Does it Pay to Invest in IPOs? Evidence from the Warsaw Stock Exchange

Abstract

In this paper we analyze IPO underpricing on the Warsaw Stock Exchange between 2003 and 2011. The average initial return was positive (14.2%), which is similar to the findings on other equity markets. Medium and long-run abnormal returns (1-month, 3-months and 1-year) on average are negative and they show great standard deviations. In general, the more time elapses from the offer day the lower the return from the IPO investment is. The abnormal initial return (AIR) was 2.9% which suggests that although in net terms IPO investments were profitable for investors the rate of return was quite small. Using leverage did not help much to boost returns. Not surprisingly the highest initial returns yielded IPOs of private domestic companies and (what is more striking) offers made by companies that migrated to the WSE from RPW CeTO market or NewConnect platform. This observation goes against information asymmetry theories of IPOs underpricing. Also the abnormal initial return was the highest in case of the latter companies. Four determinants of IPOs underpricing proved to be significant at 0.001 level including: Parkinson’s Extreme Value, reduction rate, fad and turnover ratio. These variables explain over 34% of the IPOs initial returns.

Keywords: new equity offerings, IPOs, underpricing, investment strategies

JEL Classification: G11, G12, G14, O16