This paper assesses the comparative impact of the 2007 global financial crisis on the short and long-term performance of initial public offerings (IPOs) in the Asian-Pacific emerging markets of Thailand, China, South Korea, and Malaysia. Our results indicate that the short-term performance or underpricing of Thai IPOs increased from 19% to 44% between the pre-crisis and post-crisis periods. IPOs in each of the three other emerging markets experienced a reduction in underpricing after the financial crisis. While our results are consistent with previous IPO research, the degree of underpricing in each emerging market exceeded the levels found in studies of IPOs in developed countries. In terms of the long-term performance of IPOs, our results suggest that IPOs in Thailand, China, and South Korea performed better in the post-crisis period, while Malaysian IPOs performed worse. Our overall findings suggest that the 2007 financial crisis affected IPO performance and economic growth in each of the markets studied.
An initial public offering (IPO) is a process by which a private company makes its first sale of shares to the general public with the assistance of an investment bank. An issuer sells its shares to an investment bank (the “underwriter”) who then re-sells the issuer’s shares to the public, via a stock exchange. IPO offerings are often underpriced since a share’s offer price (the price offered to the company by the underwriter) is likely to be lower than its closing price on the first day of trading. If the difference between these two price points is multiplied by the number of shares sold the resulting amount equals the money “left on the table” by the issuing company. During the 1990s, U.S IPO issuers paid $13 billion in fees to underwriters but left more than $27 billion on the table [
Despite this previous work, Yong [
Event study methodology is used to evaluate the short-term and long-term performance of IPOs in each country using 1 day and 36 month event windows, respectively. Short-term performance is measured using the market-adjusted abnormal return, and long-term performance is calculated using the cumulative average market-adjusted return. The total numbers of observations in each country ranged from 220 to 1,300 observations and include ten years of IPO data that cover the period from 1st January 2003 to 31st December 2012.
The results of this study suggest that the short-term performance or underpricing of Thai IPOs increased from 19% to 44% between the pre-crisis and post-crisis periods. In contrast, each of the three other emerging markets studied experienced a reduction in IPO underpricing after the financial crisis. In China, underpricing decreased from 114% to 41.5%, in South Korea it declined from 43.7% to 27.9%, and in Malaysia it fell from 30.1% to 11.3%.
In terms of the long-term performance of IPOs, the results of this study suggest that in Thailand, China, and South Korea, IPOs performed better in the post-crisis period, while Malaysian IPOs performed worse. The 36 months CARs for IPOs in each country during the pre-crisis and post crisis periods were: Thailand 7.5% and 43.1%, China 5% and 25%, South Korea 18.9% and 50.5%, and Malaysia −25.8% and −30.9%.
The rest of this study is structured as follows: section two critically evaluates the theoretical framework of short-term performance (underpicing) and long-term performance of IPOs. In addition it presents the empirical evidence of short-term and long-term performance of IPOs in each of the four emerging Asian-pacific countries. Section three discusses the sample data selection procedure and the methodology used to investigate this study’s research objectives. Section four presents the research findings and a final section concludes this paper.
This section critically evaluates the existing theoretical and empirical literature on IPOs with a specific focus on the issues of short-term (underpricing) and long-term performance of IPOs.
The “abnormal” positive return achieved during the first trading day of an IPO has been an intriguing phenomenon for decades. Ljungqvist [
There are many theoretical paths in the relevant literature trying to interpret IPOs underpricing. Information asymmetry between the market participants in IPOS is a key element for the majority of the different theoretical explanations offered.
More recently, Rock [
When a firm goes public, there are normally three main participants in this process: the issuing firm, the underwriter (investment bank), and the investors. In an asymmetric information model, it is believed that information is not equally shared among the three participating groups. In other words, certain parties have more information than the others. Under this theoretical model, investors are classified into two groups: informed and uninformed investors. Rock [
In a model devised by Baron [
This theory suggests that underpricing can be partly explained by reputation of the underwriting institution. As underpricing is affecting “ex-ante” uncertainty, issuing firms aim to hire reputable underwriters. Beatty and Ritter [
Nevertheless, the underwriter reputation theory is challenged by the inconsistency of its predictions. For example, Cooney, et al. [
This theory suggests that owners of issuing firms ensure that IPOs are oversubscribed [
Booth, et al. [
In the United States of America (USA), the Securities Act of 1933 requires that all signatories to a prospectus are liable for any material omissions within it. As a result, Tinic, et al. [
However, the lawsuit avoidance theory is criticised by other authors. Drake, et al. [
Dandapani, et al. [
In general, IPOs are most likely to be underpriced in order to provide investors with initial returns in excess of market norms. However, the long-term performance of IPOs is often inferior to the corresponding market-index benchmark of performance [
For example, Daniel, et al. [
Shiller, et al. [
Aggarwal, et al. [
The performance of IPOs has been widely investigated by many researchers since the 1970s. Underpricing of IPOs has been highlighted by researchers and the evidence gathered to support its existence is compelling. McDonald, et al. [
Evidence of IPO underpricing has also been discovered in other established economies throughout the world. Jog, et al. [
Although there is considerable evidence suggesting that IPOs on average are underpriced and therefore result in unusual initial returns mainly due to information asymmetry [
Unlike the consistent outstanding first-day return, IPOs appear to provide poor levels of long-term performance. In the US, Ritter [
Generally IPOs in many world markets underperform in the long-term when compared to benchmarks such as the corresponding market index return or performance of comparable firms. For example, Lee, etc [
Although the long-term performance of IPOs may be affected by many factors, one important factor appears to be the reputation of the underwriting institution. Carter, et al. [
Emerging markets are becoming more important in terms of the global IPO market. Davies [
IPO markets in emerging economies appear to be significantly different from other, more established IPO markets. For example, Bekaert [
Even though the systematic risk of emerging markets differs from that exhibited by developed markets, IPO underpricing is still likely to be found [
China has two main stock exchanges, Shanghai and Shenzhen, which operate separately and independently from each other. The Shanghai Stock Exchange was established in 1990 and in the following year Shenzhen was founded. Since then, Chinese stock markets have experienced rapid development and high growth rates. From 1992 to 2000, the number of companies listed on Chinese markets increased from 53 to 1088 companies. Between 2007 and 2012, the Chinese economy grew by nearly 60 percent, and in 2000, Chinese stock markets (in aggregate) were ranked in 10th place in terms of total worldwide market capitalization, and accounted for 1.81% of the total global market capitalisation. In 2012, Chinese stock markets ranked in the 2nd place and accounted for 6.95% of the world market capitalization.
Since China is one of the fastest growing economies in the world, researchers have provided a wealth of information about Chinese stock markets including the domestic IPO market. Research focused on the short-term performance (underpricing) and long-term performance of IPOs in China during the period 1990-1993. Mok, et al. [
Su, et al. [
South Korea has one security exchange located in Busan. The exchange is known as the Korea Exchange (KRX) and has integrated various types of trading such as stocks, bonds, futures, and other derivatives. There are three markets operating under the umbrella of the KRX. The Korea Composite Stock Price Index (KOSPI) is the main board listing medium to large capital stocks. The second market is the Korea Securities Dealers Association Automated Quotation (KOSDAQ) which is where small and medium companies with growth potential are listed. The third and final market is the Korea New Exchange (KONEX), which is relatively new, and provides finance for small business ventures looking to raise capital. Each market has its own specifications and requirements. For instance, the KOSPI and KOSDAQ are different in terms of the size of each company’s capital requirements but also in terms of their qualitative requirements, such as the listing requirements and fees.
Empirical evidence has shown that when firms go public, a significant degree of underpricing can be found in IPOs within many markets. The Korean IPO market is no exception, as during the period 2000-2007 the average initial return of IPOs was 57.6% which was considerably higher than the 25.7% achieved by IPOs in the US market during the same period. Many researchers have attempted to explain the issue of underpricing within Korean markets since the early 1990s. Kim, et al. [
The exchange in Malaysia is known as the Bursa Malaysia, which provides a fully-integrated exchange which consists of several wholly-owned subsidiaries. Each subsidiary provides and operates exchange-related services for different type of financial securities (e.g. equities, bonds, derivatives). In Malaysia, there are two separate markets, the Main market and the ACE market. Generally, the Main market provides a platform for well-established companies to raise funds while the ACE market provides alternative source of funds for companies with growth potential. In 2012, Bursa Malaysia was ranked 21st in terms of global market capitalisation with a total of 921 listed companies.
The Malaysian IPO market has a unique way of defining an IPO issue. IPOs in Malaysia may refer to public offers by private sector companies or can be privatisation initial public offers (PIPOs) issued by state-owned companies [
These results suggest that IPOs in emerging markets appear to have comparatively greater levels of underpricing than those offered in developed markets. However, the long-term performance of Malaysian IPOs appears to contradict the general findings from US studies of IPOs, which suggest a poor long-term performance in IPOs. For example, Jelic, et al. [
The Stock Exchange of Thailand (SET) is a juristic entity established in 1974 and serves as a platform for the trading of listed securities. In 2012, SET had over 600 companies listed with an aggregate market capitalization of $383 Billion, making it the 24th ranked global financial market. Thailand also has a Market for Alternative Investment (MAI) where small and medium size companies seeking funds are listed. In terms of prior work on the IPO market in Thailand, Chorruk, et al. [
Chorruk, et al. [
While the above work provides us with a good understanding of the IPO market in Thailand before the 2007 financial crisis, at the same time it appears appropriate to develop Chorruk’s, et al. [
The literature review, on IPOs suggests underpricing (in the short-term) and poor long-term performance. Empirical evidence of IPO underpricing has been discovered in most countries where equity markets are available. However, there are differences in the extent of this underpricing, with differences between countries, industries, and or sectors. IPOs in emerging (Asian-Pacific) markets tend to provide investors with higher initial returns than IPOs issued in developed market. As a result, companies in emerging markets appear to bear a higher cost from issuing IPOs, and as a result, more money is expected to be left on the table. There many reasons that may explain this underpricing, these include asymmetric information theory, agency theory, signalling theory and other similar theories. Despite this, the exact cause of underpricing is still intensely debated among researchers and there is no definitive conclusion on the matter.
In terms of long-term performance of IPOs, the literature provides evidence that suggests that IPOs are most likely to perform poorly in the long-run. Yet, some outliers have been found in emerging markets, such as Korean IPOs and Thai IPOs, where long-term performance can outrun benchmarks. Some researchers suggest that the poor long-term performance is caused by investors being too optimistic about the potential growth of young firms [
The section explains the methodology used to evaluate the short-term and long-term stock price performance of IPOs in Thailand, China, South Korea and Malaysia during the period before and after the 2007 financial crisis.
IPO data are extracted from Bloomberg for a period of 10 years starting from 1st of January 2003 to 31st December 20122. The sample was divided into two sub-periods which are5 years (1st January 2003-31st December 2007) before and 5 years (1st January 2008-31st December 2012) after the global financial crisis3. The total number of useable observations for Thailand, China, South Korea and Malaysia are 220, 1299, 643, and 332, respectively. In addition, the Bloomberg database is used to provide the daily and monthly historical closing prices of IPO firms and the relevant market index for each country.
McWilliams, et al. [
As a result, an event study methodology appears to be a suitable choice of method for investigating the impact of the 2007 global financial crisis on the short-term and long-term performance of IPOs. However, there are crucial assumptions associated with the event study approach. These include the following assumptions: 1) markets are efficient, 2) the event is not anticipated, and 3) there were no confounding effects during the event window.
The primary task for conducting an event study is to define the period in which the impact of the event is going to be measured. In this study, the event windows used to measure the short-term and long-term performance of IPOs are 1 day and 36 months, respectively.
According to Rosa, et al. [
R i 1 = ( P c , i P issue ) − 1 , (1)
where P c , i is the closing price on the first trading day of an IPOi and P issue is the issue price of IPOi. The corresponding benchmark of each country is its stock market index. The return on the market index in a corresponding period is:
R m 1 = ( P m 1 P m issue ) − 1 , (2)
where R m 1 is the first day’s comparable market return, R m 1 is the closing
market index value on the first trading day and P m issue is the closing market
index value on the offering day of the corresponding stock.
The market-adjusted abnormal return for IPOi can be calculated by using the two returns calculated in Equation (1) and Equation (2) as follows:
M A A R i 1 = R i 1 − R m 1 . (3)
The sample mean of market-adjusted abnormal return for the first day of trading can be calculated as:
M A A R ¯ 1 = 1 n ∑ i = 1 n M A A R i 1 . (4)
To test whether the mean of market-adjusted return is significantly different from zero, standardised t-statistic is computed as:
t M A A R = M A A R ¯ 1 S / n , (5)
where S is the sample standard deviation of abnormal returns ( M A A R i 1 ) and is the number of sample IPOs. Additionally, another measurement tool applied is the wealth relative, WR1, which can be calculated as:
WR 1 = 1 + 1 n ∑ i = 1 n R i 1 1 + 1 n ∑ m = 1 n R m 1 . (6)
According to Ritter [
Cumulative abnormal return (CARs)
Cumulative abnormal returns (CARs) were first used by Ritter [
R i , t = ( P i , t P i , t − 1 ) − 1 , (7)
where R i , t is the monthly raw return of the IPOi in the event month t, P i , t is the closing price at the end of month t of the IPOi, P i , t − 1 is the closing price of the IPOi at the end of month t − 1 4. Second, the same mathematical rational is applied to calculate the benchmark return for the IPOi as follows:
R m , t = ( P m , t P m . t − 1 ) − 1 , (8)
where R m , t is the monthly benchmark return of the IPOi in the event month t, P m , t is the closing price of the benchmark at the end of month t of the IPOi, P m . t − 1 is the closing price of the benchmark at the end of month t − 1 .
Third, the benchmark (market) adjusted abnormal returns A R i , t are computed by taking the difference of the raw return R i , t of the IPOi and the benchmark return R m , t over the corresponding period (event month t).
A R i , t = R i , t − R m , t . (9)
Fourth, the average abnormal benchmark-adjusted return of the portfolio with IPOs for the event month t is calculated as follows:
A R t ¯ = 1 n ∑ i = 1 n A R i , t (10)
Fifth, in order to measure the cumulative average benchmark-adjusted returns for the long-term performance from event month 1 to month t, the following calculation is applied:
C A R 1 , t ¯ = ∑ t = 1 t A R t ¯ . (11)
Finally, the standardised t-statistic is computed to assess whether the cumulative average benchmark-adjusted returns is significantly different from zero.
t C A R = C A R 1 , t ¯ S / n . (12)
The above measurements of long-term performance of IPOs are widely accepted in the literature [
As discussed earlier, three of the Asian-Pacific emerging markets, under consideration, have more than one stock exchange (e.g. Thailand, China, and South Korea). As the IPOs in these countries may be issued on different stock markets, the corresponding benchmark(s) of each IPOs is (are) explained as follows.
For Thailand, two benchmarks are applied in the above calculations. The Stock Exchange of Thailand Index is the benchmark for IPOs issued in SET market. The Market for Alternative Investment Index is the benchmark for its corresponding IPOs. For China, the benchmarks utilised are the Shanghai Stock Exchange Composite Index and Shenzhen Stock Exchange Composite Index. For South Korea, the Korea Composite Stock Price Index and Korean Securities Dealers Automated Quotations Index are selected as the benchmarks. For Malaysia, the Kuala Lumpur Composite Index is the benchmark against IPOs issued in the Bursa Malaysia stock market.
The underpricing of each IPO is tested against the market index return of the same period to eliminate the confounding effect. The t-test is then used to confirm whether the underpricing is significantly different from zero. In the long-term, the performance of IPOs is accessed by using the cumulative average returns which have been adjusted by the market index returns.
This section presents the results of the research study for the IPOs in Thailand, China, South Korea, and Malaysia.
Each set of descriptive statistics are presented in a tabular, panel data format, with Thailand, China, South Korea, and Malaysia being allocated to panels A, B, C and D, respectively. For the purposes of this event study, each country’s sample of IPOs were allocated into either a pre-crisis or a post-crisis time-period covering the years 2003-2007 and 2008-2012, respectively.
Panel A of
Panel A of
Industry Sector | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Basic Materials | 22 | 14% | 9 | 13% | 31 | 14% |
Communications | 11 | 7% | 7 | 10% | 18 | 8% |
Consumer, Cyclical | 27 | 18% | 18 | 27% | 45 | 20% |
Consumer, Non-cyclical | 13 | 8% | 9 | 13% | 22 | 10% |
Energy | 5 | 3% | 1 | 1% | 6 | 3% |
Financial | 22 | 14% | 5 | 7% | 27 | 12% |
Industrial | 45 | 29% | 14 | 21% | 59 | 27% |
Technology | 7 | 5% | 1 | 1% | 8 | 4% |
Utilities | 1 | 1% | 3 | 4% | 4 | 2% |
Total | 153 | 67 | 220 |
Industry Sector | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Basic Materials | 53 | 15% | 99 | 10% | 152 | 12% |
Communications | 12 | 3% | 49 | 5% | 61 | 5% |
Consumer, Cyclical | 57 | 16% | 125 | 13% | 182 | 14% |
Consumer, Non-cyclical | 55 | 16% | 142 | 15% | 197 | 15% |
Energy | 10 | 3% | 22 | 2% | 32 | 2% |
Financial | 18 | 5% | 17 | 2% | 35 | 3% |
Industrial | 107 | 30% | 403 | 43% | 510 | 39% |
Technology | 30 | 9% | 81 | 9% | 111 | 9% |
Utilities | 9 | 3% | 10 | 1% | 19 | 1% |
Total | 351 | 948 | 1,299 |
Industry Sector | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Basic Materials | 17 | 5% | 19 | 6% | 36 | 6% |
Communications | 45 | 14% | 35 | 11% | 80 | 12% |
Consumer, Cyclical | 41 | 12% | 35 | 11% | 76 | 12% |
Consumer, Non-cyclical | 37 | 11% | 33 | 11% | 70 | 11% |
Energy | 1 | 0% | 4 | 1% | 5 | 1% |
Financial | 42 | 13% | 25 | 8% | 67 | 10% |
Industrial | 95 | 29% | 97 | 31% | 192 | 30% |
Technology | 52 | 16% | 59 | 19% | 111 | 17% |
Utilities | 1 | 0% | 5 | 2% | 6 | 1% |
Total | 331 | 312 | 643 |
Industry Sector | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Basic Materials | 20 | 9% | 9 | 9% | 29 | 9% |
Communications | 19 | 8% | 7 | 7% | 26 | 8% |
Consumer, Cyclical | 18 | 8% | 15 | 15% | 33 | 10% |
Consumer, Non-cyclical | 40 | 17% | 17 | 17% | 57 | 17% |
Energy | 7 | 3% | 9 | 9% | 16 | 5% |
Financial | 16 | 7% | 7 | 7% | 23 | 7% |
Industrial | 75 | 32% | 27 | 27% | 102 | 31% |
Technology | 37 | 16% | 9 | 9% | 46 | 14% |
Utilities | 0 | 0% | 0 | 0% | 0 | 0% |
Total | 232 | 100 | 332 |
Exchange Market | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Stock Exchange of Thailand | 107 | 70% | 29 | 43% | 136 | 62% |
Market for Alternative Investment | 46 | 30% | 38 | 57% | 84 | 38% |
Total | 153 | 67 | 220 |
Exchange Market | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Shanghai Stock Exchange | 148 | 42% | 97 | 10% | 245 | 19% |
Shenzhen Stock Exchange | 203 | 58% | 851 | 90% | 1,054 | 81% |
Total | 351 | 948 | 1,299 |
Exchange Market | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Korea Stock Exchange | 81 | 24% | 74 | 24% | 155 | 24% |
KOSDAQ Exchange | 250 | 76% | 238 | 76% | 488 | 76% |
Total | 331 | 312 | 643 |
Exchange Market | Numbers of IPOs | |||||
---|---|---|---|---|---|---|
'03 - 07 | '08 - 12 | Total | ||||
Bursa Malaysia | 232 | 100% | 100 | 100% | 332 | 100% |
Total | 232 | 100 | 332 |
with medium to large market capital needs raise their funds. However, in the post-crisis period most IPOs were issued through the Market for Alternative Investment (MAI). Considering the differences of both exchanges, SET provides a platform for medium to large capitalisation enterprises, while MAI is suitable for small and medium size enterprises (SME). Firms listed on the SET exchange are generally more mature in their development, while the SMEs listed on the MAI exchange are firms seeking funds for growth.
Panel B of
Another factor was that in 2007 the Chinese government introduced a new regulation that required local companies that were listed on the Hong Kong Stock Exchange to return to an exchange in mainland. The top three industry sectors in China before the crisis were industrial, consumer-cyclical, and consumer-non-cyclical (30%, 16%, and 16%, respectively). After the crisis, there was no change in the top three positions, with the industrial sector expanding its share of the Chinese IPO market.
Panel B of
Panel C of
Panel C of
Panel D of
Overall, the aforementioned tables of national IPO activity in the pre-crisis and post-crisis periods provide a record of how the financial crisis affected the total number of companies going public in each of the four Asian-Pacific countries. While the impact varied by country, the financial crisis reduced IPO activity in all countries apart from China. China was an exceptional as IPO activity during the period was supported by strong economic growth and a change in Chinese stock market regulations. Nonetheless, a common trend across the four countries is that IPOs were more frequently issued by companies from the industrial sectors of each economy.
Previous research on IPOs suggests that most public offerings are likely to be under-priced, and as a result, IPOs tend to generate significant positive returns during the first trading day [
Panel A of
2003-2007 | 2008-2012 | 2003-2012 | |
---|---|---|---|
Mean | 0.190*** | 0.440*** | 0.266*** |
t-statistic | 6.611 | 6.365 | 8.884 |
Wealth Relative | 1.190 | 1.439 | 1.266 |
Observations | 53 | 67 | 220 |
2003-2007 | 2008-2012 | 2003-2012 | |
---|---|---|---|
Mean | 1.141*** | 0.415*** | 0.611*** |
t-statistic | 22.059 | 25.350 | 29.913 |
Wealth Relative | 2.140 | 1.416 | 1.612 |
Observations | 351 | 948 | 1299 |
2003-2007 | 2008-2012 | 2003-2012 | |
---|---|---|---|
Mean | 0.437*** | 0.279*** | 0.360*** |
t-statistic | 17.054 | 11.466 | 20.062 |
Wealth Relative | 1.437 | 1.278 | 1.360 |
Observations | 331 | 312 | 643 |
2003-2007 | 2008-2012 | 2003-2012 | |
---|---|---|---|
Mean | 0.301*** | 0.113*** | 0.244*** |
t-statistic | 9.321 | 2.211 | 8.834 |
Wealth Relative | 1.301 | 1.113 | 1.245 |
Observations | 232 | 100 | 332 |
t-statistic of the difference of the two sample mean market adjusted returns is 4.323***. Notes: the short-term performance of IPOs is measured using the percentage change of the closing price on the first trading day over the original issue price adjusted by the market return over the same period. *, **, *** denotes statistical significance at 10%, 5%, and 1% level, respectively.
are likely to be more underpriced than less risky IPOs. According to asymmetric information theory, the uncertainty about the IPOs price is positively related to the degree of underpricing [
Furthermore, the average level of IPO underpricing before and after the crisis in Thailand are significantly different from one another, at 1% level of significance. These results confirm that after the financial crisis in 2007, the underpricing of Thai IPOs significantly increased5. In general, Thai IPOs are more likely to be underpriced with a higher magnitude of underpricing after the crisis due to both external (the world economy slow down) and internal risk factors (the political unrest).
In contrast to the situation in Thailand, the magnitude of Chinese IPO underpricing declined dramatically after the financial crisis. This change in underpricing of Chinese IPOs is represented by the decline in the mean value of market-adjusted returns (MAAR) in Panel B of
The pre-crisis results of this study are in line with the results of previous studies of the Chinese IPO market. Chi, et al. [
In an effort to alleviate such structural market problems, during 2005 the Chinese government announced stock market reforms aimed to reduce the proportion of shares held by governmental bodies. This reform increased the availability of shares in certain Chinese IPOs, thereby reducing the overall level of underpricing in the Chinese stock markets.
Panel C of
Panel D of
In the post-crisis period, Malaysian IPOs experienced similar trend in underpricing as those reported in China and South Korea. The average initial excess return of Malaysian IPOs decreased from 30.1% to 11.3%, suggesting that underpricing was significantly lower(at the 1% level) in the post-crisis period6. Overall, as a consequence of IPO underpricing in the Malaysian market during 2003-2012, issuing Malaysian firms left US $2.3 billion on the table. The overall results of our underpricing analysis in each of the four Asian-Pacific emerging markets supports the theoretical expectation of significant IPO underpricing in emerging markets during both the pre-crisis and post-crisis periods. Furthermore, it is commonly found that the level of IPO underpricing in the pre-crisis period differed from the post-crisis period which suggests that the financial crisis affected the pricing behaviour of IPOs in each country. However, it is important to note that the Thai IPO market showed an opposite trend to the other three countries. Thailand exhibited higher levels of underpricing because of severe political instability, while the other three countries faced lower underpricing due to reforms which reduced uncertainty. For example, IPO underpricing in China was influenced by regulatory reforms. However, the level of underpricing in each of the four emerging markets studied is relatively high when compared to the results of studies on IPOs in developed countries. The economic significance of the high level of IPO underpricing in the emerging markets of the Asian-Pacific region (given the high IPO activity) is evidenced by the fact that during 2003-2012 (before and after the financial crisis), issuing firms in the four Asian-Pacific emerging markets left more than US$ 200 billion on the table. The level of underpricing in these four Asian-Pacific emerging markets became more evident in the post-crisis period, given the increase of IPO activity in this period. In particular, issuing firms in these four Asian-Pacific emerging markets left on the table US $64 and 136 billion in the pre-crisis and post-crisis five years period, respectively, which may affect negative the potentials for economic growth in the region. Although the results of short-term performance analysis provide valuable evidence about the extent of IPO underpricing in each country, it does not fully explain the overall performance of IPOs. As a result, next section analyses the long-term performance of IPOs in each of the four Asian-Pacific emerging markets in both the pre-crisis and post-crisis periods.
Although the majority of prior studies provide evidence of widespread underpricing of IPOs, critics of such work argue that IPOs may not really be underpriced. For example, investment banks may correctly price an IPO but the offer price could be influenced by “noisyinvestors” who are overconfident (optimistic) about the potential growth of IPO companies [
In order to extend our existing knowledge of long-term performance of IPOs in emerging markets, this section analyses the long-term performance of IPOs in the Asian-Pacific emerging markets of Thailand, China, South Korea, and Malaysia during the pre-crisis and post-crisis periods.
Panel A of
Month | 2003-2007 | 2008-2012 | ||||||
---|---|---|---|---|---|---|---|---|
CAR | StdDev | t-stat | Size | CAR | StdDev | t-stat | Size | |
12 | 0.031*** | 0.128 | 2.985 | 152 | 0.194*** | 0.142 | 9.578 | 49 |
24 | −0.046*** | 0.130 | −4.313 | 150 | 0.317*** | 0.101 | 19.586 | 39 |
36 | 0.075*** | 0.186 | 4.880 | 147 | 0.431*** | 0.091 | 24.970 | 28 |
Month | 2003-2007 | 2008-2012 | ||||||
---|---|---|---|---|---|---|---|---|
CAR | StdDev | t-stat | Size | CAR | StdDev | t-stat | Size | |
12 | −0.106*** | 0.125 | −15.883 | 351 | −0.014*** | 0.102 | −3.817 | 798 |
24 | −0.052*** | 0.118 | −8.312 | 351 | −0.001 | 0.081 | −0.261 | 519 |
36 | 0.050*** | 0.141 | 6.597 | 351 | 0.250*** | 0.250 | 34.942 | 171 |
Month | 2003-2007 | 2008-2012 | ||||||
---|---|---|---|---|---|---|---|---|
CAR | StdDev | t-stat | Size | CAR | StdDev | t-stat | Size | |
12 | −0.009 | 0.156 | −1.094 | 331 | 0.097*** | 0.173 | 9.379 | 282 |
24 | 0.091*** | 0.179 | 9.215 | 331 | 0.199*** | 0.147 | 18.295 | 204 |
36 | 0.189*** | 0.136 | 25.165 | 331 | 0.505*** | 0.126 | 41.512 | 109 |
Month | 2003-2007 | 2008-2012 | ||||||
---|---|---|---|---|---|---|---|---|
CAR | StdDev | t-stat | Size | CAR | StdDev | t-stat | Size | |
12 | −0.036*** | 0.128 | −4.291 | 231 | −0.115*** | 0.111 | −9.670 | 87 |
24 | −0.185*** | 0.147 | −19.215 | 231 | −0.203*** | 0.088 | −18.064 | 61 |
36 | −0.258*** | 0.162 | −24.248 | 231 | −0.309*** | 0.140 | −13.057 | 35 |
CARs over the 36 months period shown in Panel B of
Chen, et al. [
Panel C of
Malaysia is the only country where long-term IPO performance resulted in high
negative returns. Panel D of
Paudyal, et al. [
This study investigated the effects of the 2007 global financial crisis on the relative short-term and long-term performance of IPOs in the Asian-Pacific emerging markets of Thailand, China, South Korea, and Malaysia. The results of this study suggest that the short and long-term performance of IPOs in each of the four emerging markets were significantly affected by the 2007 financial crisis. However, the extent of this impact was inconsistent across the four markets.
While IPO underpricing increased in Thailand partly as a result of increased political uncertainty, the level of underpricing actually decreased in China, South Korea, and Malaysia. Between the pre-crisis and post crisis periods, IPO underpricing in Thailand increased from 19% to 44%. In contrast, underpricing in Chinese, South Korean and Malaysian IPO markets declined from 114% to 41.5%, 43.7% to 27.9%, and 30.1% to 11.3%, respectively. Even though underpricing in emerging markets has been reduced due to regulatory reforms [
In terms of the long-term performance of IPOs in the post-crisis period, IPOs in Thailand, China, and South Korea all outperformed the benchmark in the 36 month period after each IPOs was placed. In contrast, the long-term performance of Malaysian IPOs was poor. During the post-crisis period of 2008-2012, IPOs in South Korea generated the highest performance with a CAR of 50.5% during the 36 months period after IPO placement. The post-crisis long-term CAR performance results for Thailand, China and Malaysia were 43.1%, 25% and −30.9%, respectively.
The long-term performance results for each of the four emerging markets are interesting, as they also contradict the results and observations from IPOs studies in developed markets. While, most IPOs in developed markets appear to underperform the market in the long-term, the results of this study suggest that IPOs in emerging markets outperformed the market in the long-run, especially in the post-crisis period.
The policy implications of this study are very important for financial regulators and corporations (firms) seeking for new sources of finance through capital markets. More specifically, the economic significance of the high level of IPO underpricing in the Asian-Pacific emerging markets during 2003-2012 period (before and after the financial crisis) is evident by the US $200 billion left on the table by issuing firms. Given the increase of IPO activity in the Asian-Pacific emerging markets in the post-crisis period, the significance of the economic implications of IPO underpricing in the emerging markets (in the Asian-pacific region) becomes more evident. In particular, issuing firms in these four Asian-Pacific emerging markets left on the table US $64 and 136 billion in the pre-crisis and post-crisis five years period, respectively, which may affect negative the potentials for economic growth in the region.
In this research study the analysis of the IPO performance is limited only to four (emerging) countries. In addition, the research on the IPO performance is conducted separately for each country to provide more specific information for each country’s IPO performance. Future research on the IPO performance of the Asian-pacific emerging markets may be conducted on a pooled basis.
The inconsistency in the comparative short and long-term performance of IPOs in emerging and developed markets is a potential area for future research. In addition, it would be interesting to investigate the specific factors that affect IPO performance in emerging markets. For instance, Warther [
The authors would like to thank the editor and the three anonymous reviewers for their helpful comments on a previous version of this paper.
The authors declare no conflicts of interest regarding the publication of this paper.
Giannopoulos, G., Degiannakis, S., Holt, A. and Pongpoonsuksri, T. (2018) The Impact of the 2007 Global Financial Crisis on IPO Performance in Asian-Pacific Emerging Markets. Theoretical Economics Letters, 8, 2640-2672. https://doi.org/10.4236/tel.2018.811168