Do IPOs underperform in the long run? Evidence from the Johannesburg Securities Exchange (JSE)

Abstract

This article examines the three-, five- and ten-year long-run performance of initial public offerings (IPOs) on the Johannesburg Securities Exchange (JSE). The Buy and Hold Abnormal Return (BHAR) and the Cumulative Abnormal Return (CAR) methods were used to calculate the IPO long-run performance. Using a sample of 313 companies listed for the period 1996– 2007, this study established that IPOs on the (JSE) underperformed the market over three years (by 65.59% and 59.77% for BHAR and CAR respectively) and five years (by 64.37% and 7.77% for BHAR and CAR respectively). Also observed was that IPOs on the JSE outperform the market over a ten-year period when using the CAR (116.23%). Furthermore, the three-, five- and ten-year BHAR in the JSE were affected by the market period, which had no significant impact on the CAR. These findings basically stress the effect the different benchmarks and methodologies have when calculating the long-run performance of IPOs. Although IPOs underperform the market over a five-year period from the first trading day, the yearly performance of most of these companies from their fourth trading year is positive. As such, investors are advised to stay out of the stock market within the first three years, but in the fourth year they are encouraged to invest and buy mainly portfolios comprising companies that have been trading for at least four years.

Keywords: IPO, long-run performance, JSE