Why do Banks Go Public? Evidence from the 2005-2007 Wave of Brazilian IPOs

Abstract

This study analyzes the wave of Initial Public Offering (IPO) of Brazilian banks from 2005 to 2007. The results show that the banks that went public in this period showed ex-ante characteristics different from those of similar banks that remained privately held. Specifically, IPO-banks had greater profitability, larger loans/asset ratio, smaller proportion of non-performing loans and were more capital constrained than banks that remained private. These results show that the wave of bank IPOs cannot be explained simply by the market-timing theory, but probably is due to the greater growth opportunities of these banks relative to their competitors. Thus, market liquidity is a necessary, but not sufficient condition, to explain these IPOs. We also investigate the effect of the going public decision on the post-issue operational performance of these banks, and find evidence on the increase in the proportion of loans relative to total assets, associated with a rise in the proportion of nonperforming loans, even controlled by the credit boom occurred in the period. An improvement in managerial efficiency is also perceived, which may indicate economies of scale resulting from the going public process.

Keywords: initial public offering, banks, post-IPO performance, Brazil

JEL Classification: G20, G28, G32