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IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

Each method has pros

Each method has pros and cons (see for instance Barber and Lyon (1997) or Brav and Gompers (1997) for a discussion). CARs result in more conservative performance estimates, and assume periodic portfolio rebalancing. BHRs tend to magnify long-term performance. Equally critical is the choice of the performance benchmark. We use three benchmarks: the MIDCAC index, a measure of the performance of French medium-sized companies; industry indices provided by the Paris Bourse; and comparison portfolios. We think of the MIDCAC results only as a first pass at the data, as company characteristics of index firms are quite different from IPOs’ characteristics. Industry indices suffer from an opposite problem: the weight of recent IPOs is large in most of them, thus biasing the results toward the null hypothesis of no abnormal performance. We put most faith in performance calculations involving comparison portfolios. We use 250 seasoned (i.e. non-IPO) companies listed on the Marché Comptant over our study period. For each year we break down these companies into four groups based on book-to-market ratio, and four groups based on size. Combining these two criteria, we obtain 16 benchmark portfolios. At the beginning of each year each of our sample IPOs is matched to one of those portfolios. In this fashion we control for book-to-market and size effects, as in Brav and Gompers (1997). Figure 1 (panels A to C) presents our results (mean and median adjusted performance) over a 36-month horizon for CAR and BHR adjusted returns, and our three benchmarks 6 . Consistent with the previous literature, long-term risk-adjusted performance is very sensitive to the mode of calculation of long-term returns and to the choice of benchmark. Figure 1-Panel A presents average performance. The only measures for which we observe a negative performance are the ones that use industry benchmarks. This may come from the fact that most IPOs occurred in dynamic industries characterized by high market returns. Weighted average long-term performance (Figure 1-Panel B) is better than the non-weighted one, confirming Brav and 10

Gompers (1997)’s finding that poor long-term performance is concentrated among small companies. Finally, we notice (Figure 1-Panel C) that whichever measure and horizon we consider, average performance is generally better than median performance. This means that in the long- run the over-performance of “big winners” is larger, in absolute value, than the under- performance of “big losers”. The cross-sectional variation in performance is large, and whatever horizon we consider, not all of the adjusted performance measures turn out to be statistically different from 0. However, some results, like the industry-adjusted performance over one year or more are significantly negative at conventional levels, but significance is probably over-estimated due to clustering among IPOs. Thus, we are unable to reject the null-hypothesis that on average, French IPOs are correctly priced at the offering – or at least perform similarly to several reasonable benchmarks. 5. The cross-section of IPO stock price performance: ex ante factors We have established that French IPOs perform normally as a whole. We now ask whether certain categories of IPOs exhibit abnormal performance. We regress the adjusted performance of French IPOs (over 6, 12, 18, 24, 30 and 36 months) on a variety of variables that were known to investors at the time of the offering. The null hypothesis of market efficiency predicts that the coefficients on these variables should not be significantly different from 0. An alternative hypothesis is that the market systematically overprices or underprices certain types of offerings. We introduced the following independent variables in our analysis: � age: as noted above, until recently, IPOs in France usually involved mature companies, whose founders wished to cash out. Lately, young startups have started going public just a 6 IPOs that occurred in 1998 did not have a 36-month history at the end of 2000. Consequently, the long-term 11

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