The long-term performance of failed Initial Public Offerings (IPOs) on the Johannesburg Stock Exchange (JSE)
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Date
2016
Authors
Harvey, F. N.
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Afrikaans: Een van die oudste en gewildste frases in die besigheidswêreld is: "Die enigste manier om te oorleef is om te groei" (Audretsch en Lehmann, 2005: 6). Maar dikwels is die behoefte om te groei groter as die finansiële hulpbronne wat beskikbaar is om die verlangde groei te akkommodeer. Een van die populêrste maniere om nuwe kapitaal in te samel om 'n Initial Public Offering (IPO) uit te reik. Draho (2004: 1) definieer n IPO as die proses waar die aandele van 'n private maatskappy beskikbaar gestel word vir openbare beleggers vir verhandeling op die aandelemark.
Gao, Ritter en Zhu (2012), beskryf die toenemende mislukking van IPOs as 'n probleem in die IPO "ekosisteem" en ag die IPO mark as "gebroke". Fama en French (2004) beweer dat daar 'n verandering in IPO karaktereienskappe oor die jare was. Alle aanduidings is dat die internationale IPO mark verswak rakende kwessies soos underpricing, negatiewe langtermyn opbrengste, mislukking en die aantal nuwe IPOs wat op die beurs lys. Die primêre doel van hierdie studie is om die prestasie van 347 IPO maatskappye wat op die Johannesburgse Effektebeurs (JSE) gelys het van 1996 tot 2007 te bestudeer.
Die hoofdoel van hierdie studie is om langtermyn-beleggers te help in hul IPO keuringsproses deur die melding van faktore en eienskappe wat hulle kan help om te onderskei tussen potensieel mislukte en suksesvolle IPO maatskappye. 'N Beduidende negatiewe verhouding was gevind tussen mislukking en posetiewe langtermein opbrengstes. Daar is gevind dat mislukte IPOs 'n gemiddelde BHAR van -60,69% gehad het. Ander maatskappye, wat oorleef, gedenoteer (vir ander redes as mislukking) of saamgesmelt het, het 'n gemiddelde BHAR van -19,52% gehad. Suksesvolle maatskappye het 'n gemiddelde BHAR van -3,26% gehad. 'N Kwantitatiewe navorsingsbenadering is aangeneem. As gevolg van skewe data was natuurlike logaritmiese transformasies op die data uitgevoer met 'n Z-waarde van meer as +/- 2.58. Ook, alle relevante waardes was aangepas vir inflasie wat die vergelyking van opbrengstes van die data oor verskillende tydperke meer betroubaar maak. Al die maatskappye op die JSE was verdeel in ses sektore.
Met betrekking tot die bevindings in die data-analise sal die volgende aanbeveel aan beleggers gemaak word om in staat wees om hoë risiko IPOs en potensiële swak langtermyn presterend IPOs te identifiseer. Met betrekking tot sikliese markte, beleggers moet veral versigtig wees wanneer 'n IPO wat lys tydens 'n warm mark periode. Met betrekking tot die bord (Main board of Altx) waar die IPO lys, was dit gevind dat meeste maatskappy wat lys op die AltX misluk en ook die slegste langtermyn prestasie getoon het. Met betrekking tot die sektor waarin die maatskappy lys, beleggers word aanbeveel om sektore wat hoë volumes van nuwe maatskappye wat lys ervaar te vermy, veral gedurende warm mark te vermy. Dit was ook gevind dat maatskappye met n kleiner ouderdom swakker presteer oor die langtermyn en meer waarskynlik was om te misluk. 'N aanvanklike aanbod prys van 175,97 Suid-Afrikanse sent en kleiner en ‘n lysings grootte kleiner as R232.43 miljoen verhoog die kaanse van swak langtermyn opbrengste en mislukking.
Die moontlikheid van swak langtermyn opbrengste sowel as IPO mislukking word verhoog wanneer die dag een MAAR 136,47% of meer is. Beleggers word dus aanbeveel om al die mark faktore, die maatskappy eienskappe en aanvanklike aandeelprys bewegings in ag te neem wanneer 'n belegging besluit geneem moet word, aangesien dit hulle sal help om potensiële mislukte IPO maatskappye te identifiseer met swak langtermyn opbrengstes.
English: One of the oldest and most popular phrases in business is: “The only way to survive is to grow” (Audretsch and Lehmann, 2005:6). However, more often than not the need to grow exceeds the financial resources available to accommodate the desired growth. One of the most popular methods to raise new capital is to issue an Initial Public Offering. Draho (2004:1) defines an Initial Public Offering (IPO) as the process where the shares of a private company become available to public investors for trading on the stock market. Gao, Ritter and Zhu (2012), describes the increasing failure of IPO listings as a problem in the IPO “ecosystem” and deem the IPO market as “broken”. Fama and French (2004) claim that there has been a change in IPO characteristics over the years. All indications are that the IPO market internationally has deteriorated regarding issues such as underpricing, long term underperformance, failure and the number of IPO listings. The primary objective of this study is to assess the long-term performance of 347 IPO companies that were listed on the Johannesburg Stock Exchange (JSE) from 1996 to 2007. A quantitative research approach was adopted. Because of skewed data natural logarithmic transformations were performed on data with a Z-value exceeding +/- 2.58. Also, all relevant values were adjusted for inflation which made comparing the output of the data over different time periods more reliable. All the industries on the JSE will be divided into six main sectors, namely: basic material, consumer goods, industrial, financial and real estate, electronic and lastly venture capital The main purpose of this study was to assist long-term investors in their long-term IPO investment selection process by presenting them with factors and characteristics which can assist them in differentiating between potentially failed and successful IPO companies. A significant negative relationship was found between failure and BHAR. It was found that failed IPO displayed an average BHAR of -60.69%. Other companies, which include surviving, delisted (for reasons other than failure) or merged IPOs, noted to have an average BHAR of -19.52%. Successful companies displayed an average BHAR of -3.26%. Taking the findings of this study into consideration the following was recommended to investors to be able to identify IPOs with high failure risk and potential poor long-term performance. With regards to cyclical markets, investors need to be particularly cautions when investing in an IPO which lists during a hot market period. When considering the board of listing, the AltX proved to have the most company failures as well as the worst long-term performance. With regards to the sector of listing, it was recommended to avoid sectors which experience high volumes of listings. It was also found that companies with a smaller age before listing displayed worse long-term underperformance and were more likely to fail. An initial offer price of below 175.97 cents and an issue size smaller than R232.43 million greatly improves the chances of poor long-term performance and company failure. The possibility of poor long-term performance as well as IPO failure is also increased when the day one MAAR is 136.47% or greater. Therefore, it is recommended to investors to take all the market factors, company characteristics and initial share price movements mentioned above into consideration when making an investment decision, as it will assist them in being able to identify potential failing IPO companies with poor long-term performance.
English: One of the oldest and most popular phrases in business is: “The only way to survive is to grow” (Audretsch and Lehmann, 2005:6). However, more often than not the need to grow exceeds the financial resources available to accommodate the desired growth. One of the most popular methods to raise new capital is to issue an Initial Public Offering. Draho (2004:1) defines an Initial Public Offering (IPO) as the process where the shares of a private company become available to public investors for trading on the stock market. Gao, Ritter and Zhu (2012), describes the increasing failure of IPO listings as a problem in the IPO “ecosystem” and deem the IPO market as “broken”. Fama and French (2004) claim that there has been a change in IPO characteristics over the years. All indications are that the IPO market internationally has deteriorated regarding issues such as underpricing, long term underperformance, failure and the number of IPO listings. The primary objective of this study is to assess the long-term performance of 347 IPO companies that were listed on the Johannesburg Stock Exchange (JSE) from 1996 to 2007. A quantitative research approach was adopted. Because of skewed data natural logarithmic transformations were performed on data with a Z-value exceeding +/- 2.58. Also, all relevant values were adjusted for inflation which made comparing the output of the data over different time periods more reliable. All the industries on the JSE will be divided into six main sectors, namely: basic material, consumer goods, industrial, financial and real estate, electronic and lastly venture capital The main purpose of this study was to assist long-term investors in their long-term IPO investment selection process by presenting them with factors and characteristics which can assist them in differentiating between potentially failed and successful IPO companies. A significant negative relationship was found between failure and BHAR. It was found that failed IPO displayed an average BHAR of -60.69%. Other companies, which include surviving, delisted (for reasons other than failure) or merged IPOs, noted to have an average BHAR of -19.52%. Successful companies displayed an average BHAR of -3.26%. Taking the findings of this study into consideration the following was recommended to investors to be able to identify IPOs with high failure risk and potential poor long-term performance. With regards to cyclical markets, investors need to be particularly cautions when investing in an IPO which lists during a hot market period. When considering the board of listing, the AltX proved to have the most company failures as well as the worst long-term performance. With regards to the sector of listing, it was recommended to avoid sectors which experience high volumes of listings. It was also found that companies with a smaller age before listing displayed worse long-term underperformance and were more likely to fail. An initial offer price of below 175.97 cents and an issue size smaller than R232.43 million greatly improves the chances of poor long-term performance and company failure. The possibility of poor long-term performance as well as IPO failure is also increased when the day one MAAR is 136.47% or greater. Therefore, it is recommended to investors to take all the market factors, company characteristics and initial share price movements mentioned above into consideration when making an investment decision, as it will assist them in being able to identify potential failing IPO companies with poor long-term performance.
Description
Dissertation (M.Com.(Business Management))--University of the Free State, 2016
Keywords
Initial Public Offerings, Johannesburg Stock Exchange, Alternative exchange, Long-term performance, Initial underpricing, Failure, Success, Company characteristics, Cyclical markets