Retail IPO in Emerging Markets

1. XI International Academic Conference on Economic and Social Development Retail IPO in Emerging Markets Dmitry Kokorev www.cfcenter.ru http://en.cfcenter.ru/ www.cfjournal.ru Basic Research Programme of the Higher School of Economics in 2010

2. IPO: definition and main issues • IPO - issuing shares to the general public for the first time, with the expectation that a liquid market will develop. • Main issues: 1) Underpricing(the price change measured from the offering price to the market price on the first trading day, 16% in US Market) [Ritter, Ibbotson] • Long-Run performance (poor stock price performance of IPOs in the long run, -20% 3-years abnormal return in US Market) [Ritter,Loughran] • Market timing (cycles existence in both the volume and the average initial returns of IPOs) [McDonald, Titman, Zingales]

3. Key factors, which affect IPO return • Type of owner (Private vs State Owned) [Perotti, Megginson] • Type of investor (Retail vs Institutional) [Aggarwal, Ljungqvist, Wilhelm] • Country [Ritter, Loughran] • Other factors (IPO size, number of shares offered, company’s age, operational performance before offering, etc)

4. IPO in emerging markets: database • Data base • 1911 offerings • 15 emerging markets • Source: Bloomberg, Factiva, VanDijk Basic criteria • Company form one of emerging markets • Time period: 2003-2010 • Shares – actively traded • Market cap > $30 Mln

5. IPO in emerging markets: country differences • India [Ghosh] • Most of companies – private • 22 stock-exchanges • High level of demand from local retail investors and NRI • More than 6000 companies, $700 bln. • Brazil [Cigerza] • Developed rules of trading • Almost none of government intervention • Foreign and retail investors actively participate • Most of companies trade only preferred shares (family owned) • Near 400 companies, $600 bln. • Russia • A lot of Open Joint-Stock companies through Privatization, but most of them – non-tradable • Low market liquidity and level of activity of retail investors • Near 200 companies, $670 bln. China [Guo, McGuinness] • A – shares vs Other shares • Government intervention • Before 2001 – planning system of IPO • Price regulation • System of non-tradable securities • High level of demand from retail investors • Near 2300 companies, $1 700 bln. 5

6. IPO in emerging markets *Average Long-Run return – buy-and-hold return, adjusted by country index (BHAR)

7. IPO in emerging markets: country differences

8. Retail IPO: data and methodology Pilot Study • DATA : • 2003-2008 cross-section • Additional data about: • Oversubscription • Share of retail investors in offering • Owner before IPO • 150 companies from 6 countries Model for underpricing Model for long-run return 8

9. Retail IPO: descriptive statistic Pilot Study 9

10. Retail IPO: privatization status Pilot Study • Only 18 companies • 11 – China • 3 – Russia • 2 – Poland • 1 – India • 1 - Egypt

11. Retail IPO: regression analysis Pilot Study *** - 1% significance level ** - 5% significance level * - 10% significance level 11

12. Results • In average, investor earns more from investing in emerging market IPO • Country factor is crucial • Retail investors are generally lose on average in LR • Privatization Retail IPO generally gives more return (SR and LR)

13. Thank you for your attention!

14. IPO in Emerging Markets: descriptive statistic

15. Retail IPO: descriptive statistic