Retail IPO in Emerging MarketsRetail IPO in Emerging Markets

XI International Academic Conference on Economic and Social Development

Dmitry KokorevDmitry Kokorev

www.cfcenter.ruhttp://en.cfcenter.ru/

www.cfjournal.ru

Basic Research Programme of the Higher School of Economics in 2010 1

IPO - issuing shares to the general public for the first time, with the expectation that a liquid market will develop.

Main issues:

1) Underpricing (the price change measured from the offering price to the market price on the first trading day, 16% in US Market) [Ritter, Ibbotson]

2) Long-Run performance (poor stock price performance of IPOs in the long run, -20% 3-years abnormal return in US Market) [Ritter,Loughran]

3) Market timing (cycles existence in both the volume and the average initial returns of IPOs) [McDonald, Titman, Zingales]

2

IPO: definition and main issues

Type of owner (Private vs State Owned) [Perotti, Megginson]

Type of investor (Retail vs Institutional) [Aggarwal,

Ljungqvist, Wilhelm]

Country [Ritter, Loughran]

Other factors (IPO size, number of shares offered,

company’s age, operational performance before offering, etc)

3

Key factors, which affect IPO return

IPO in emerging markets: database

Basic criteria

Company form one of emerging markets

Time period: 2003-2010

Shares – actively traded

Market cap > $30 Mln

4

Data base

1911 offerings

15 emerging markets

Source: Bloomberg, Factiva, VanDijk

IPO in emerging markets: country differences

China [Guo, McGuinness]

A – shares vs Other shares

Government interventionBefore 2001 – planning system of IPO

Price regulation

System of non-tradable securities

High level of demand from retail investors

Near 2300 companies, $1 700 bln.

5

India [Ghosh]

Most of companies – private

22 stock-exchanges

High level of demand from local retail investors and NRI

More than 6000 companies, $700 bln.

Brazil [Cigerza]

Developed rules of trading

Almost none of government intervention

Foreign and retail investors actively participate

Most of companies trade only preferred shares (family owned)

Near 400 companies, $600 bln.

Russia

A lot of Open Joint-Stock companies through Privatization, but most of them – non-tradable

Low market liquidity and level of activity of retail investors

Near 200 companies, $670 bln.

IPO in emerging markets

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Underpricing Average 1-Year return Average 2-Year return Average 3-Year return

Emerging Markets Emerging Markets (w/out A-shares) USA [Ritter]

Emerging markets vs USA

*Average Long-Run return – buy-and-hold return, adjusted by country index (BHAR)

IPO in emerging markets: country differences

CountryNumber of

IPOsAgregate Gross Proceeds, $ mln.

Average IPO size

UnderpicingAverage 1-Year return

Average 2-Year return

Average 3-Year return

BRAZIL 102 36 915 362 4% -13% -18% -13%HONG KONG 193 38 092 197 13% 2% 2% -10%SINGAPORE 127 12 805 101 13% 4% -9% 3%

MEXICO 22 95 098 4 323 9% -8% -4% -19%RUSSIA 32 36 747 1 148 3% -4% -9% 19%TURKEY 30 8 525 284 -26% -22% -18% -25%

GROUP 1 506 228 182 451 8% -3% -7% -7%

CHILE 11 26 811 2 437 20% -11% -14% -3%CHINA 384 169 707 442 21% -11% -18% -28%EGYPT 8 2 809 351 31% -18% -20% -29%

GROUP 2 403 199 328 495 21% -11% -18% -27%

INDIA 221 33 179 150 36% 4% 13% 41%THAILAND 104 6 349 61 12% 9% 3% 10%POLAND 71 6 969 98 20% 18% 44% 47%

ROMANIA 3 180 60 20% 24% 1% -12%

GROUP 3 399 46 677 117 27% 8% 16% 33%

CHINA(A-shares) 601 83 159 138 89% -19% -10% -24%CZECH 2 687 344 240% -40% -22% -13%

Retail IPO: data and methodology

8

Model for underpricing

OwnerLnVolumeOverSubOptionretShareR 54321

yAbnormalDaOwnerLnVolumeOverSubretShareR 65431

DATA : 2003-2008 cross-sectionAdditional data about:

OversubscriptionShare of retail investors in offeringOwner before IPO

150 companies from 6 countries

Pilot Study

Model for long-run return

Retail IPO: descriptive statistic

9

Pilot Study

18%

-2% -3% -1%

20%

-18%

-34%

-53%

12,00%8,70% 10,70%

19,70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Underpricing Average 1-Year return Average 2-Year return Average 3-Year return

Emerging Markets Retail IPO PIPO

Effect of owner

10

Retail IPO: privatization status

Only 18 companies11 – China3 – Russia2 – Poland1 – India1 - Egypt

Pilot Study

Retail IPO: regression analysis

11

Pilot Study

*** - 1% significance level** - 5% significance level* - 10% significance level

  Underpricing 1-Year return 2-Year return 3-Year return

Const .238*** -.662 -.061 .035

RetShare .0922** -.391** -.425* -.327*

Option .0227      

OverSub .007* .003 -.001 -.004

LnVolume -.0465** -.064** -.003** -.080**

Owner .0336* .324** .414** 1.32

AbnormalDay   -.271** -.518 -.341

 

Observations 150 148 90 57

R2 0,23 0,152 0,114 0,122

Results

In average, investor earns more from investing in emerging

market IPO

Country factor is crucial

Retail investors are generally lose on average in LR

Privatization Retail IPO generally gives more return (SR and LR)

 12

Thank you for your attention! 13

IPO in Emerging Markets: descriptive statistic

11

)1()1(t

jtt

it CRERBHAR

Year Number of IPOsAgregate Gross Proceeds, $ mln.

Average IPO size UnderpicingAverage Half-Year return

Average 1-Year return

Average 2-Year return

Average 3-Year return

2003 164 17 051 104 43% -4% -8% -20% -24%2004 280 31 065 111 28% -4% 0% 6% 18%2005 215 66 917 311 46% 13% 21% 45% 7%2006 283 99 810 353 35% -11% -22% -11% -23%2007 439 141 915 323 66% -17% -19% -18% -14%

2008 Н1 135 116 849 866 48% 1% 10% 0% n/a2008 Н2 51 4 771 94 33% 4% -4% n/a n/a2009 Н1 24 5 452 227 29% -9% 35% n/a n/a2009 Н2 207 55 102 266 39% -1% n/a n/a n/a

2010 113 19 101 169 25% n/a n/a n/a n/a

Retail IPO: descriptive statistic

Number of IPOs

ReturnNumber of

IPOsReturn

Number of IPOs

ReturnNumber of

IPOsReturn

Number of IPOs

Return

China 111 19% 111 -12% 110 -24% 65 -40% 35 -83%Egypt 1 79% 1 -26% 1 -12% 1 -67%India 2 88% 2 -23% 1 -6% 1 76%

Poland 12 13% 12 10% 12 -1% 2 -3% 1 30%Russia 3 1% 3 -12% 3 -34%

Singapore 21 34% 21 -23% 21 -27% 21 -52% 21 -43%Total Retail IPO 150 20% 150 -10% 148 -18% 90 -34% 57 -53%

Total all offerings (w/out China A-shares) 1 310 18% 1 180 -3% 1 140 -2% 1 045 -3% 748 -1%

Average 2-Year return Average 3-Year returnCountry

Underpicing Average Half-Year return Average 1-Year return