domestic service firms in both operating return on assets and operating cash flows in the post-IPO period. Lastly, the study documents that survival rate of service firms subsequent to an IPO issue increases with pre-IPO internationalization.

Changes in underwriters' selection of comparable firms pre- and post-IPO: Same bank, same company, different peers

We compare the selection of peer firms made by investment banks as underwriters at the IPO with that done shortly thereafter as analysts. We find that 3 out of 7 comparable firms, on average, are changed. The peers published in the IPO prospectuses have higher valuations than those published in the post-IPO equity research reports of the same firm, especially if the underwriter is US-based. We argue that underwriters select comparable firms that make the issuer's shares look conservatively priced at the IPO, while this conflict of interest tends to fade afterwards. The upward bias in peer selection is larger for underwriters with greater market power, and lower for repeat players in the IPO market. A biased selection of peers results in higher underpricing and lower long run performance of IPOs.

The long-run performance of IPOs: the case of the Stock Exchange of Mauritius

This study examines the long-run performance of initial public offerings on the Stock Exchange of Mauritius (SEM). The results show that the 3-year equally weighted cumulative adjusted returns average −16.5%. The magnitude of this underperformance is consistent with most reported studies in different developed and emerging markets. Based on multivariate regression models, firms with small issues and higher ex ante financial strength seem on average to experience greater long-run underperformance, supporting the divergence of opinion and overreaction hypotheses. On the other hand, Mauritian firms do not on average time their offerings to lower cost of capital and as such, there seems to be limited support for the windows of opportunity hypothesis.

Underpricing, long-run performance and secondary-market liquidity: an empirical examination of Indian IPO market

In this paper, we study the underpricing, long-run performance of IPOs and the impact of underpricing on secondary market liquidity of IPOs which were issued in India during the period 2000–2008. The average underpricing for Indian IPOs is 37%. Uncertainty, information asymmetry and investor optimism are the factors which explain underpricing. The IPOs which take more time in getting listed on stock exchange after the close of the issue have higher underpricing. In the case of big IPOs, mature firms have less underpricing and the IPOs which have more lead managers have more underpricing. Calendar-time factor regression results show that IPOs underperform in the long-run. However, underperformance is more for big and more oversubscribed IPOs than that of small and less oversubscribed IPOs respectively. IPOs which are more underpriced in the primary market are more liquid in the secondary market and this relation holds for all the measures of liquidity used in the study.

Effective derivative hedging and initial public offering long-run performance

We investigate the role of corporate currency risk management through the use of financial derivatives in influencing the long-run performance of a sample of Australian resources companies. We find that derivative users generally outperformed nonderivative users in the 5-year period following listing. Effective derivative users consistently outperformed the nonhedgers. Furthermore, within the population of derivative users, effective derivative users tended to perform better than ineffective hedgers. Our results indicate that effective financial risk management plays a role in long-run IPO performance.

Short-Run and Long-Run Performance of IPOs: Evidence from Taiwan Stock Market

This paper studies the aftermarket stock performance of IPOs in short-run and long-run, and examines whether the long-run underperformance exists in Taiwan stock market. This paper applies the measure of expected skewness to verify that the highly expected skewed IPO firms are overpriced and experience the long–run underperformance. We find that IPO firms are underpriced 48.54% and severely underperform from three to five years in comparison to the reference portfolios. Skewness is reported to be positively related with the underpricing level of the first day. However, our findings suggest that this skewness measure can’t explain for the long-run phenomenon of IPOs.

Initial Underpricing and Long-Run Performance of French Venture Capital-Backed and Non-Venture Capital-Backed IPOs

We empirically examine the effects of venture capital (VC) firms on VC backed listed companies in French Nouveau Marche and Second Marche between 1991 and 2004. While studies in the US market shown a lower underpricing and a better long run performance for VC backed firms, we find that the effects of venture capitalist’s participation are more complicated. VC-backed firms are less underpriced than non VC-backed firms. Such result supports the certification model. However, in the long run, participation of VC firms has negative effect on performance of initial public offerings supporting the adverse selection and the opportunist behavior (grandstanding) models that younger VC firms bring their portfolios to the market prematurely.