Do initial reserves signal long-term IPO stock performance?

Figures & data

Table 1. Aftermarket performance—CARs

Event year	CAR (EW) (%)	t-statistic	CAR (VW) (%)	t-statistic
Panel A: Industry-adjusted CARs
1	−0.4	−0.3	1.2	1.0
2	2.3	1.3	−1.1	−0.6
3	1.3	0.6	−6.1**	−2.9
4	1.1	0.4	−6.5**	−2.7
5	2.9	1.1	−5.2*	−1.9
Panel B: Market-adjusted CARs
1	−0.2	−0.1	1.3	1.0
2	3.2*	1.8	0.6	0.3
3	5.5**	2.5	−2.6	−1.2
4	3.5	1.4	−7.6**	−3.0
5	5.3*	1.9	−8.5**	−3.0
Panel C: Size-matched CARs
1	0.2	0.1	−0.4	−0.2
2	−4.3*	−1.7	−5.0*	−2.0
3	−12.5***	−4.1	−12.8***	−4.2
4	−18.9***	−5.4	−15.1***	−4.3
5	−20.0 ***	−5.1	−14.4***	−3.6

Notes: One, two, and three asterisks indicate significance at the 5, 1, and 0.1% level or better (1-tailed), respectively.

Table 2. Aftermarket performance—BHARs

Event year	BHAR (EW) (%)	t-statistic	BHAR (VW) (%)	t-statistic
Panel A: Industry-adjusted BHARs
1	−0.4	−0.3	1.2	1.0
2	1.6	0.9	−2.6	−1.5
3	−1.4	−0.7	−8.9***	−4.3
4	−5.6*	−2.3	−15.0***	−6.3
5	−0.6	−0.2	−13.1***	−4.9
Panel B: Market-adjusted BHARs
1	−0.2	1.0	1.3	1.0
2	2.5	1.4	−0.7	−0.4
3	4.4*	2.0	−4.1*	−1.9
4	2.2	0.9	−10.8***	−4.3
5	5.1*	1.8	−12.9***	−4.6
Panel C: Size-matched BHARs
1	0.2	0.1	−0.4	−0.2
2	−5.8*	−2.3	−5.4**	−2.7
3	−17.0***	−5.6	−15.0***	−4.9
4	−24.4***	−6.9	−17.4***	−4.9
5	−26.9***	−6.8	−16.7***	−4.2

Notes: One, two, and three asterisks indicate significance at the 5, 1, and 0.1% level or better (1-tailed), respectively.

Table 3. Aftermarket performance—Wealth Relatives (Ritter, 1991)

Holding period	Wealth relative (industry adjusted)	Wealth relative (size matched)
1-year	1.01	1.00
2-year	1.02	0.96
3-year	1.01	0.89
4-year	0.98	0.86
5-year	1.00	0.82

Table 4. The number of bonus issues made by IPO firms in the five post-IPO years

	Total sample	Firms without bonus issue	Firms with one bonus issue	Firms with two bonus issues	Firms with three bonus issues	Firms with four or more issues
Number of firms	741	205	266	192	63	15
Percentage	100%	27.7%	35.9%	25.9%	8.5%	2.0%

Table 5. Post-announcement (bonus issues) stock/operating performance

Panel A: operating performance after bonus issues
	Measures	Financial year	Mean	10% percentile	25% percentile	50% percentile	75% percentile	90% percentile
905 bonus issues made by 741 IPO firms	Size-matched sales growth	One year before	14.7%*** (7.55)	−26.2	−8.2	4.2%*** (6.59)	29.7	57.3
		Bonus issue year	16.2%*** (9.41)	−22.6	−8.6	5.1%*** (8.58)	28.6	59.9
		One year after	18.0%*** (5.82)	−31.0	−11.3	4.9%*** (6.66)	28.2	59.5
	Size-matched ROE	One year before	1.0%* (2.21)	−3.8	−1.0	0.6%*** (6.25)	3.2	8.4
		Bonus issue year	1.0% (1.60)	−3.6	−1.0	0.8%*** (9.24)	4.3	8.4
		One year after	1.1%** (2.96)	−5.4	−1.3	0.8%*** (7.18)	4.7	9.4

Panel B: stock performance (BHAR) after bonus issues
	Measure	Mean	10% percentile	25% percentile	50% percentile	75% percentile	90% percentile
905 bonus issues	One-year post-announcement BHAR (size-matched)	15.4%*** (7.92)	−34.7	−17.0	5.7%*** (6.55)	36.2	70.8

Notes: One, two, and three asterisks indicate significance at the 5, 1, and 0.1% level or better (1-tailed), respectively. Mean t-test statistics and median Wilcoxon signed-rank test statistics are in parentheses.

Table 6A. The size of initial reserves and long-run IPO stock performance (5) $${\text{Performance}}_{i,t}={\mathit{\beta }}_0+\text{Initial}{\text{Reserves}}_i+{\text{Size}}_i+\text{Sales}{\text{Growth}}_{i,t}+{\text{ROE}}_{i,t}+{\text{HiTech}}_i+{\text{Energy}}_i+\text{Year}{\text{Dummy}}_i+{\mathit{\epsilon }}_{i,t}$$(5)

	Expected Sign	1-year holding performance	2-year holding performance	3-year holding performance	4-year holding performance	5-year holding performance
Size of initial reserves	+	0.043*** (4.58)	0.030*** (3.48)	0.024** (3.02)	0.016* (2.23)	0.003 (1.30)
Firm Size	−	−0.048 (−1.18)	−0.053 (−1.11)	−0.162** (−2.40)	−0.023 (−1.10)	0.014 (1.00)
Sales growth	+	0.191** (3.04)	0.267*** (3.42)	0.261** (2.56)	0.200* (2.21)	0.213* (1.70)
ROE	+	1.012*** (3.87)	0.783** (2.72)	1.121*** (4.32)	0.875*** (3.19)	0.743** (2.53)
Hi-Tech	+/−	0.034 (0.58)	0.027 (0.38)	0.036 (0.53)	−0.016 (−0.44)	−0.168* (−1.75)
Energy	+/−	0.077 (0.26)	−0.158 (−1.56)	−0.143 (−1.27)	0.109 (0.30)	−0.067 (−0.48)
Year dummies	+/−	Included	Included	Included	Included	Included
Intercept	+/−	Included	Included	Included	Included	Included
R^2		13.2%	16.2%	17.2%	17.9%	17.1%
Adjusted R^2		13.1%	14.8%	14.2%	16.8%	14.4%
F Statistic		12.08	12.67	13.92	14.12	11.11
Observations		741

Variables
Long-run IPO stock performance	Size-matched Wealth Relatives (Ritter, 1991) in IPO event year t (t = 1, 2, 3, 4, 5 respectively)
The size of initial reserves	The total amount of capital/revenue reserves scaled by equity immediately after the IPO, net of the contemporaneous figure of the size-matched peers
Firm size	The natural logarithm initial market capitalization at the end of the first trading day
Sales growth	The average yearly sales growth ratio reported from the IPO year to the event year t net of the contemporaneous figure of the size-matched peers
ROE (net income scaled by equity)	The average yearly ROE reported from the IPO year to the event year t net of the contemporaneous figure of the size-matched peers
Two industry dummies	Hi-tech IT industry dummy and integrated oil/gas industry dummy
4 year dummies (for the IPO year 1996, 1997, 1998, and 1999, respectively)	e.g. Year dummy 1996 takes the value of 1 if the IPO is offered in the year 1996, 0 otherwise

Notes: One, two, and three asterisks indicate significance at the 5, 1, and 0.1% level or better (1-tailed if sign predicted), respectively. The t-statistics are in parentheses.

Table 6B. Interactive effect (initial reserves and firm characteristics) on IPO stock performance (6) $${\text{Performance}}_{i,t}={\mathit{\beta }}_0+{\text{Size}}_i+\text{Sales}{\text{Growth}}_{i,t}+{\text{ROE}}_{i,t}+\text{Initial}{\text{Reserves}}_i+{\text{Size}}_i\times \text{Initial}{\text{Reserves}}_i+{\text{ROE}}_{i,t}\times \text{Initial}{\text{Reserves}}_i+\text{Sales}{\text{Growth}}_{i,t}\times \text{Initial}{\text{Reserves}}_i+{\text{HiTech}}_i+{\text{Energy}}_i+\text{Year}{\text{Dummy}}_i+{\mathit{\epsilon }}_{i,t}$$(6)

	Expected sign	1-year holding performance	2-year holding performance	3-year holding performance	4-year holding performance	5-year holding performance
Firm size	−	−0.034 (−1.24)	−0.066 (−1.11)	−0.183** (−2.47)	−0.025 (−1.01)	0.055 (0.45)
Sales growth	+	0.128* (2.11)	0.254** (2.67)	0.236* (2.09)	0.233* (2.21)	0.247* (1.82)
ROE	+	1.184*** (4.47)	0.876*** (3.23)	1.412*** (4.65)	1.149*** (4.33)	1.217*** (3.13)
Initial reserves	+	0.054*** (4.11)	0.034*** (3.20)	0.027** (2.68)	0.024* (2.10)	0.009 (1.20)
Interaction term 1 (size × initial reserves)	−	0.012 (0.54)	0.021 (0.49)	0.015 (0.92)	0.021 (0.19)	0.041 (0.10)
Interaction term 2 (ROE × initial reserves)	+	0.334*** (3.47)	0.219** (2.88)	0.144* (2.03)	0.102* (2.09)	0.004 (1.47)
Interaction term 3 (SG × initial reserves)	+	0.237*** (3.33)	0.201*** (3.47)	0.111** (2.59)	0.184* (2.05)	0.107 (1.46)
Hi-Tech	+/−	0.012 (0.58)	0.021 (0.56)	0.002 (0.53)	−0.032 (−0.34)	−0.013 (−0.69)
Energy	+/−	0.009 (0.48)	0.032 (0.98)	0.049 (0.34)	0.014 (0.24)	−0.017 (−0.24)
Year dummies	+/−	Included	Included	Included	Included	Included
Intercept	+/−	Included	Included	Included	Included	Included
R^2		15.1%	17.5%	17.3%	18.9%	17.1%
Adjusted R^2		14.7%	16.3%	14.2%	17.4%	15.8%
F Statistic		13.62	12.83	12.45	12.82	11.72
Observations		741

Figure 1. IPO long-run stock performance and size of initial reserves.

Ritter, J. R. (1991). The long-run performance of initial public offerings. The Journal of Finance, 46, 3–27.https://doi.org/10.1111/j.1540-6261.1991.tb03743.x

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