The Performance of IPO Investment Strategies and Pseudo Market Timing - Evidence from Germany

35 Pages Posted: 6 Mar 2007

See all articles by Andreas Trauten

Andreas Trauten

University of Muenster - Finance Center

Roland Schulz

University of Muenster - Accounting Center

Maik Dierkes

Leibniz University Hannover

Date Written: January 2007

Abstract

We analyse the performance of simple investment strategies in IPOs based on a large sample of IPOs in Germany between 1985 and 2002. We find that investing in each IPO and disinvesting after a certain holding period yields significantly negative abnormal performance compared to a broad market index on average. In contrast, investing in a portfolio that comprises recent IPOs does not result in statistically significant underperformance. Since the only difference between these strategies is that the first weights each IPO equally and the latter weights each calendar month equally, this finding implies that firms going public in hot IPO markets perform worse than those going public in cold markets. Schultz (2003) offers a rational explanation for the clustering of IPOs at market peaks and subsequent underperformance which he calls pseudo market timing. It arises if firms' propensity to go public increases with market price levels. Indeed, we find that the IPO activity in Germany can largely be explained by price levels. We apply simulations in order to test the extent to which pseudo market timing can account for economically significant underperformance of IPOs in Germany. We find that pseudo market timing can partly explain the performance of IPO investment strategies between 1985 and 2002. Our results indicate that investing in a portfolio of recent IPOs is preferable to investing in each firm going public separately.

Keywords: Initial Public Offerings, long-run stock performance, market efficiency, German stock market, market timing

JEL Classification: G10, G11, G14

Suggested Citation

Trauten, Andreas and Schulz, Roland and Dierkes, Maik, The Performance of IPO Investment Strategies and Pseudo Market Timing - Evidence from Germany (January 2007). Available at SSRN: https://ssrn.com/abstract=967420 or http://dx.doi.org/10.2139/ssrn.967420

Andreas Trauten (Contact Author)

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Roland Schulz

University of Muenster - Accounting Center ( email )

Universitätsstr. 14-16
Münster, 48143
Germany

Maik Dierkes

Leibniz University Hannover ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

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