12: Raising Long-Term Financing
These findings are controversial, because they challenge the notions that investors are rational and
financial markets efficient. More recent research casts doubt on this long-run underperformance for IPO
shares. Studies conclude that most IPOs do not yield significant long-run underperformance – provided
that IPO returns are compared to an appropriate benchmark. In particular, a compelling case is made
that much of the observed underperformance can be explained by leverage effects and risk reductions
resulting from the IPO itself. Raising new equity capital via an IPO reduces the firm’s leverage and its
financial risk, so investors will accept a lower required return subsequent to the offering. On balance, we
conclude that IPOs tend to earn normal long-term returns. Given these conflicting findings, we cannot
yet draw firm conclusions about the long run return on IPO shares.
AVERAGE FIRST-DAY RETURNS ON IPOS FOR 43 COUNTRIES
Significantly positive initial returns on IPOs are observed
in many countries. As this figure shows, IPO underpricing
is observed in at least 43 countries; all show significant
underpricing, and 24 of these countries have mean initial
returns that are greater than the US average. The average level
of underpricing varies greatly across countries – from about 5%
in Russia and Argentina to about 100% in India to an amazing
170% in China.
finance in practice
0
20
40
60
80
100
Average first-day return (%)
Country
120
140
160
180
Russia
Argentina
AustriaCanadaDenmark
Chile
Norway
Netherlands
FranceTurkeySpain
PortugalNigeriaBelgium
Israel
Mexico
Hong Kong
United Kingdom
United States
Finland
Italy
Australia
New Zealand
IndonesiaPhilippines
Iran
PolandCyprusIrelandGreece
GermanySwedenSingapore
South Africa
ThailandTaiwan
JapanBrazil
Sri Lanka
Korea
Malaysia
India
China (A share)