Initial and Long-Run IPO Returns in Central and Eastern Europe

ABSTRACT

This article provides original evidence on IPO underpricing and long-run underperformance in Central and Eastern Europe (CEE) and compares results to the European Union’s developed capital markets from 2000 to 2009. Using both index-adjusted and CAPM-adjusted returns, we find significant underpricing that is significantly higher than underpricing of comparable IPOs in the European Union’s developed capital markets. We show that the CEE’s initial IPO returns also exhibit significantly higher volatility. In line with the asymmetric information theory, we indicate that smaller IPOs in the CEE region have greater underpricing than the larger IPOs. Contrary to the literature, we unambiguously confirm long-run underperformance toward the benchmarks. In some model specifications, we also find that IPO long-run underperformance in the CEE region is less present than in the European Union’s developed capital markets.

KEY WORDS:

• emerging markets
• financial intermediation
• IPO long-run performance
• IPO underpricing

Acknowledgments

The authors thank Ali M. Kutan and three anonymous reviewers for detailed and valuable feedback from which they were able to significantly improve and restructure this article. Further, the authors thank Rogerio Mazali, Tjeerd Boonman, and discussants at the International Conference on Finance, Banking and Regulation held on July 16–18, 2014, in Brasilia for their remarks on how to improve the article. All mistakes remain the authors’.

Notes

^1. The detailed data on financial depth in EU countries (banks and market capitalization-to-GDP) are available upon request.

^2. There were 173 IPOs on Deutche Boerse with a total IPO value of EUR 37.9 billion between 2000 and 2009; that is, on average EUR 219 million IPO value per company.

^3. Detailed data available upon request.

^4. See results under section CEE capital markets (> EUR 10 million IPO value) in Table 5.

^5. Detailed data available upon request.

^6. Detailed data available upon request.