An empirical analysis of European IPO markets
This analysis provides evidence regarding the performance of Initial Public Offerings (IPOs) in Europe during a time of dramatic change. For the sample of 973 IPOs taken from the six major Continental European markets and Sweden during 1988-98, there is significant underpricing and autocorrelation in IPO underpricing and activity. Privatization programs account for most of the "money left on the table". For the sample as a whole, we do not find long-run underperformance. Over shorter measurement horizons, IPOs outperform the market. The favourable performance is driven by New Economy IPOs, which account for 28 percent of the sample. The pervasiveness of these results across various methodological choices is puzzling and shows one of the forces behind the dramatic shift in industry composition of IPOs in favour of New Economy IPOs during the "Internet Bubble" of 1999 and 2000. Underpricing extends across all countries studied, with IPO activity being partially influenced by changes in tax regimes or in the regulatory framework. There is also a strong link between IPO performance and the national exchanges' ability to attract New Economy IPOs. This fundamentally explains why stock exchanges have attempted to establish "New Market" segments during the 1990s. Tests for performance differences between countries confirm the homogeneity of the European IPO market. In order to shed more light on the results, we study the relationship between management behaviour towards earnings management and the subsequent market response for the German IPO market. When applying two forms of earnings management, issuers that overperform in the long-run tend to manage earnings less aggressively. Over shorter measurement horizons, however, the performance is sensitive to the starting date of the measurement period. The market takes a considerable amount of time to respond to the fundamental message conveyed by management behaviour towards earnings management. Within the first four months, IPO returns are essentially driven by factors other than fundamentals. Apart from casting doubt on the efficiency of the IPO aftermarket, this can explain the observed negative relationship between short- and long-run IPO returns and the rationale behind investing in IPOs.