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IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

are correlated with

are correlated with some variables, like short-term return (10-day underpricing) and market conditions. This is consistent with previous literature, which shows that the number of equity offerings is typically correlated with variables that reflect the “hotness” of the stock market (See for instance Loughran and Ritter (1995)). For some variables, changes can be explained by institutional changes in the French stock market: the creation of the Nouveau Marché in 1996 has a clear impact on some variables. The firms that go public on this market are typically small, with a short history and high growth potentials. These characteristics are reflected in the age, book-to-market or size variables, which have decreased in the last years of the 1991-1998 period. We also notice that the percentage of shares created during the IPO has increased between 1991 and 1998. This is not surprising, since the firms that choose the Nouveau Marché typically need capital to pursue their development, and always create new shares when they go public. To summarize somewhat abruptly the recent changes in the French stock markets, the firms that go public are now generally young and small. They go to the market because they need capital to finance their development, as the reason for going public variable shows. On the contrary, firms that went public at the beginning of the period were already established, with large size and high book-to-market ratio. However, we do not see very clearly an increasing involvement of capital-venture funds in the IPO market, which might be suggested by the recent trends in this market. As the pre-IPO shareholders variable shows, the firms that go public are still predominantly family owned. In Table 2-Part B, splitting by exchange allows us to identify more clearly the differences between firms that go public on the Nouveau Marché and the ones that choose the Second Marché. Our previous remarks are confirmed: Nouveau Marché companies are typically smaller, younger, with smaller book-to-market and larger long-term debt ratios. It is also clear, when we (1999). 8

look at the % of new shares created and reasons for going public variables, that Nouveau Marché firms predominantly come to the market because they need cash to finance their development 4 . When we compare the two exchanges, we also notice that the initial return and market conditions variables are much larger on Nouveau Marché. This effect almost disappears when we control for IPO years. Indeed, the last 3 years in our 1991-1998 period are characterized by large values for those two variables. 4. Do French IPOs underperform? We examine the stock price performance of French IPOs over a three-year period, and ask whether they underperform in the long run. The results of long-term performance studies are very sensitive to methodological choices. We take this robustness issue seriously and present our results using a variety of methods. Long-term performance can be computed using buy-and-hold returns (BHR) or cumulative abnormal returns (CAR): BHR = τ τ ∏ [ 1 + Rit ] − ∏[ 1 + E( Rit ) ] iτ t= 1 t= 1 iτ τ = ∑ t= 1 it CAR AR where ARit=Rit - E( Rit ), BHRiτ and CARiτ are calculated for company i between IPO date + 10 trading days 5 and τ, Rit is the return for company i at date t, and E( Rit ) is the expected return for company i at date t, i.e. the return of company i’s benchmark over the same period. 4 Legal requirements explain those differences: candidates to the Nouveau Marché must create new shares at the time of their IPO and their owners can not sell their shares for a given period of time. However, our previous remarks are still valid, since the market on which a firm gets listed is a choice variable. 5 We choose a 10-day period to get rid of the short-term effects following the IPOs (table 2-Part A exhibits an average 10-day underpricing of 17.5%. In previous studies, the authors generally choose a 1 day period (see for instance Ritter (1991)), but in the U.S., IPO firms always reach their “equilibrium price” after a few hours, whereas in France, it often takes several days. This is due to different quotation rules in the first days of trading and also most probably to a difference in liquidity between the French and American exchanges. 9

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