Red flags for IPO downfalls in New Zealand (2017)
Purpose: The strong performance of New Zealand’s equity market and the Government’s efforts to encourage small investors to invest in initial public offering (IPO) firms raises two questions: should retail investors invest in IPO offers and what types of IPOs are worth buying in the long term? The paper aims to discuss these issues.
Design/methodology/approach: The authors construct buy and hold equally weighted portfolios of IPOs and peers based on sales forecast, market capitalisation, and price-to-book ratio. The authors employ four benchmark-adjusted performance measures: cumulative average abnormal return (CAR), holding period return difference, wealth relative, and excess return (α).
Findings: IPOs underperform their peers over the medium and long term, with a five-year CAR ranging between −6.4 and −19.7 per cent. IPOs listed post-GFC show inferior benchmark-adjusted performance with a statistically significant average monthly CAPM α of −1.07 per cent (vs −0.13 per cent for pre-2009 IPOs). Over a five-year horizon, mature IPOs, IPOs with high market cap, high sales forecast, high leverage, low price-to-book ratio, and positive earnings forecast outperform other IPOs. Small IPOs or those with a small degree of leverage exhibit the worst five-year CAR ranging between −30.2 and −49.1 per cent. Of all IPOs examined, large firms, well-established firms, and value firms achieved positive five-year CARs of between 6.6 and 17.5 per cent.
Practical implications: The results are useful for retail investors and financial advisors in making sensible investment decisions.
Originality/value: This study is the first to utilise book-to-market and sales forecast to construct peer samples and to identify the red flags for IPO downfalls in New Zealand. It covers the longest sample period (1991-2015) in New Zealand’s context.
CitationDang H, Jolly M (2017). Red flags for IPO downfalls in New Zealand. Managerial Finance. 43(9). 1034-1051.
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KeywordsIPO; New Zealand; Initial public offering; Benchmark-adjusted performance
ANZSRC Fields of Research35 - Commerce, management, tourism and services::3502 - Banking, finance and investment
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