Aftermarket performance of initial public offerings and its determinants in Pakistan

Abstract

The aftermarket performance of initial public offerings (IPOs) is considered a puzzling phenomenon due to its abnormal returns in the short—run as well as in the long—run. In general, an IPO firm generates abnormal positive returns in the short-run and abnormal negative returns in the long-run, which are considered as direct and indirect losses of money for the issuing firm as well as for the investors. Previous studies mainly focused on the firm—and-offerings, and country—specific characteristics to determine the IPO’s aftermarket performance. However, very little attention has been given to examining the direct impact of industry—specific characteristics on IPO’s aftermarket performance. Therefore, this study aims at determining the aftermarket performance of IPOs and its determinants at industry-specific characteristics along with firm-and—offerings, and country-specific characteristics. This study contributes to the existing body of literature from three distinctive ways. Firstly, this study investigated the impact of firm—and—offering specific, and country—specific characteristics in addition to industry—specific characteristics on the IPO’s short—run performance. Secondly, this study examined the impact of firm-and-offering level characteristics in addition to industry level and country level characteristics on the IPO’s long-run performance. Thirdly, this study highlighted the relative importance of each level factors that best explains the IPO’s short—run and long-run performance. An analysis of 77 non-financial IPO’S firms listed on the Pakistan Stock Exchange (PSX) was conducted from the period of 2000 to 2015. This study utilized three estimators namely ordinary least square, logit, and probit regression to determine the both IPO’s short-run and long-run performance. To examine the relative importance of each level factors, this study employed artificial nested testing procedure and nested statistics. The results demonstrated that the industry—specific factors such as munificence, dynamism, and industry concentration as well as country—specific characteristics such as rule of law, corruption perception, and political risk play an important role in determining the IPO’s short—run and long—run performance. Furthermore, the industry—specific and country—specific characteristics explained about 7% and 9% of the variation in the level of IPO’s short-run performance (underpricing), respectively. However, in the long-run, about 8% and 19% of the variations in the level of underperformance were caused by industry—specific and country-specific characteristics, respectively. The outcome of this study provides policy direction and practical implications for firms and investment banks to better understand the behavior of IPO’s aftermarket performance in protecting the issuing firms and investors from potential losses.