THE AFTER-MARKET PERFORMANCE OF INITIAL
PUBLIC OFFERINGS: AN EMPIRICAL STUDY FOR
SOUTH AFRICA
Clayton M. Reed
1
AGENDA
Background of South Africa
Why South Africa?
Research Questions
Literature Review
Data & Methodology
Results & Findings
Concluding Remarks
Q&A
2
BACKGROUND OF SOUTH AFRICA
3
4
BACKGROUND OF SOUTH AFRICA
Former British colony
Apartheid
Whites
Coloureds
Blacks
African National
Congress
First universal
elections held in 1994
5
WHY SOUTH AFRICA?
6
WHY SOUTH AFRICA?
One of the top emerging
markets in the world
BRICS
South African Rand
Largest African economy
3.8% GDP growth for
2011*
Resource-rich country
Gold, chrome, platinum,
coal
*Citi Investment Research & Analysis
7
RESEARCH QUESTIONS
8
RESEARCH QUESTIONS
As a prospective investor, what type of equity
(unseasoned or seasoned) exposure will
yield the greatest return?
Is IPO performance in South Africa
consistent with previous international
studies?
Is IPO performance in South Africa different
during a post-Apartheid era?
9
LITERATURE REVIEW
10
LITERATURE REVIEW
Aggarwal and Rivoli (1990) – United States
Ritter (1991) – United States
Levis (1993) – United Kingdom
Aggarwal, Leal, and Hernandez (1993) –
Latin America
Page and Reyneke (1997) – South Africa
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PAGE AND REYNEKE (1997)
118 South African IPOs between 1980-1991
48-month holding period
Size matched seasoned portfolio – IPO
underperformance of 13.1% per annum
Sector matched seasoned portfolio – IPO
underperformance of 18.4%
12
DATA & METHODOLOGY
13
DATA & METHODOLOGY
174 IPOs between 1995-2008
Short-term performance
First 21 days post-issue
Long-term performance
First 36 months post-issue
Benchmark index
Johannesburg All-Share Index
14
DATA & METHODOLOGY
Adjusted returns
Raw excess returns
Holding period returns
Cumulative excess returns
Wealth relative ratios
Relative excess returns
15
RESULTS & FINDINGS
16
RESULTS & FINDINGS
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Days Following IPO
Average Short-Term Holding Period Returns Following Initial Public Offering
HPR
HPR-Index
17
RESULTS & FINDINGS
-70.00%
-60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Months Following IPO
Average Long-Term Holding Period Returns Following Initial Public Offering
HPR
HPR-Index
18
CONCLUDING REMARKS
19
CONCLUDING REMARKS
Short-term outperformance
1.57% per week
Long-term underperformance
27.98% per annum
Results are consistent with previous
international literature
Recommendation: do not hold South African
IPOs for long-term exposure
20
Q&A
21
APPENDIX
22
APPENDIX: EQUATIONS
ARit = Rit — Rbmt
ARt =
HPR =
HPRT =
WPRT = / 23
APPENDIX: DATA TABLES
Period Relative to the
IPO Listing
No. of
Companies
IPO Portfolio
HPR
Index
Portfolio
HPR
Wealth
Relative
First week 174 3.80%* -0.35%* 1.042
Second week 174 -0.23%* -0.24%* 1.000
Third week 174 0.67%* 0.72%* 1.001
First two weeks 174 -1.17%* -0.49%* 1.007
Weeks two and three 174 0.56%* 0.30%* 0.998
First three weeks 174 4.66%* -0.06%* 1.047
Short-Term Performance
Notes: *Significant at the 5% level.
Average holding period returns are calculated as /n; where, Rit, is the return on share i for day t following the listing date and Ti is
the number of days from the listing date. For IPO companies that are delisted before the required holding period ends, the holding period return is calculated
until listing date. The benchmark index returns are also calculated over the same truncated period.
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APPENDIX: DATA TABLES
Period Relative to the
IPO Listing
No. of
Companies
IPO Portfolio
HPR
Index
Portfolio
HPR
Wealth
Relative
First year 174 -20.59%* 7.32%* 0.740
Second year 168 -25.99%* 9.71%* 0.733
Third year 159 -10.51%* 7.00%* 0.922
First two years 168 -47.13%* 17.01%* 0.468
Years two & three 174 -36.86%* 18.57%* 0.645
First three years 174 -58.00%* 25.87%* 0.380
Long-Term Performance
Notes: *Significant at the 5% level.
Average holding period returns are calculated as /n; where, Rit, is the return on share i for month t following the listing date and Ti is
the number of months from the listing date. For IPO companies that are delisted before the required holding period ends, the holding period return is calculated
until listing date. The benchmark index returns are also calculated over the same truncated period.
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