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.

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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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