Pre-Operating Performances and IPOs After Market Returns Yuhong Fan Weber State University

1. Pre-Operating Performances and IPOs After Market Returns Yuhong Fan Weber State University

2. Introduction • Two apparent anomalies in the IPO market • Initial underpricing- offer price below the price subsequently traded on the market • Long-run underperformance- IPO firms underperformed match firms in the long run.

3. Current theories for underpricing • Asymmetric Information: the winner’s curse • A signal of firm’s quality • Book Building Theory • Agency theory • Underpricing as a marketing role • Legal liability hypothesis

4. Studies for IPOs underperformance • Ritter (1991). • Tech, Welch, and Wong (1998) • Yi (2001)

5. Changing risk Composition Hypothesis- Cont. For Internet firms Higher Initial return .Pre-IPO operating performances .Age Higher future uncertainty

6. Overreaction Hypothesis • Investors- overoptimistic • Evidence: Cooper (2002) found Name change to dotcom positive abnormal return • Daniel, Hirshleifer, and Subrahmanyam (DHS) : overreaction framework (1998)

7. DHS’s Overreaction Framework Overreaction Price Rational expected value 1 2 3 Time

8. Three stages to explain of high initial underpricing In the initial day . Can uncertainty variables explain initial returns? In the 6 month . Does price momentum exist? In the 36 month . Doesprice reversal exist?

9. Differences from other studies • Bartov et al (2002) - Investigate valuation differences between Internet and non-Internet firms - Focus on offer prices instead of initial returns - Small sample size (n=98)

10. Differences from other studies • Ljungqvist and Wilhelm (2001) - Ownership structure and inside selling behavior can explain high initial return for 1999-2000 - Based on agency theory

11. Differences from other studies • Jaggia and Thosar (2004) - Investigating high-tech IPO medium term performance - Found positive price momentum - Without investigating long-run performance

12. Sample selection • Sample firms are identified from Edgar-online • Comprises 744 IPOs - 376 Internet related - 368 Non-Internet related • Must priced between Jan 01 1999 to Jan 01 2001

13. Description of variables- Cont. • Long-run (3-year) index adjusted returns- following Jay Ritter (1991) . Initial trading date is month 0 . Aftermarket includes 36 months after IPO . Each month including 22 trading days For example: month1 1-22; month2 23-44

14. Description of sample firms

15. Pre-IPO financial performances

16. Regression Analysis- Initial return as dependent variables INIRET i= i + ij UNCERij +ij CVij + i DUMMYi + I INIRET: initial returns UN UNCER: uncertainty variables; including pre-IPO operating performance measures, firm size, and firm age. CV: control variables; including underwriter’s ranking and float. DUMMY: Internet dummy variables.

17. Initial return as dependent variables

18. Graph of after market returns

19. 36-month return by size and market to book ratio

20. Chang of operating performance

21. Regression results for short-run momentum

22. Regression results with 3-year returns as dependent variable

23. Main Results • Internet firms faced higher future uncertainty than non-Internet firms. • Among all the uncertainty variables, sales growth rate and age are most powerful. • Internet dummy variables can significantly explain firm’s initial return.

24. Main Results- cont. • Internet dummy variables are significantly positive with 4, 5, 6 month buy and hold index adjusted returns as dependent variable; the average coefficient is .2388. • Hot IPOs earned significantly higher returns in the short run than other firms. • Fundamental variables like age and EPS are irrelevant to firms’ short-term returns.

25. Main Results- cont. • If 3-year buy and hold return as dependent variable, all Internet dummy variables are significant negative; • Fundamental variables like sales per share and sales to total assets are significantly positive • Change of firms EPS in the three year period can also predict firms long run performance • Extra hot IPOs have the worst returns.

26. Conclusions • The high initial return for Internet firms are explainable by firm’s high future uncertainty. . Age . sales growth rate . Debt to total assets

27. Conclusions- cont. • Investors’ overreaction to Internet IPOs significantly contributed to their high initial returns. . Strong short-term momentum . Long-term price reversal after controlling for the change of operating performance, size, and market to book ratio

28. Thank you very much!