Long-Run Stock Performance of German Initial Public Offerings and Seasoned Equity

Abstract

Existing estimates of the long-run abnormal performance after initial public offerings in Germany differ between +1.54 % and -19.85 % for holding periods of 36 months. We discuss the methodological problems of these studies and the peculiarities of the German market. Using a large sample, alternative benchmarks (the equally and the value-weighted market portfolio, size portfolios and matching stocks), and a simulation study we conclude that size portfolios and matching stocks are better benchmarks than market portfolios, mainly because IPO stocks typically have a small or medium market capitalization and a size effect in stock returns exists. The new listing bias, discussed intensively by Barber/Lyon (1997) seems to be of minor importance in the German market. Using buy-and-hold abnormal returns, we estimate that German stocks involved in an IPO or in a SEO, on the average, underperform a portfolio consisting of stocks with a similar market capitalization by 6 % in three years. This is considerably less than the underperformance after IPOs and SEOs in the US market reported by Loughran/Ritter (1995) and the underperformance after IPOs in Germany reported by Ljungqvist (1997). For stocks involved in a SEO the underperformance is statistically significant, for IPO stocks it is not. This is the first estimate of the abnormal performance after SEOs for the German market. We also show that the apparent underperformance of the 1988-1990 IPO cohort discovered by Ljungqvist (1997) disappears when the abnormal performance estimate is based on size portfolios, instead of market portfolios. Since we have a relatively small number of observations per event, the use of matching firms as benchmarks in the calculation of long-run abnormal returns is associated with a much higher variance of the average long-run abnormal performance estimate than the use of size portfolios in both, the actual event studies and the simulations.

Keywords: Initial public offerings, seasoned equity issues, long-run stock performance, market efficiency, German stock market

JEL Classification: G14, G12, G15