Measuring IPOs Volatility
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Transcript of Measuring IPOs Volatility
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Measuring IPOs Volatility: IsVolatility of IPOs an indicatorof their future performance?
ByPeter Krastev
Master of Business AdministrationHawaii Pacific University
Fall 2005
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Agenda
IPOs Overview
Data
Methodology Findings
Conclusion
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First
YearSecond
YearThird
YearFourth
YearFifth
Year
IPOs
Style Matched0
2
4
6
8
10
12
14
16
18
AnnualPercentageReturns
Annual returns in the five years after going public for 7,026 IPOs from 1970-2001, with returns
through December 2002. Style-matched firms match on market cap and book-to-market.
Source: Ritter, J. (2003). What should be changed in the IPO market?
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0
100
200
300
400
500
600
700
800
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Calendar Year
NumberofIPOs
0
10
20
30
40
50
60
70
80
AverageFirst-DayReturns,%
Number of Offerings and Average First-day Returns, 1980-2002
Source: Ritter, J. (2003). What should be changed in the IPO market?
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Overview - IPO and Volatility
Three forms of risk exposure that a firm faces when raising capital
offer price risk
distribution risk
after-market risk
Volatility of individual stocks divided to three components:
industry-specific
market-related
firm-level volatility (idiosyncratic) - large upward trend
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Overview - IPO and Volatility
High-risk offerings would be underpriced more than low-risk offerings
Underpricing initially the high-risk IPOs will make thembring higher first-day return and eventually higherinvestors interest in short term
The higher the risk of the IPO, the higher the potentialshort term return!
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Data Sample: 30 stocks from 6 industry groups (2001 and 2002)
healthcare, insurance, investment bank, manufacturing, retail, andservices (personal and business)
Diversify industry specific risk
5 iShares as a benchmark iShares Dow Jones U.S. Financial Sector Index (IYF) iShares Dow Jones U.S. Healthcare Sector Index (IYH) iShares Dow Jones U.S. Consumer Cyclical Sector Index (IYC) iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index (IYK) iShares Dow Jones U.S. Total Market Index (IYY)
Data downloaded from: : http://biz.yahoo.com/ipo/
http://biz.yahoo.com/ipo/http://biz.yahoo.com/ipo/ -
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Table 1. Summary of the Characteristics of the Investigated IPOs
Name Ticker Indusrty Offering Date Offering Price
AMN Healthcare Services Inc AHS Healthcare 15-Nov-01 $17.00
Alliance Imaging Inc AIQ Healthcare 1-Aug-01 $13.00
Medcath Corp MDTH Healthcare 1-Aug-01 $25.00Odyssey HealthCare Inc ODSY Healthcare 1-Nov-01 $15.00
United Surgical Partners Intl USPI Healthcare 11-Jun-01 $14.00
Hub International Ltd HBG Insurance 29-Jul-02 $14.00
Max Re Capital LTD MXRE Insurance 30-Aug-01 $16.00
Platinum Underwriters
Holdings PTP Insurance 30-Oct-02 $22.50
Odyssey Re Holdings Corp ORH Insurance 20-Jun-01 $18.00
Willis Group Holdings Ltd WSH Insurance 13-Jun-01 $13.50
Investors Capital Holdings
Ltd ICH Invest Bank 20-Mar-01 $8.00
MCG Capital Corp MCGC Invest Bank 3-Dec-01 $17.00
Phoenix Cos Inc PNX Invest Bank 20-Jun-01 $17.50
Principal Financial Group Inc PFG Invest Bank 23-Oct-01 $18.50
Prudential Financial Inc PRU Invest Bank 14-Dec-01 $27.50
AU Optronics Corp AUO Manufacturing 23-May-02 $11.57
Alcon, Inc. ACL Manufacturing 22-Mar-02 $33.00Align Technology Inc ALGN Manufacturing 31-Jan-01 $13.00
Aquacell Technologies Inc AQA Manufacturing 7-Mar-01 $5.00
BioDelivery Sciences Intl Inc BDSI Manufacturing 26-Jul-02 $5.25
Aeropostale Inc ARO Retail 29-May-02 $18.00
Asbury Automotive Group Inc ABG Retail 22-Mar-02 $16.50
Big 5 Sporting Goods BGFV Retail 18-Sep-02 $13.00
Petco Animal Supplies Inc PETC Retail 26-Feb-02 $19.00
GameStop Corp GME Retail 14-Feb-02 $18.00
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Methodology
Daily returns considered
Historical volatility - the standard deviationof the intraday returns
Volatility measured twice:
1st six-month period after the offeringInitial
2nd six-month period 3 years after the offeringdateAfter
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Industry groups Initial Return After Retun Initial Standard Deviaiton After Standard Deviation
Helathcare 0.14% 0.26% 2.29% 1.73%
Insurance 0.06% 0.06% 1.84% 0.96%
Investment Bank -0.01% 0.00% 1.90% 1.31%
Manufacturing -0.30% -0.21% 3.63% 2.89%
Retail -0.19% -0.01% 3.13% 1.71%
Service 0.29% 0.10% 2.15% 1.39%
Total for IPOs 0.00% 0.03% 2.49% 1.66%
Total for ETFs -0.04% 0.02% 1.05% 0.61%
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Paired-sample T-test by Industry
Initial Volatility vs. After VolatilityInitial Volatility vs. After Return
Results: The Sig. value of .000 of all of the results indicates that theresults are statistically significant beyond the 99% confidence level.
There is a significant difference between the daily mean of the IPO stocksstandard deviation in the first six-month period versus the second six-month period after three years.
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Correlation Test by Industry
Initial return vs. Initial volatility Insurance and Retail association between the
initial return and the initial volatility
Initial Return vs. Initial Volatility Significant
Healthcare .064
Insurance .000
Investment Bank .816
Manufacturing .656
Retail .000
Services .158
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Correlation Test by Industry
After return vs. After volatility Service sector - association between the After return
and the After volatility
After Return vs. After Volatility Significant
Healthcare .586
Insurance .122
Investment Bank .505
Manufacturing .471
Retail .314
Services .001
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Correlation Test by Industry
Initial Volatility vs. After Return
Initial Volatility vs. After Return Significant
Healthcare .846
Insurance .344
Investment Bank .878
Manufacturing .893
Retail .992
Services .420
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Paired-samples T-test UsingETFs as a Benchmark
To identify if there is statistically significant differencebetween initial volatility of each IPO and initial
volatility of a relevant ETF
30 outputs summarized
For 7 stocks there is significant difference between the
daily means of the IPO stocks initial volatility and therelative ETFs volatility
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I nitial volat ility IPO Init ial volat ility ETF Significant
AMN Healthcare Services Inc IYH healthcare sector index 0.000
Alliance Imaging Inc IYH healthcare sector index 0.000
Medcath Corp IYH healthcare sector index 0.000
Odyssey HealthCare Inc IYH healthcare sector index 0.000
United Surgical Partners Intl IYH healthcare sector index 0.000
Hub International Ltd IYF financial sector index 0.510
Max Re Capital LTD IYF financial sector index 0.000
Platinum Underwriters Holdings IYF financial sector index 0.193
Odyssey Re Holdings Corp IYF financial sector index 0.003
Willis Group Holdings Ltd IYF financial sector index 0.000
Investors Capital Holdings Ltd IYF financial sector index 0.000
MCG Capital Corp IYF financial sector index 0.006
Phoenix Cos Inc IYF financial sector index 0.000
Principal Financial Group Inc IYF financial sector index 0.003
Prudential Financial Inc IYF financial sector index 0.006
AU Optronics Corp IYC consumer cyclical 0.000
Alcon, Inc. IYC consumer cyclical 0.002
Align Technology Inc IYC consumer cyclical 0.000
Aquacell Technologies Inc IYC consumer cyclical 0.000
BioDelivery Sciences Intl Inc IYC consumer cyclical 0.000
Aeropostale Inc IYK consumer non-cyclical 0.000
Asbury Automotive Group Inc IYK consumer non-cyclical 0.000
Big 5 Sporting Goods IYK consumer non-cyclical 0.000
Petco Animal Supplies Inc IYK consumer non-cyclical 0.000
GameStop Corp IYK consumer non-cyclical 0.000
Accenture Ltd IYY total market index 0.000
Advisory Board Co IYY total market index 0.000
Alliance Data Systems Corp IYY total market index 0.000Computer Programs & Systems IYY total market index 0.000
Cross Country Inc IYY total market index 0.000
Paired-sample T-test of the Initial Volatility of IPO to Initial Volatility of ETF
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Paired-sample T-test of the After Volatility of IPO to After Volatility of ETF
After volatility IPO After volatility ETF Significant
AMN Healthcare Services Inc IYH healthcare sector index 0.000
Alliance Imaging Inc IYH healthcare sector index 0.000
Medcath Corp IYH healthcare sector index 0.000
Odyssey HealthCare Inc IYH healthcare sector index 0.000
United Surgical Partners Int l IYH healthcare sector index 0.000
Hub International Ltd IYF financial sector index 0.000
Max Re Capital LTD IYF financial sector index 0.000
Platinum Underwriters Holdings IYF financial sector index 0.000
Odyssey Re Holdings Corp IYF financial sector index 0.003
Willis Group Holdings Ltd IYF financial sector index 0.000
Investors Capital Holdings Ltd IYF financial sector index 0.000
MCG Capital Corp IYF financial sector index 0.000Phoenix Cos Inc IYF financial sector index 0.000
Principal Financial Group Inc IYF financial sector index 0.000
Prudential Financial Inc IYF financial sector index 0.000
AU Optronics Corp IYC consumer cyclical 0.000
Alcon, Inc. IYC consumer cyclical 0.000
Align Technology Inc IYC consumer cyclical 0.000
Aquacell Technologies Inc IYC consumer cyclical 0.000
BioDelivery Sciences Intl Inc IYC consumer cyclical 0.000
Aeropostale Inc IYK consumer non-cyclical 0.000
Asbury Automotive Group Inc IYK consumer non-cyclical 0.000
Big 5 Sporting Goods IYK consumer non-cyclical 0.000
Petco Animal Supplies Inc IYK consumer non-cyclical 0.000
GameStop Corp IYK consumer non-cyclical 0.000
Accenture Ltd IYY total market index 0.000
Advisory Board Co IYY total market index 0.000
Alliance Data Systems Corp IYY total market index 0.000
Computer Programs & Systems IYY total market index 0.000
Cross Country Inc IYY total market index 0.000
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Findings 1/2
Overall Average Daily Data for Each Industry and Total Data of ETFs
Industry groups Initial Return After Retun Initial Standard Deviaiton After Standard Deviation
Helathcare 0.14% 0.26% 2.29% 1.73%
Insurance 0.06% 0.06% 1.84% 0.96%
Investment Bank -0.01% 0.00% 1.90% 1.31%
Manufacturing -0.30% -0.21% 3.63% 2.89%Retail -0.19% -0.01% 3.13% 1.71%
Service 0.29% 0.10% 2.15% 1.39%
Total for IPOs 0.00% 0.03% 2.49% 1.66%
Total for ETFs -0.04% 0.02% 1.05% 0.61%
Overall IPO volatility turned to be higher than the total volatility of ETFs for bothinvestigated periods
The initial return is lower than after daily return for each industry group exceptfor the Service sector
Yet, the initial volatility is higher than the after volatility for each industry group
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Findings 2/2
IPOs returns have increased from the
initial to the after period (3 years after
the offering)
Initial volatility has decreased in the
After period
IPO sample is more volatile than the ETFsample, while bringing slightly higher dailyreturns