Title
Performance and Efficiency Dynamics of Initial Public Offerings in Pakistan Sector-wise Analysis Focus.
Abstract
In this study performance and efficiency of IPO firms listed on Karachi Stock Exchange from 2000 to 2012 is analyzed. The main objectives include; to provide insights of the underpricing (first trading day) of IPOs, to find out the determinants of underpricing in the light of asymmetric information and signaling theories, to provide insights of the long run IPO performance, analysis and comparison of the efficiency of IPOs and especially comparison on sectoral basis in the pre and post period of IPOs.
The results indicate that the level of underpricing is also observed in KSE. In this study initially 83 IPO firms are analyzed for underpricing analysis covering the period of 13 years from year 2000 to 2012. For long run performance, the sample is reduced to 61 IPOs to cover the period of three years after the listing. The level of underpricing with regard to marked adjusted model is found to be 28.28% for the full sample of 83 IPOs, showing that investors can make a market adjusted profit of 28.28% while investing in the new issues of the firms. The profit opportunity for the day traders is also observed. The year-wise analysis of underpricing shows that the overall amount of level of underpricing decreased over the years, however, year 2007 has shown highest level of underpricing. Further, the level of underpricing is observed in all the sectors except equity investment instruments, technology hardware and equipment and personal goods.
The risk adjusted performance is also measured with the help of four models by using matched firms. The selection of matched firms as true proxy of IPO firms is validated by tracking error and t statistics. The level of underpricing is observed to be 39% or greater on the basis of the entire five models for reduced sample. All the five models on average gave some consistent and significant results. The amount of level of underpricing increases accounting for taking more risk factors size, value and momentum. Further, the results indicate that the choice of model does not matter while measuring the risk adjusted returns of IPO firms on first trading day.
The determinants for level of underpricing are observed in the KSE in the light of asymmetric and signaling theories. The regression analysis is made to explain these determinants of level of underpricing with the help of Ex-Anti, Market Capitalization, Incidence of secondary market issues, Market Volatility, Offer Size, the proportion of shares offered to general public, Over / Under Subscription and Price Earnings ratio variables. These results validate the prior theories.
The long run performance of IPOs is measured by using CARs, BHARs, and Jensen’s alpha through CAPM, 3-FF and 4-F models for different time horizons after the period of three years of going public. Considering the volatile nature of the KSE, performance is measured on weekly and fortnightly basis in addition to monthly basis. The results suggest that IPOs do not sustain their initial level of underpricing and provide investors with negative abnormal returns over a long period of one to three years after listing. The investors earn market adjusted negative returns as well as risk adjusted negative returns accounting for market, size, value and momentum factors. The results also validate the misspecification of model in KSE.
The amount of level of underperformance is increased in BHARs model as compared with the CARs model. In all the regression models with regard to CAPM, 3-FF and 4-F, Jensen’s alpha is observed to be negative but insignificant under monthly, fortnightly and weekly basis analysis. In the analysis of GCT regression model, the Jensen’s alpha is found to negative and significant under the three level of maturity of firms showing the significant underperformance of IPOs. In all the three cases of maturity levels, the risk adjusted performance marginally found to be higher from 1st to 2nd level and then 2nd to 3rd level of maturity by -1.339%, -1.154% and -1.121% respectively after the period of three years.
To measure the efficiency of IPOs in pre and post IPO window MPI under DEA is used in three stages according to Zhoo (2001) methodology. In first stage (profitability), the number of employees, total assets and equity of sample IPOs used as input variables while total revenue and profit after taxes used as output variables. In second stage (marketability), total revenue and profit after taxes of sample IPOs used as input variables while earning per share, return to investors and market value of IPO firms used as output variables. In third stage (overall), the input of 1st stage and output of 2nd stage variables are used. The overall efficiency scores of IPO firms remain dismal as the percentage of optimum level of IPO firms remain between 5% and 20% in all the three stages in pre and post IPO. In the analysis of broader categories of sectors; private, SOEs, manufacturing, financial, other services sectors, the results of DEA model of three stages suggest that neither of the sector is CRS efficient nor VRS efficient in pre and post IPO. Even the efficiency scores are decreased in post IPO after one year. However, SOEs showed some better efficiency than private IPO firms. The overall results of declining trend in total productivity growth of IPOs after three years’ period in KSE are observed. and it was accordance with the Alanzai (2010) and Gao and Li (2013) studies. The overall results suggest that, after acquiring further resources of equity, assets and addition of employees, IPO firms did not improve their efficiency level after three years of IPOs.