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In recent years, the academic community has closely examined and intensely debated the performance of initial public offerings (IPOs). An overview of the corresponding studies reveals the existence of severe aftermarket underperformance for issuers. This phenomenon has been reported in the U.S. and in other countries, and is also observed with seasoned equity offerings. If the aftermarket underperformance phenomenon exists, then it raises questions concerning aftermarket efficiency.
Previous research has presented convincing empirical evidence that IPOs underperform in the long run (Putter [1991]; Loughran and Pvitter [1995]). However, Brav and Gompers [1997] have recently challenged the U.S. findings. They find that the underperformance result is sensitive to the method used to evaluate abnormal returns, and is not exclusive to IPO firms. Therefore, it seems important, before accepting or rejecting the efficient market hypothesis, to further examine the robustness of the U.S. findings using non U.S. data. Jenkinson and Ljungqvist ([2001], p. 166) state "the importance of investigating IPO phenomena from an international perspective rather than a U.S.-centric one. " The IPO market in Canada is of special interest, given the fact that companies going public in Canada tend to be much smaller than their U.S. counterparts and that Canadian exchanges have different listing requirements from those in the U.S. Hence, we may expect dissimilar results.
This article presents three distinctive features. First, we use both an event-time as well as a calendar-time framework to measure IPO aftermarket performance. Within each framework, we examine two measures of abnormal returns: i) buy-and-hold abnormal returns and cumulative abnormal returns; ii) mean calendar-time abnormal returns and alphas from the Fama-French three-factor model (FF-TFPM). Continuously rebalanced control portfolios (size and book-to-market equity ratios) purged from IPOs are used to measure abnormal returns. second, two weighting schemes (equally- and value-weighted IPO portfolios) are analyzed to examine the robustness of our results. Third, we examine the cross-sectional variance of long-run performance. Existing literature proposes numerous theoretical explanations for the long-run underperformance of IPOs. However, empirical works that support these theories are limited. Consequently, we do not focus on a single possible explanation of the Loughran and Ritter "new issue puzzle," but rather, consider different potential variables that may explain the long-term behaviour of Canadian IPOs.
We find underperformance when event-time buy-and-hold...