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5 years ago

IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

The first objective of

The first objective of our study is to provide an out-of-sample replication of U.S. evidence. Our sample consists of 243 companies listed between 1991 and 1998 on the Second Marché and Nouveau Marché, obtained by exhaustive enumeration. We use a variety of benchmarks to adjust stock price performance for risk. We find that on average French IPOs do not underperform relative to benchmarks of similar risk. Our finding is consistent with Brav and Gompers (1997), who argue that the disappointing stock price performance of U.S. IPOs largely disappears once proper risk adjustments are introduced. We also analyze the cross-section of IPO performance, introducing a number of ex ante variables. None of them exhibits significant explanatory power in our sample over the whole 36-month period, suggesting that no subcategory of IPOs systematically underperforms (or overperforms) -- at least when the subcategory is defined using information known at the time of the IPO. The normal long-run stock price performance of IPOs suggests that they are correctly priced initially, and that initial investors’ expectations are reasonable. The second objective of our study is to ask whether these expectations are embodied in earnings forecasts issued at the time of the IPO. We look at earnings forecasts published in the IPO prospectuses, as well as forecasts by financial analysts. We distinguish between financial analysts affiliated with the bank taking the company public, and unaffiliated analysts. We find that prospectus forecasts and forecasts issued by analysts affiliated to underwriters are more optimistically biased than forecasts issued by unaffiliated financial analysts. Analysts forecasts for IPO companies are not more biased than forecasts issued for non-IPO firms, suggesting that accuracy incentives may be high for analysts dealing with newly listed companies. Finally, we find that analysts’ forecast errors are the main driver of IPOs’ stock price performance. Thus, analyst forecasts at or around Initial Public Offerings appear to embody investors’ expectations at the time of the IPO. The paper is organized as follows: section 2 describes our data. Section 3 presents descriptive statistics on our sample. Section 4 presents our results on long-term stock price 4

performance. Section 5 analyzes the ex ante determinants of IPO stock price performance. Section 6 focuses on the ex post determinants of IPO stock price performance, specifically the post-IPO earnings record. Section 7 concludes. 2. Data sources and description Our sample consists of 243 Initial Public Offerings (IPOs) that were conducted in France between January 1991 and July 1998. We included all IPOs in that period, with the exception of privatized companies and a few large IPOs that occurred on the main exchange and differ in size with other offerings in our sample 1 , and we focus on all the IPOs that took place on two exchanges: Le Second Marché (SM), which was created in 1983 as a transitory access to the stock market for small companies that did not have access to the larger exchanges, and Le Nouveau Marché (NM), which was created in 1996 to attract young companies with a short history, typically high-technology start-ups. We use 3 types of variables: - long-term performance variables, - ex-ante firm-specific variables, - post-IPO earnings and earnings forecasts. Table 1 gives a list and a description of each of those variables by type. Some of them are self-explanatory. The others are described below. Long-term performance is calculated for each firm using the paris Bourse daily stock price database. We use Paris Bourse MIDCAC and industry indices as benchmarks, as well as comparison portfolios à la Brav and Gompers (1997). Those portfolios are constructed using all the non-IPO firms listed on the Second Marché and Marché au Comptant. 5

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