Initial and aftermarket performance of IPO Stocks

Mark J. Holmes / European Review of Economics and Finance 3 (2003) 3-18

23

European Review of Economics and Finance Vol. 4, n.º 3, December 2005, 23-31

Initial and aftermarket performance of IPO Stocks: Evidence from Greece Evangelia Kasimati a Peter Dawson b

a

Corresponding author. Department of Economics and International Development, University of Bath, Claverton Down, Bath BA2 7AY, UK. Tel: +44-(0)-1225 384864, Fax: +44-(0)-1225 383423, E-mail: [email protected] b Department of Economics and International Development, University of Bath, Claverton Down, Bath BA2 7AY, UK. E-mail: [email protected]

Abstract The pricing of Initial Public Offerings (IPOs) in the short-run and long-run has been examined by numerous theoretical and empirical studies referring to the main international stock markets. In Europe, the specific topic has gained increasing prominence in the last few years partly as a result of increasing number of companies gaining a stock market listing (i.e. ‘going public’). This short paper extends the European literature on IPOs by examining the case of the Athens Stock Exchange (ASE). In particular, the study is conducted on the ASE Main and Parallel Markets between January 1999 and April 2004. All 144 IPOs are examined to determine both the short-run and long-run stock performance after going public. The results provide evidence consistent with the existing literature that report short-term excess returns associated with IPOs. Specifically, our study shows that Greek IPOs are on average underpriced by 25.4%. In contrast to the results from other markets, however, we find no evidence of long-run IPOs underperformance in the ASE. Keywords: Initial public offerings, short-run stock performance, long-run stock performance, Greek stock market JEL Classification: G24; G32; G14

Review12.pmd

23

26-10-2005, 16:31

24

Evangelia Kasimati, Peter Dawson / European Review of Economics and Finance 3 (2005) 23-31

Introduction Several studies have examined the initial and aftermarket performance of IPOs in a number of European markets. For example, Loughran et al. (1994) investigated IPOs in the UK, Ljungqvist (1999) in Germany, Keloharju (1993) in Finland and Kunz and Aggarwal (1994) for Switzerland. These studies find that initial underpricing is a common phenomenon although they do differ in terms of the magnitude of the underpricing: ranging from a modest 9.9% in Finland to 35.8% in Switzerland. Long-run underperformance of IPOs is also prevalent. Starting with Stehle et al. (2000) a series of studies found a negative long-run performance for time periods up to 3 years in Germany. This trend has been repeated in several other European stock markets (Ljungqvist, 1997; Levis, 1993; Keasey, 1992; Aggarwal and Rivoli, 1990; Uhlir, 1989), and in the US (Ritter, 1991; Loughran and Ritter, 1995; Brav and Gompers, 1997). Although the IPO performance has gained attention in the European academic literature, little work has been done on Greece. To our knowledge, only one academic study exists by Kazantzis and Levis (1995), who examined the performance of 79 Greek firms going public between 1987 and 1991. They found that these IPOs were, on average, underpriced by 48.5%. Greece has an active and well-established stock market, which experienced considerable IPO activity in the late 1990s and early 2000s. Between January 1999 and April 2004, Greece attracted more than Euro 5.2 billion on the moneyraising front. The nomination of Athens in 1997 to host the 2004 Summer Olympic Games also played an important role in encouraging more Greek companies to go public (Veraros et al., 2004). Furthermore a desire for high-tech stocks and the Euro’s arrival helped make 2000 a record year for Greece’s IPO market recording 51 IPOs, including the privatisation of the mobile telecommunications company COSMOTE and the industrial development bank ETBA, collecting more than Euro 2.7 billion in the process. In the present study we provide evidence on the IPOs short-run and longrun performance in the Greek stock market. We extend the work of Kazantzis and Levis in several ways. First, their early study typically looked at the performance during the year after the IPOs. Our study covers three years after the IPO. Second we use a somewhat larger sample size. In particular, 144 newly listed firms are examined on the two major markets of ASE –the Main and Parallel Marketbetween January 1999 and April 2004. We do not consider the IPOs on New

Review12.pmd

24

26-10-2005, 16:31


25

Table 1. Number of IPOs listed during January 1999 – April 2004 Year No. of IPOs Main Market Parallel Market Gross Proceeds (thous. E)

1999 36 15 21

2000 51 17 34

2001 20 12 8

2002 17 7 10

2003 13 1 12

2004 7 3 4

Total 144 55 89

801.7

2,751.4

1,452.1

83.5

97.0

79.1

5,264.8

% of total

15.2

52.3

27.6

1.6

1.8

1.5

100

Notes: The sample’s population excludes eight companies listed in NE.HA between January 1999 and April 2004 with total gross proceeds of Euro 37.3 thousands.

Market (NE.HA), the stock market established in 1999 in which small fast-growing firms are listed, since the determinants of their market valuation are completely different. Finally, we use share prices that are adjusted for dividends, while their study used an index as benchmark that did not include dividends. The remainder of the paper is organised as follows. The next section provides a background on the Athens stock market. We then describe the data set and discuss the methodology used to analyse short-run and long-run IPO performance. Next the empirical results are presented followed by some concluding remarks.

The process of ‘going public’ in Greece In most countries a variety of options are available when introducing new shares on the stock exchange. The ‘going public’ process in Greece starts with a firm and a financial advisor selecting a market, choosing the floatation mechanism and estimating the offer price range. In the prospectus the intended use of the new funds must be presented, and detailed information about the firm, its controlling shareholders and its subsidiaries have to be provided. An underwriter is selected to certify that the issuing firm complies with the listing requirements. The shares marketed through a public offer may be existing shares or newly issued shares, or both. Voting and non-voting shares may be offered to the public. Prior to 2001, almost all IPOs adopted the fixed-price issue procedure, i.e. the fixed price of the shares was published in the prospectus. From 2001 a new procedure (book building with open price) was developed, according to which

Review12.pmd

25

26-10-2005, 16:31

26


the final price is set after the collection of bids. In this case the investors do not know exactly the offer price when they purchase shares and the lead underwriter announces the final share price one day after the completion of the public offer. The ASE is divided into three markets: the Main Market, a market for small caps (Parallel Market) and a market for small firms having high growth potential (NE.HA). Most of the firms (64%) are traded at the Main market. To be admitted to the Main market, the issuing firm must publish the last five annual reports, exhibit a capability to generate revenues and undertake to adopt a disclosure policy. The offered shares should represent at least 25% of the equity capital, and the total capitalization should exceed Euro 11.73 million. The ASE lists 361 companies as at April 2004 (Main: 231, Parallel: 122, NE.HA: 8), with a market capitalization of Euro 84.5 billion, which represents approximately 55% of Greek GNP.

Data description The sample used in this study comprises the initial listings of 144 firms on the ASE between 1999 and 2004. The sample includes only listings of common stocks. Preference stocks as well as transfers from one market to another are not examined. The data on new issues (i.e. subscription period, type of market, offer price, capital raised and first day of trading) come from our own database and was cross checked with the data in the database maintained by National Securities company in Athens. IPOs on NE.HA are not considered, because their characteristics and evaluation frameworks are peculiar, whereas the size of this market is insignificant. Daily closing prices of each company in the first day of trading and in the aftermarket as well as of the ASE General Index were collected from the Bloomberg database to analyse performance both in the short-run and in the longrun. All share prices are adjusted for stock dividends, stock splits and rights issue or for a change in their nominal value. The sample we analyse is unique, and to our knowledge, this is the first time such a research is carried out on such a wide basis in Greece. The 19992004 period was selected, because it is when ASE experienced a considerable growth and attracted a significant foreign interest, while it also played an important role in the economical development of the country. Before 1999, ASE was mainly characterised by low number of IPOs and low liquidity, while the regulation surrounding new issues was not very demanding in terms of disclosure requirements.

Review12.pmd

26

26-10-2005, 16:31


27

Methodology To determine the short-run and long-run stock performance, we follow Aggarwal et al. (1993) in calculating the market-adjusted abnormal return for each IPO on day t: AR i, t

ª 1 R i, t º 1» x 100 « »¼ ¬« 1 R m, t

(1)

where: ARi,t = market-adjusted abnormal return of stock i at time t, Ri,t = total return on the ith security from offering to t trading days after the initial offering, and Rm,t = total market return for the corresponding period. The total return for stock i in period t is calculated as follows:

R i, t

P i, t P i ,0

(2)

1

Where: Pi,t = price of stock i at time t, and Pi,0 = offer price The return on the market index during the same time period is calculated in the following equation R m, t

P m, t P m,0

(3)

1

where: Pm,t = market index value (ASE General Index) at time t, and Pm,0 = market index value (ASE General Index) on the offer day Wealth relatives are also calculated using the formula proposed by Ritter (1991) and Levis (1993):

Review12.pmd

27

26-10-2005, 16:31


28

1 N ¦ R N i 1 i, t 1 N 1 ¦ R m, t Ni 1 1

WR i, t

(4)

where: WRi,t Ri,t Rm,t N

= = = =

Ritter’s wealth relative, rate of return on stock i in day t from the offer day, market return during the same time period, and total number of IPOs in the sample.

A wealth relative above 1 will imply that IPOs outperformed the market in that period, while a wealth relative below 1 will indicate underperformance. Wealth relatives from day 1 are also calculated.

Empirical results Panel A of Table 2 reports mean and median market-adjusted returns for holding periods between 1 day and 3 years, assuming purchase of the stock at the offer price. Wealth relatives for the same period are also reported. Consistent with previous studies on IPOs, where the existence of excess returns on the first day of trading was documented, positive mean and median excess returns of 25.4% and 4.8% respectively are found for Greece. The t-statistic of 4.21 is significant at the five percent level. Even though a number of Greek IPOs showed negative market-adjusted performance on the first day, the holders of new issues gained on average on the first day of trading. In addition, the short-run results for months 1, 2, and 3 are also significantly different from zero and the investors who purchased the issues at the offer price and held throughout the aforementioned period received mean market-adjusted excess returns of 27.7%, 30.5% and 37.6% respectively. An interesting point from these findings is the consistent upward trend of the returns from day one up to month 3, being beneficial to those investors who followed the ‘buy and hold’ strategy for a three-month period. Evidence from the UK, the U.S.A and other stock markets suggests that IPOs underperform the market in the long-run. Levis (1993), for example, reported

Review12.pmd

28

26-10-2005, 16:31


29

average first day returns of 14.3% for 712 IPOs between 1980 and 1988 in the UK and long-run underperformance of –30.59% by the third year after the offer. Aggarwal and Rivoli (1990) found the mean and median market-adjusted returns to be negative for investors who purchased new issues at the offer price and held for one year. Ritter (1991) also found similar results over a three-year holding period assuming a purchase on the first day. In the Greek case, the mean excess return of 27.1% for an investor who bought at the offer price and held for one year is significantly different from zero. This long-run overperformance of the Greek IPOs is not consistent with the findings reported by the aforementioned studies on the main world markets. The mean returns in our sample continue to be positive but not significant at the five percent level for years 2 and 3 as seen in Panel A. The wealth relatives are above one from day one up to the end of the third year. Table 2. The Aftermarket performance of Greek IPOs during a1999-2004

Day 1 Month 1 Month 2 Month 3

Panel A. Market-Adjusted Returns from Public Offering t-stat.c Mean Median Standard Deviation 144 25.4 4.8 72.4 4.21* 144 27.7 5.1 75.8 4.39* 141 30.5 6.4 77.6 4.67* 138 37.6 7.5 92.7 4.76*

Year 1 Year 2 Year 3

128 112 87

Time

Nb

3.72* 1.38 0.60

1.34 1.12 1.11

Month 1 Month 2 Month 3

Panel B. Market-Adjusted Returns from Day One t-stat.c Mean Median Standard Deviation 144 18.6 -2.8 87.0 2.57* 141 21.0 -1.9 91.2 2.73* 138 26.3 0.4 110.7 2.79*

Wealth Relative 1.20 1.23 1.31

Year 1 Year 2 Year 3

128 112 87

Time

27.1 10.1 5.4

6.0 -11.9 -17.3

82.4 77.6 84.2

Wealth Relative 1.22 1.28 1.32 1.41

Nb

8.4 -2.5 -6.4

-10.8 -17.4 -29.9

70.0 73.5 77.5

1.37 -0.36 -0.77

1.18 1.03 1.01

Notes: a Abnormal returns are market-adjusted (in percentage), calculated by Equation (1). Wealth relatives are calculated as in Equation (4). b Number of observations c The t-statistic is calculated as the mean/standard error where the standard error is the standard deviation divided by the square root of the number of observations. * Statistically significant at the 5% level (two-tailed test).

Review12.pmd

29

26-10-2005, 16:31

30


Next we examined the performance of new issues following a purchase at the closing price on the first day of trading (Panel B). The short-run results for months 1, 2 and 3 are significantly different from zero with excess returns of 18.6%, 21.0% and 26.3% respectively. As also shown in Panel B, the market-adjusted return for one-year holding period provides an excess return of 8.4%, however it is not significantly different from zero. Furthermore, after a holding period of two and three years, the market-adjusted returns become negative with mean values of –2.5% and –6.4% respectively. These negative returns are also not statistically different from zero. The corresponding medians of –17.4% and -29.9% are all negative. The wealth relatives also continue to be above one until the end of the third year. The returns in year 3 are not affected by survivorship bias since the 128 firms with one-year excess returns continued to be listed in year 3. All 128 firms could not be utilised in the year 2 and year 3 analysis, because their second- and/ or third- year anniversary were outside the sample period.

Concluding remarks This study sheds some light to empirical evidence on initial and aftermarket performance of IPOs in the Greek stock market, where there is limited past literature. We found excess initial one-day return to be 25.4%, revealing the existence of underpricing of initial public offerings phenomenon. However, our estimate of IPO underpricing is considerably lower than the 48.5% estimate of the prior study by Kazantzis and Thomas (1995) on the Greek market. In addition, high IPOs returns for a three-month post-offering period appear consistent with the academic literature on new issues, which finds excess returns in the short run. The mean and median market adjusted returns were positive and significant for the 12 months in the aftermarket. Overall, no long-run underperformance of the Greek IPOs was found in the ASE.

Acknowledgements The author thanks Michael Lalas for the access to the data source and his endless patience and support. Professor John Hudson, Charalambos Constantinou and

Review12.pmd

30

26-10-2005, 16:31


31

Aggelos Pentalios get special thanks. Elie Nasr is also acknowledged for the spiritual motivation. The usual caveat applies.

References Aggarwal, R., Ricardo, L., and Hernandez, L. (1993), The Aftermarket Performance of Initial Public Offerings in Latin America. Financial Management, Spring, 43-53. Aggarwal, R. and Rivoli, P. (1990), Fads in the Initial Public Offering Market?. Financial Management, Winter, 45-57. Brav, A. and Gompers, P.A. (1997), Myth or reality? The long-run underperformance of initial public offerings: Evidence from venture and nonventure capital-backed companies. Journal of Finance, Vol. 52, 1791-1821. Kazantzis, C. and Levis, M. (1995), Price support and initial public offerings: evidence from Athens Stock Exchange. Journal in International Business and Finance, Vol. 12, 185-200. Keasey, K. (1992), The underpricing of initial public offerings: some UK evidence. International Journal of Management Sciences, Vol. 20, 429-448. Keloharju, M. (1993), Winner’s Curse, Legal Liability, and the Long-Run Price Performance of Initial Public Offerings in Finland. Journal of Financial Economics, Vol. 34, 251-277. Kunz, M. and Aggarwal, R. (1994), Why initial public offerings are underpriced: evidence from Switzerland. Journal of Banking and Finance, Vol. 20, 1189-1210. Levis, M. (1993), The long-run performance of Initial Public Offerings: The UK Experience 19801988. Financial Management, 28-41. Ljungqvist, A.P. (1999), IPO underpricing wealth losses and the curious role of venture capitalists in the creation of Public Companies. Working Paper, Said School of Business, Oxford. Ljungqvist, A.P. (1997), Pricing initial public offerings: further evidence from Germany. European Economic Review, Vol. 41, 1309-1320. Loughran, T. and Ritter, J.R. (1995), The new issues puzzle. Journal of Finance, Vol. 50, 23-51. Loughran, T., Ritter, J.R., and Rydqvist, K. (1994), International Public Offerings: International Insights. Pacific-Basin Finance Journal, 2: 165-200. Ritter, J. (1991), The long-run performance of Initial Public Offerings. Journal of Finance, 3-27. Stehle, R., Edrhardt, O., and Przyborowsky, R. (2000), Long-run stock performance of German initial public offerings and seasoned equity issues. European Financial Management, Vol. 6, 173196. Uhlir, H. (1989), Going public in F.R.G. in a re-appraisal of the efficiency of Financial Markets, New York: Springel. Veraros, N., Kasimati, E., and Dawson, P. (2004), The 2004 Olympic Games announcement and its effect on the Athens and Milan Stock Exchanges. Applied Economics Letters, Vol. 11, 749753.

Review12.pmd

31

26-10-2005, 16:31