Returns on initial public offerings (IPOs) on the Johannesburg Securities Exchange (JSE): success and failure patterns
Neneh, Brownhilder Ngek
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Initial Public Offerings (IPOs) offer a fresh source of capital that is vital to the growth of the company and provides the company and existing shareholders a liquid market for their shares. An IPO renders investors an opportunity to share in the rewards of the growth of the company. However, empirical evidence indicates that IPOs have a high level of initial underpricing and poor long run performance. The high rate of initial underpricing is detrimental to both the company and existing shareholders since they are not able to attract the much needed capital to either finance their investment projects or to harvest as a means to get out of the business and ideally reap the value (cash flow) from their investment. Also, the long run underperformance of IPO shares hurts the investors, since they do not get an opportunity to earn superior long run returns from their investments. The high rate of initial underpricing and long run underperformance have been accompanied by high failure rates and low success rates of IPOs all around the world. This has resulted in IPO companies earning very poor long run returns, and has led to a loss of confidence from investors and cast a pall on the IPO market. Investors typically have very little information about the companies going public and their behavior in early trading is conditioned by basic information. Because of uncertainty about the value of the company, asymmetric information exists between informed and uninformed investors. This as a result has placed investors in a challenging position, where they find it difficult to get sufficient information that can enable them make informed decisions. Consequently, most uninformed investors end up with a bulk of the least desirable shares, yielding poor long run returns (Asma, 2010:9). Thus, in order for investors to maximise their returns, there is a need to critically improve the IPO selection process. In improving the IPO selection process, several factors and characteristics have been identified to be key determinants for predicting IPO returns, and IPO success and failure, although with contradicting results. Therefore, to encourage stock market investment on the JSE, there is need to critically find out which IPO characteristics can be used to predict IPO returns on the JSE and differentiate between successful and failed IPO companies. The primary objective of this study was to find out which IPO characteristics can be used to predict IPO returns and explain the differences in the success and failure patterns of IPO companies on the JSE. The argument of this study was that there are some IPO characteristics which have been identified to be key determinants for predicting IPO returns, and IPO success and failure. A total of 313 IPO companies listed on the JSE from 1996-2007 were used in this study. Secondary data was obtained from McGregor-BFA database. The statistical analysis used included descriptive statistics, frequencies, cross-tabulation, chi-square, ANOVA, t-test, principal component factor analysis (PCA), correlation analysis, multiple regression analysis and Structural Equation Modeling (SEM).