Red flags for IPO downfalls in New Zealand
Abstract
Purpose
The strong performance of New Zealand’s equity market and the Government’s efforts to encourage small investors to invest in initial public offering (IPO) firms raises two questions: should retail investors invest in IPO offers and what types of IPOs are worth buying in the long term? The paper aims to discuss these issues.
Design/methodology/approach
The authors construct buy and hold equally weighted portfolios of IPOs and peers based on sales forecast, market capitalisation, and price-to-book ratio. The authors employ four benchmark-adjusted performance measures: cumulative average abnormal return (CAR), holding period return difference, wealth relative, and excess return (α).
Findings
IPOs underperform their peers over the medium and long term, with a five-year CAR ranging between −6.4 and −19.7 per cent. IPOs listed post-GFC show inferior benchmark-adjusted performance with a statistically significant average monthly CAPM α of −1.07 per cent (vs −0.13 per cent for pre-2009 IPOs). Over a five-year horizon, mature IPOs, IPOs with high market cap, high sales forecast, high leverage, low price-to-book ratio, and positive earnings forecast outperform other IPOs. Small IPOs or those with a small degree of leverage exhibit the worst five-year CAR ranging between −30.2 and −49.1 per cent. Of all IPOs examined, large firms, well-established firms, and value firms achieved positive five-year CARs of between 6.6 and 17.5 per cent.
Practical implications
The results are useful for retail investors and financial advisors in making sensible investment decisions.
Originality/value
This study is the first to utilise book-to-market and sales forecast to construct peer samples and to identify the red flags for IPO downfalls in New Zealand. It covers the longest sample period (1991-2015) in New Zealand’s context.
Keywords
Acknowledgements
The authors would like to thank Thomas Cameron, Joseph Ge, Kathleen Starrie, and Lucy Dao for contributing data and giving the authors a starting point from which to refine our IPO and peer selection processes. The authors also thank Northington Partners for providing access to Capital IQ for data acquisition, and the Forsyth Barr investment banking team for providing access to their internal IPO database. Michael Jolly would like to thank Northington Partners for technical advice, inspiration, and financial assistance.
Citation
Dang, H.D. and Jolly, M. (2017), "Red flags for IPO downfalls in New Zealand", Managerial Finance, Vol. 43 No. 9, pp. 1034-1051. https://doi.org/10.1108/MF-05-2017-0197
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited