DoIPOsperformbetterduringeconomiccrises?
AmsterdamBusinessSchoolName WoutervanRoessel Studentnumber 105558373Program Economics&BusinessSpecialization Finance&OrganizationNumberofECTS 12Supervisor IlkoNaaborgTargetcompletion 31/January/2017AbstractThis thesis researches if IPO performance is better during economic crisis. This research
compares the one-year performance of IPOs between 2001-2006 with the one year IPO
performance between 2008-2011, for companies listed on the NYSE. Also the returns will be
calculated,excludingthefirstweekaftertheIPO.ThiswillberesearchedduetothefactthatIPOs
oftenhavehighfirstdayreturns.ByexcludingthefirstweektheIPOunderperformancecouldbe
evenbigger.Tocalculatetheabnormalreturns,thisresearchmakesuseoftheFamaandFrench
five-factormodel. To test the difference in the performance a two-sample t-test is used. This
paper finds underperformance of the whole period, as for the separate periods. Also for the
wholeperiodandtheperiodbetween2001-2006theunderperformanceisworseifthefirstweek
isexcluded.Bydoingat-testthereisasignificantdifferencefoundbetweenthecrisisperiodand
theperiodbefore the crisis. Therefore the IPOperformance is better compared to themarket,
duringeconomic crisis, thanbefore theeconomic crisis. However the robustness check shows
theproblemswithcalculatinglongtermstockperformance.
Keywords:IPO,underperformance,financialcrisis
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StatementofOriginalityThisdocumentiswrittenbystudent,WoutervanRoessel,whodeclarestotakefullresponsibilityforthecontentsofthisdocument.Ideclarethatthetextandtheworkpresentedinthisdocumentisoriginalandthatnosourcesotherthanthosementionedinthetextanditsreferenceshavebeenusedincreatingit.TheFacultyofEconomicsandBusinessisresponsiblesolelyforthesupervisionofcompletionofthework,notforthecontents.
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TableofContents
1. Introduction ................................................................................................................ 32. Literature review ........................................................................................................ 43. Methodology and Data ............................................................................................... 6
3.1. Methodology ................................................................................................... 64. Analysis .................................................................................................................... 12
4.1. Empirical Results .......................................................................................... 124.2 Robustness check ........................................................................................... 15
5. Conclusion and discussion ....................................................................................... 156. Appendix .................................................................................................................. 19References .................................................................................................................... 19
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1.Introduction
IPO’sunderperformcomparedtothemarket(Ritter&Welch,2002).Thisis
becauseoptimisticinvestorsthinktheyfoundthenewFacebook.Thereforethe
priceopenshighbutifopinionsofinvestorscomeclosertoeachothertheprice
becomesmoreontheaverage,andlowers.Lerner(1994)showsthatventure
capitalisttrytotakefirmstothecapitalmarkets,duringmarketpeaks.Bythis
theytrytogetthehighestprice.Howevertherehasnotbeenmanyresearchif
IPOsperformbetterorworseduringtimesofeconomiccrisis.Thereforethis
paperinvestigatesiftheIPOperformanceisbetterduringtheeconomiccrisis
2008-2011.Toinvestigatethisresearchwilltrytoanswerthefollowing
question:IstheoneyearIPOperformance,comparedtothemarket,better
duringtheeconomiccrisisof2008-2011,thanbefore?IfIPOsperformbetter
duringtheeconomiccrisis,thanacrisisperiodwillbearelativelygoodtimeto
investinIPOs.ThiscouldleadtomoreinvestmentsinIPOsduringtimesofa
financialcrisis.
ThisresearchwillmakeuseofanOLSregressionbasedontheFamaand
Frenchfive-factormodel.Thisisarelativelynewmodel.Thereforetherehasnot
beendoneresearchontheperformanceofIPOs,usingthismodel.Thismodel
willhelpmetobetterestimatetheabnormalreturnsofIPOs,thaninprevious
researches.Becausethereareproblemsmeasuringlong-termstockreturn
(Ritter&Welch,2002).Thisnewwayofmeasuringabnormalreturnscouldlead
todifferentfindingsintheunderperformanceofIPOs.Toseewhichcompanies
wenttothestockmarket,theZephyrdatabaseisused.ThentheCRSPdailystock
pricesoftheIPOcompaniesareusedtocalculatethedailyreturns.Thedifferent
factorsofthefive-factormodelaredownloadedfromKennethFrench’swebsite.
Thesegivethe2x3dailyfactors.
FirsttheliteraturereviewwillshowtheoriesontheIPO
underperformanceandthedifferenceintheperformanceofIPOsduringmarket
peaksandnon-marketpeaks.ThenthemethodsusedtocalculatetheIPO
performancearediscussed.Afterwardsthedatausedisshown,andifthereare
problemswiththedata.Therobustnesscheckshowsifthemodelgivesthesame
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resultsduringadifferenttimeperiod.Afterwardstheresultswillbeshown,and
discussed.Atlastaconclusionisgiven,andsuggestionsforfurtherresearch
2.Literaturereview
Theprobabilitythatacompanygoespublicriseswithageandsize(Pagano,
Panetta,&Zingales,1998).Theymostlydothistogetaccesstoalternative
financemethodsinsteadofbanks(Pagano,Panetta,&Zingales,1998).Thisis
especiallyinterestingforcompanieswithhighfutureinvestments.Alsogoing
publicmakesiteasiertospotatakeovertarget.Thereforeit’seasierfora
shareholdertosellhisassets(Zingales,1995).Furthermoregoingpublicgives
diversificationopportunitiesforshareholders,anditraisestheliquidity(Pagano,
Panetta,&Zingales,1998).
Thebiggestdownsideofgoingpublicisthatitisvery
costly.UnderwritersgetapercentageoftheIPOprice,accountingcostriseand
stockexchangefeeshavetobepaid(Pagano,Panetta,&Zingales,1998).Alsothe
investorsarelessinformedaboutthestockthantheissuers.Thisleadstoa
lemonsproblem,whichleadstoadeclineintheaveragequalityoftheIPO.
ThereforeinvestorsarenotpreparedtopayahighpricefortheIPOstock.This
under-pricingleadstoabigvaluelossfortheissuer(Leland&Pyle,1977).
Despitethehighfirstdayreturns,IPOsstillhavebadlong-term
performance(Ritter&Welch,2000).WelchandWong(1998)saythatIPOfirms
trytomakethefirmlookasgoodaspossibleonpaper.Whenthefirmgoes
publictheycannolongerkeepupthe“optimistic”accounting(RitterandWelch,
2002).RitterandWelch(2002)statethatnotonlythechoiceofeconometric
modelisofinfluenceofthelongrunIPOperformance,butalsothechoiceof
sampleperiod.ThisisespeciallyduringtheInternetbubble.IPOshadinitialhigh
returns,butthebubblecollapsedandthereturnsvanished(RitterandWelch
2002).ThereforetheIPOunderperformancewasreallyhighduringthisperiod.
Fama(1998)saysthereisaproblemwiththecalculationoflong-term
stockreturns,becauseofmarketinefficiencies.Thereforeitcouldbethatthe
measuredunderperformanceisaresultofmis-measurement.BravandGompers
(2000)usetheFamaandFrenchthree-factormodel.Healreadyimprovesthe
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modelbyaddingthefactor“noequityissuedinthelast5years”insteadofthe
HMLfactor.Thisresearchwilltrytoimproveestimationsevenmorebyusingthe
FamaandFrenchfive-factormodel(2015).
Lerner(1994)foundthatIPO’s,whicharebackedbyseasonedventure
capitalist,arebetterinfindingmarketpeaks.Inexperiencedventurecapitalist
maywanttotaketherefirmpublicbeforethemarketpeak.Thiswaytheycan
signtothemarketthatthecompanyisofhighquality(Lerner,1994).Thiswould
meanthattheaverageIPOqualityisbetterifthemarketis“cold”.However
anotherexplanationisthatlessexperiencedventurecapitalist,can’tfindan
underwriterwho’swillingtotaketheirfirmtothemarketduringmarketpeaks
(Lerner1994).ThisisinlinewithSchultz(2003).HelookedatIPOsbetween
1973and1997.Hecalculatesabnormalreturnsbysubtractingtheaverage
marketreturnsbythereturnsoftheIPOs.Hesaysthatfirmsgopublicwhen,
investorsareopportunistic,andfirmscangetahighpricefortheirstock.
Becauseofthislessfirmstrytogopublicduringaneconomiccrisis,ascanbe
seeninthedataofthisresearch.
LoughranandRitter(1995)saythathighgrowthofIPOs,makeiteasyto
justifyhighopeningprice.Optimisticinvestorsbelievetheyfoundcompanies,
whicharegoingtogrowveryrapidly.Overtheyearsthepricegoesmoretothe
averageoftheoptimisticinvestorsandtherestofthemarket,thereforetheprice
drops(Ritter&Welch,2002).Duringacrisisinvestorsarelessoptimisticandthe
openingpricewillbelower.Thereforethedropinpricewillbelower,which
leadstoasmallerunderperformance.
Lowry(2003)researchedthethree-yearstockreturnof1526IPOs
between1975-1984.ListedonAmex-NYSEorNASDAQ.ShefindsthathighIPO
volumeleadstolowIPOreturns.HoweverduringtimesofHighIPOvolume,
companieswithsimilarcharacteristicsasIPOs,arealsovaluedhighbythe
market.TimesofhighIPOvaluearefollowedbylowmarketreturns.Soduring
thisperiodtheIPOperformanceisnotgood,butalsothemarketisnot
performingwell.ThereforetheIPOsabnormalperformanceisnotworseduring
aperiodofhighIPOvolume.Thiswouldmeanthereisnodifferencebetweenthe
performanceofIPOsbeforeandafterthecrisis.
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IPOstrytogopublicwhenthemarketisatitspeak(Lerner1994).Theytrytodo
this,becauseinvestorsaremoreoptimisticandwillpayahigherpriceforthe
newstock.Firmscantrytosignaltheirqualitytothemarketbygoingpublic
duringa“cold”market(Lerner1994).Thisleadstohigherqualityfirmsgoing
publicin“cold”periodthanduringmarketpeaks(Lerner1994).Thiswillleadto
lessunderperformanceduringcoldmarkets,whichisinlinewiththefindingsof
Schultz(2003).RitterandWelch(2002)findthatoptimisticinvestorsbuythe
IPOstockinhopetogethighreturns.Overtime,thepricegoestotheaverageof
theoptimisticinvestorsandtherestofthemarket.Becauseinvestorsareless
optimistic,thedifferencebetweenthemarketandtheopinionoftheoptimistic
investorsissmaller.Thisleadstoasmallerdropinprice,whichleadstoalower
underperformance.ThiswouldmeanthatIPOsperformbetter,comparedtothe
market,duringthecrisisperiodthanbeforethecrisisperiod.Thereforethe
hypothesisis:TheoneyearIPOperformance,relativetothemarket,isbetter
duringtheeconomiccrisis,thanbefore.
3.MethodologyandData
3.1.Methodology
Thereareproblemswithcalculatinglongrunstockperformance(Ritter,
2002).Becauseofthis,it’shardtodeterminehowabnormaltheIPOreturnsare
(Ritter,2002).Butbecausethispaperwilllookatashortertimeperiod,than
previousresearches,theestimationswillbelessbiased.Alsotheone-year
returnswillbeusedbecausethen,thecrisis,andthenon-crisisperiodcanbe
easilydistinguished.Ifthe3-yearreturnsaremeasured,asusedinmostpapers,
therewillbeanoverlappingtimeperiod.Timeperiodslongerapartfromeach
othercouldbeused,butthenexternalfactorswillprobablyinfluencetheresult
more,thanifthetimeperiodsclosertoeachother.
ThispaperwillmakeuseoftheFamaandFrenchfive-factormodel(Fama
andFrench,2015).Where𝑅!"isthemonthlyreturnoftheIPOportfolio.𝑅!"Is
theriskfreereturn.𝛼Isaconstant.𝑅!"Isthemarketreturn.Smallminusbig
(SMB)isthedifferencebetweenthestockreturns,withsizeabovethemedian
andbelowthemedian.Highminuslow(HML)isthedifferencebetweenreturns
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ofportfolioswithahighbooktomarketequityandlowbooktomarketequity.
Robustminusweak(RMW)isthedifferencebetweenfirmswithahighandlow
profitability.Conservativeminusaggressive(CMA)isthedifferenceinreturns
betweenhighandlowinvestmentfirms.
𝑅!" − 𝑅!" = 𝛼 + 𝐵 𝑅!" − 𝑅!" + 𝑏!𝑆𝑀𝐵 + 𝑏!𝐻𝑀𝐿 + 𝑏!𝑅𝑀𝑊 + 𝑏!𝐶𝑀𝐴 + 𝜀
ThebetaswillbecalculatedbydoingaregressioninStataonthedatasetofthe
market.Theabnormalreturnsaretherealstockpricessubtractedbythe
estimatedstockprices.Bydoingatwo-samplet-test,thesignificanceofthe
differencecanbetested.
Afterwardsthesameregressionwillbedone,butexcludingthefirstweek
returns.Thiswayhighfirstdayreturnsareexcluded.Thiscouldleadtoeven
higherunderperformance.Atwo-samplet-testwillbeused,totestifthe
differenceissignificant,comparedtothewholefirstyearreturns.
FamaandFrench(1993)foundthatexceptforthebetaonthemarket
return,alsothesizeandthebooktomarketratioissignificantinpredictingstock
returns.Becausesmallcompaniesareofahigherriskthanbigcompanies,their
returnsarehigheronaverage.ThereforeSMBwillgiveapositiverelationonthe
abnormalreturns(FamaandFrench,1993).FamaandFrench(1993)foundthat
firmswithlowalowbooktomarketratiohavea0.40%lowermonthlyreturn
thatfirmswithahighbooktomarketratio.Thisisbecausehighbooktomarket
firmstendtohavepersistentlyhighearning,whereaslowbooktomarketratio
persistentlyhavepoorearnings.Novy-Marx(2013)foundthatprofitabilityofa
companyleadstosignificantabnormalreturns.Profitablefirmshaveonaverage
alowbooktomarketratio.Thiswouldleadtolowerabnormalreturns.But
analysis,onthepremium,forcompanieswithahighbooktomarketratio,Show
thatthispremiumisnotdrivenbycompanieswithlowprofitability(Novy-Marx,
2013).Titman,WeiandXie(2004)foundanegativerelationbetweenthelevel
ofinvestmentandthestockreturn.Theyfoundthathighinvestmentcompanies
tendtooverinvestandtherebyloweringtheirstockreturns.Anotherpossibility
isthatcompaniestrytoincreasetheirstockreturnbyinvesting,whentheirstock
returnislow(Titman,Wei,&Xie,2004).Boththeorieswouldgiveagood
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explanationonwhytheinvestmentsareasignificantpredictorinstockreturns.
BecauseoftheseresearchesthedifferentfactorsintheFamaandFrenchfive-
factormodel,wouldgivecausaleffectsontheexcessreturninsteadofjust
correlations.
It’suncertainifthefactorshaveapositiveoranegativeeffectonthe
regression,becausethatdependsonthecharacteristicsoftheIPOs.MostIPOs
aresmallgrowthfirmstheHMLwillprobablybepositive.Becausesmallfirms
mostlyhavehigherreturnsthanbigfirms.IntheresearchofFamaandFrench
(2014)and(2015)theHMLisaredundantfactor.ThisisbecausetheHML
returniscapturedbytheotherfactorsinthefive-factormodel(Famaand
French,2014).Thereforethereisachancethatitdoesnothaveasignificant
influenceonthestockreturn.TheRMWisnegativeifcompaniesareinthelower
portfoliosofprofit(FamaandFrench,2014).IPOssometimeshavenegative
profitsiftheygopublic.ThereforeRMWwillprobablybenegative.Famaand
French(2014)foundthattheCMAfactorgiveanegativefactorforsmall
companieswithhighinvestments,butapositivecoefficientifthefirmsisbigand
hashighinvestments.BecauseIPOsaremostlysmallfirmsandneedtoinvesta
lottogrow,theCMAfactorwillprobablybenegative.
It’spossiblethatthereisanomittedvariablebias,becausealotoffactors
haveinfluenceonthepriceofstock.ThereforeIwilluseaRamseyresettest,to
testifthereareomittedvariables.
3.2.Dataanddescriptivestatistics
FirsttheZephyrdatabaseisusedtocheckwhichcompaniesdidanIPOon
theNYSE,betweentheyears2001-2006andbetween2008-2011.Byusingthis
timeperiod,thedot-combubblewillbeavoided.Becauseofthebubblecollapse
mostofthetechcompanieshadnegativereturns.BecausemostoftheIPO’s
duringthisperiodwheretechcompanies,istheaverageIPOreturnsarestrongly
negative.Becauseitwasabubble,thisperiodisnotrepresentativefortheIPO
performanceindifferenttimeperiods(Ritter,Welch,2002).Thecrisisperiod
usedisbetween2008and2011.Thistimeperiodisusedastheeconomiccrisis
becausethecrisisstartedin2007.Withthecollapseinvalueofmortgagebacked
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securities.AtthistimetherewereonlyproblemsinAmerica,butbecauseIuse
theNewYorkstockexchangethiswillbeagoodtimeasthestartingpoint.Iuse
2011astheendbecausemostoftheproblemswereover,andtheeconomywas
inrecovery.
Forsomestocksthereweremissingpricesinthedata,thereforedaily
returnscouldn’tbecalculated.Forthisreasonthesecompaniesaredeletedfrom
thedataset.Alsothecalculatedreturnshadreallybigoutliers.Thesearethe
resultofpennystocks.Becausesomecompanieshadstockpricesbelow$5,
thereforeasmalldifferenceinpriceleadstoabigdifferenceinthereturn.
Thereforereturnsbiggerthan50%,orsmallerthan-50%areexcluded.Thisis
stillbigfordailyreturns,butbecausepartofthisresearchisduringacrisis
period,returnsofthissizecouldbepossible.Someresearchexcludepennystock,
thisdoesimprovetheestimationoflong-termstockreturn(RitterandWelch,
2002).Howeversomeofthecompanieswithextremereturnsdidnotstartas
pennystock.Butduringthecrisistheirstockpricedroppeddramatically.But
becausetheystartedasnormalcompanieswithhigherstockprices,theywon’t
beexcludedformthesample.
Figure1:IPOreturns-riskfreerate
Source:WhartonResearchDataServices(2017)
-100
-50
050
100
150
return-rf
01jan2000 01jan2002 01jan2004 01jan2006 01jan2008 01jan2010 01jan2012date
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TheSMB,HML,RMWandtheCMAfactors,fromtheFamaandFrenchfive-factor
model,aredownloadedfromtheKennethFrench’sdatabase.Thesegivethedaily
factorsfrom2001-2011.Iffromacertaindatethefactorsareunknown,thenthe
closestdatewithknownfactorswillbeused.French(2017)usesalstocksonthe
NYSE,AMEXandNASDAQtocalculatethefactors.
Smallminusbig(SMB)iscalculatedbysubtractingtheaveragereturnof
smallcompaniesbytheaveragereturnofbigcompanies.(French,2017)The
smallcompaniesareallcompaniesunderneaththemedian,andthebig
companiesareallcompaniesabovethemarketmedian.Thesizeofthe
companiesisbasedontheirmarketvalue(FamaandFrench2015).
Thehighminuslow(HML),arethereturnoffirmswithahighbooktomarket
valueminusthereturnsoffirmswithalowbooktomarketvalue(Famaand
French2015).Therobustminusweak(RMW),arethereturnsoffirmswithhigh
operatingprofitsminusfirmswithlowoperatingprofits(FamaandFrench
2015).Theoperatingprofitabilityisnotjusttheoperatingprofitability,because
FamaandFrench(2014)alsosubtracttheinterestexpenses.Theconservative
minusaggressive(CMA),arethereturnsoffirmswithlowinvestmentsminus
thereturnswithhighinvestments(FamaandFrench2015).TheHML,RMWand
CMAarecalculatedinthesameway.Frenchmakes6portfoliosbasedonsizeand
booktomarketratio,6portfoliosonsizeandoperatingprofitand6portfolioson
sizeandinvestment(French,2017).Thetwobreakpointsareonthe30thandthe
70thpercentile(FamaandFrench2015).Thecoefficientsarethencalculatedby
subtractingthetoptwoportfoliosbythelowesttwoportfolios(French,2017).
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Table1:Descpriptivestatistics
Return-rf
(Std.dev)
Min.
Max.
Mktrf
(Std.dev.)
Min.
Max.
SMB
(Std.dev.)
Min.
Max.
HML
(Std.dev.)
Min.
Max.
RMW
(Std.dev.)
Min.
Max.
CMA
(Std.dev.)
Min.
Max.
#obser-
vations
#ofIPOs
2001-2006 -1.1355 0.027279 0.01134 0.021354 0.00907 0.000423 63,870 260
(2.18291) (0.87591) (0.48983) (0.32261) (0.4048) (0.2750)
-41.8188 -5.03 -3.16 -4.15 -2.67 -5.92
35.80218 5.43 2.58 2.39 3.01 2.32
2008-2011 -0.03545 0.03626 0.014795 -0.0139 0.0218 0.01336 42,105 166
(2.90897) (1.51516) (0.65542) (0.75680) (0.4265) (0.3049)
-49.9886 -8.95 -3.42 -4.22 -2.36 -1.67
43.61702 11.35 4.53 4.8 1.99 1.25
Totalperiod -0.69845 0.030847 0.012713 0.007347 0.01413 0.005563 106,405 426
(2.55414) (1.17239) (0.56150) (0.53905) (0.4136) (0.2873)
-49.9886 -8.95 -3.42 -4.22 -2.67 -5.92
43.61702 11.35 4.53 4.8 3.01 2.32
Source:WhartonResearchDataServices(2017)
Table2:correlationswholeperiod
returnrf MktRF SMB HML RMW CMAreturnrf 1 MktRF 0.3441* 1 SMB 0.1746* 0.3055* 1 HML 0.1104* 0.2749* 0.1035* 1 RMW -0.1601* -0.4569* -0.3156* -0.2791* 1 CMA -0.0138* 0.0106* 0.1111* 0.2023* -0.2682* 1*significancewith5%
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Thistableshowsthatallcoefficientsaresignificantlycorrelatedoverthe
wholeperiodtoeachother;thisleadstohigherstandarderrors.Famaand
French(2014)alsodescribethis.Forexamplethenegativecorrelationbetween
SMBandRMWmeans,thatbigfirmsinvestless.Thiscorrelationisalsothe
reasonthatinFamaandFrech(2014)andFamaandFrench(2015)theHML
becomesredundant.
4.Analysis
4.1.EmpiricalResultsTable3:coefficients
rm-rf
(Std.dev.)
SMB
(Std.dev.)
HML
(Std.dev.)
RMW
(Std.dev.)
CMA
(Std.dev.)
Constant
(Std.Dev.)
2001-2006 0.634802*
(0.013991)
0.439736*
(0.02214)
0.0471945*
(0.034936)
0.047195
(0.03299)
-0.26684*
(0.04741)
-1.17139*
(0.008419)
2008-2011 0.7445517*
(0.021437)
0.245362*
(0.03443)
-0.06381***
(0.03594)
-0.25185*
(0.05607)
-0.37764*
(0.06250)
-0.05657*
(0.012919)
total 0.693186* 0.370404* 0.109640* 0.05858** -0.25205* -0.72758*
(0.01332) (0.02027) (0.023681) (0.02827) (0.03910) (0.007385)
Significance:*p<0.01,**p<0.05,***p<0.10
Source:WhartonResearchDataServices(2017)
Theregressionoverthewholeperiodgivesonlysignificantfactors.Thismeans
allthefactorsshouldbeincludedintheregression.Thereforethefive-factor
modelexplainstheabnormalreturnsbetterthanthethree-factormodel.Also
thereisanegativeconstant,whichisalsosignificant.Thismeansthatoverthe
wholeperiodthereisunderperformanceoftheIPO’scomparedtothemarket.
Inthenon-crisisperiodthe,robustminusweak,isnotsignificant.Thisis
notinlinewithFamaandFrench(2015).FamaandFrench(2015)foundthat
HMLwasaredundantfactorintheirresearch.Thismeansthatintheir
regressiontheinfluenceoftherobustminusweakiscapturedbytheother
factors.
InthecrisisperiodtheHMLfactorisredundant,whichisinlinewithFamaand
French(2015).Alsotheconstantislessnegativethantheconstantbeforethe
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crisisperiod.ThereforethereseemstobelessunderperformanceofIPO’sduring
thecrisisthanbefore.
Table4:Twosamplet-test
#obs Underperformance Std.Dev.
2001-2006 63870 -1.171391 0.008419
2008-2011 42105 -0.0565663 0.012189
diff>0 Pr(T>t) 1.0000
Totestiftheunderperformanceofthetwotimeperiodsdiffers
significantly,atwo-samplet-testisconducted.Thetestshowsthatthedifference
betweenthetwotimeperiodsisbiggerthan0,whitsignificancehigherthan
99%.ThereforeH0isrejected.Sotheone-yearIPOperformanceisbetterduring
thecrisisrelativetothemarket,thanbeforethecrisis.Onaveragethe
underperformanceoftheIPO’sisnotreallyhigh.Thiscouldbeduetothehigh
first-dayreturns.Thereforearegressionwillbedoneexcludingthefirstweek
returns.
Table4:t-testcomparing1yearand1year-firstweekreturns
Coefficients Underperformance
(Std.Dev.)
Twosamplet-
test
Period 1year 1yearwithoutfirstweek Pr(T>t)
2001-2006 -1.171391 -1.175763 1.0000
(0.0084185) (0.0084523) >0
2008-2011 -0.0565663 -0.0526998 1.0000
(0.0129189) (0.0130371) <0
Total -0.7275785 -0.7299796 1.0000
(0.0073851) (0.7299796) >0Source:WhartonResearchDataServices(2017)
Thistableshowstheone-yearIPOunderperformance.Thefirstcolumn
showsthecoefficientofthewholeyear.Thesecondcolumnshowsthereturnsof
thefirstyear,excludingthefirstweek.For2001-2006asforthetotalperiodthe
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underperformanceisbiggerifthefirstweekisexcluded.Thedifferenceissmall
butthat’sbecausethefirstweekisjustasmallpartoftheperiod,soitdoesn’t
influencethe1-yearreturnbyalargeamount.Buttheydosignificantlydiffer.In
theperiodbetween2008-2011theunderperformanceissmaller,excludingthe
firstweekreturns.Thismeansthatthefirstweekreturnsareworsethantherest
oftheyear.Thisisnotinlinewiththetheory,becausealltheprevious
researchesfoundhighfirstdayreturns.It’spossiblethatinthisperiodonlythe
firstdayreturnsarehigh,butfortherestofthefirstweek,therearenegative
returns.
Table5:Ramseyresettest.
Period F-test p-value2001-2006 10.24 0.0002008-2011 47.53 0.000Total 66.38 0.000H0=Modelhadnoomittedvariablebias.
BecausetheP-valuesarereallylowtheH0isrejectedandthereisan
omittedvariable.Thiswasexpectedup-frontbecausetherearealotofdifferent
factors,whichinfluencestockprice.Toimprovetheregressiontherehastobe
donemoreresearchonthecompanycharacteristicsthatinfluencestockprices.
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4.2RobustnesscheckTotesttherobustnessofthemodel,theone-yearIPOperformanceofthefirst
twoyearsafterthecrisiswillbetested.
Table6:2013-2014regressioncoefficients.
returnrf Coef. P>|t|
MktRF 0.012239 0
SMB 0.007196 0
HML 0.004761 0.052
RMW -0.00187 0.428
CMA -0.0025 0.516
_cons 0.000176 0.771
Source:WhartonResearchDataServices(2017)
DuringthisperiodHML,RMWandCMAarenotsignificantwithasignificanceof
5%.Thismeansthatthereisnoevidencethatthefactorspredictthereturnsof
theIPOs.Anothernotablecoefficientistheconstant.Inthisregressionthe
constantispositive,whichwouldmeanthatIPOsperformbetterthanthe
market,whichistheoppositeofwhattheorypredicts.Howevertheconstantis
alsonotsignificant,sonoconclusionscanbedrawnfromthisregression.
Becausetheconstantisnotsignificant,itisnotpossibletocomparethe
underperformanceofthecrisisperiod,withthe2013-2014period.AnF-teston
RMWandCMAshowsthattheyarejointlysignificant,seetable8.SotheFama
andFrenchfive-factormodelwouldgivebetterestimationsthanthethree-factor
model.
Theinsignificantcoefficientsduringthisperiodcouldmean,thatthe
FamaandFrenchfivefactormodel,isnotagoodmodelinestimatingstock
performance.HowevertheRamseyresettestontheregressionfrom2001-2011
alreadyshowsthatthereisanomittedvariablebias.Thereforeit’spossiblethat
duringthisperiodfactorsnotincludedinthismodelhaveabiggerinfluencethan
intheperiodbetween2001-2011.
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ApossibleexplanationfortheinsignificanceoftheCMAisthattherisk
freerateis0%duringthewholeperiod.Thereforeit’scheaptoborrowand
companieswillinvestmore.Becauseofthatmanycompaniesareinvestingalot.
Thereforethedifferencebetweenthehighestinvestingcompaniesandthe
lowestinvestingcompaniesissmall.ThisleadstoasmallCMA,whichleadstoan
insignificantcoefficient.TheinsignificantRMWcouldalsobeexplainedbythe
lowinterestrates.Theinterestexpensesaresubtractedfromtheoperating
profits.Thereforecompanieswhoinvestagetloweroperatingprofits.However
becausetheriskfreerateis0%,theinterestexpensesarealsolow.Thisleadsto
areductioninthespreadbetweencompanieswithhighoperatingprofitsto
companieswithlowoperatingprofits.ThereforetheRMWissmallerandthe
factorbecomesinsignificant.TheHMLisalsoredundantinFamaandFrench
(2015)andduringthe2008-2011periodofthisresearch.Thereforeisnot
notablethatthisisalsothecaseduringthe2013-2014period.
2013-2014isashortperiod,thereforedeviationsfromthemodelareof
biggerinfluencethanifalongerperiodismeasured.Alsobecausetheperiodis
short,it’shardtogeneralizetheresults.FamaandFrench(2015)findthatthe
HMLisaredundantfactor.AndthisresearchfindsthatRMWisaredundant
factorforthe2001-2006periodandthatHMLisaredundantfactorforthe2008-
2011period.Butbecauseduringmosttimeperiodsresearchedthefive-factor
modelgivessignificantcoefficients,themodeldoespredictreturnsreasonably
well.The2013-2014timeperiodregressionshowsagainproblemswith
calculatinglong-termreturns.SoonaveragetheFamaandFrenchfive-factor
modeldoesgivegoodestimationsofthestockprices.Howeverthe2013-2014
periodshowsyouhavetobecarefuldrawingconclusionsfromtheabnormal
returns,usingtheFamaandFrenchfive-factormodel.Becausealotoffactors,
whicharenotincludedinthemodel,influencestockprices.
5.ConclusionanddiscussionInthispaperaFamaandFrenchfivefactorsregressionisused,tocalculate
abnormalreturns,offirmsoneyearaftertheirIPO,betweentheperiodof2001-
2006and2008-2011.ThispaperfindsthatIPOsunderperformcomparedtothe
17
market,forthewholeperiodasfortheseparateperiods.Thispaperalsofinds
thattheunderperformanceofIPOsislessduringthecrisisthanbefore.Thisis
linewiththetheorybecauseinvestorsarelessoptimistic,soIPOsgetless
overpriced.Alsogoodcompanieswanttosignaltheirquality,bygoingtothe
publicmarket.Sothatinvestorsknowthecompanyisdoinggooddespitethebad
economictimes.BecauseofthesmallerunderperformanceofIPOsduringthe
economiccrisis,isthisperiodarelativelygoodtimetoinvestinIPOs.
The2013-2014periodshowsinsignificantresult.It’scuriouswhyit
differssomuchfromthe2008-2011period,despitetheshorttimeperiod
betweenthem.Anexplanationfortheinsignificantfactorscouldbetheriskfree
rate,whichissetat0%.Thiscouldleadtohigherinvestmentsofmany
companies,whichleadstoareductioninthespreadbetweenthehighandlow
investingfirms.Thelowinterestratescouldalsoexplaintheinsignificanceofthe
RMW.Becauseofthelowinterestrate,theinterestpaymentsdrop,whichleads
toariseintheoperatingprofit.Highinvestingfirmsprobablyhavelow
operatingprofits.Butbecauseofthelowinterestratethespreadbetweenthe
operatingprofitsofhighandlowinvestingcompaniescouldbereduced.This
showsagaintheproblemswithcalculatinglong-termstockreturns.Althoughthe
2013-2014isashortperiod,thereforeit’shardtodrawconclusionforthewhole
model.HowevertheFamaandFrenchfive-factormodelshouldbetestedon
multipletimeperiods,totestifit’snotjustcoincidencethatthe2001-2011
periodsgivesignificantresults.
Alsotheone-yearperformanceexcludingthefirstweekisresearched.
Thisistoseeiftheunderperformancewouldbeevenbigger,excludingthehigh
firstdayreturns.Forthe2001-2006periodasforthewholeperiod,the
underperformancewasindeedsignificantlybigger.Althoughitwasjustasmall
difference.Howevertheunderperformanceofthe2008-2011periodgotsmaller
byexcludingthefirstweekreturns.Thisisnotinlinewiththetheory,becauseall
previousresearchesfoundhighfirstdayreturns.Apossibleexplanationisthat,
thefirstdayreturnsarehigh,butthereturnsoftherestofthefirstweekare
negative.
Thefirstlimitationofthisresearchisthatthereareproblemswith
calculatingabnormalreturns.ThispaperusestheFamaandFrenchfive-factor
18
model.TheRamseytestshowsthatthereisanomittedvariablebias.Thisisnot
strangebecausealotoffactorinfluencestockprices.Iftherehasbeendonemore
researchonthefactorsthatinfluencestockprices,abettermodelcouldbeused.
Thisnewwayofcalculatingstockreturnscouldleadtodifferentconclusions.
Alsoonlyonecrisisperiodisused.It’spossiblethattheunderpricingis
biggerduringdifferentcrisisperiod.Forexamplethedot.combubbleis
excluded.Thisdropinthemarketwasmainlyduetoover-pricedIPOs.Soit’s
possiblethatIPOsperformworseduringadifferentcrisis.Furthermorethe
period,towhichthecrisisperiodiscompared,isjustafterthedot-combubble.
Thereforeit’spossiblethatinvestorsarenotoptimisticaboutIPOs.Maybethe
IPOswouldperformevenbetterduringthecrisisperiod,iftheyarecomparedto
adifferentperiod.OnlyIPOsontheNYSEareresearched.It’spossiblethatthe
performanceofIPOsisdifferentonotherstockmarkets.
FuturestudiescouldtrytomeasuretheIPOperformancewithdifferent
waysofmeasuringabnormalreturns.Alsotheyshouldcheckmultiplecrisesto
seeiftheriseisIPOperformanceisnotjustlimitedtothiscrisis.
19
6.AppendixTable7:twosamplet-testcomparing2001-2006with2008-2011
Table8:F-testonCMAandRMWonthe2013-2014period(1)CMA=0(2)RMW=0F(2,49936)=0.84Prob>F=0.4308
Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000 Ha: diff < 0 Ha: diff != 0 Ha: diff > 0
Ho: diff = 0 Satterthwaite's degrees of freedom = 65587.9 diff = mean(x) - mean(y) t = -1.6e+04 diff -1.114825 .0000712 -1.114964 -1.114685 combined 105,975 -.7284592 .0016761 .5456323 -.7317444 -.7251741 y 42,105 -.0565663 .000063 .0129189 -.0566897 -.0564429 x 63,870 -1.171391 .0000333 .0084185 -1.171456 -1.171326 Obs Mean Std. Err. Std. Dev. [95% Conf. Interval] Two-sample t test with unequal variances
20
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