The Aftermarket Performance of Initial Public Offerings in Canada

In this paper, we empirically investigate Canadian initial public offerings (IPOs) to provide one case on the international evidence on the long-run performance of IPOs. Specifically, we examine whether the choice of a performance measurement methodology directly determines both the size and power of statistical test, as documented in previous studies (Mitchell and Stafford, 2000; Loughran and Ritter, 2000; and Brav, Geczy and Gompers, 2000). Our sample consists of 445 IPOs between January 1991 and December 1998. Using cumulative abnormal returns as an abnormal performance measure, we find that the Canadian IPOs underperform significantly the sample of seasoned firms with the same market capitalization. More specifically, the 3 year and the 5 year underperformances estimated on value weighted (VW) basis are statistically significant. Moreover, using the buy-and hold returns as an alternative measurement for long-run performance, we find that investors who buy immediately after listing and hold shares for five years will make a loss of 24,66%, on equally weighted (EW) basis (15,16% on VW basis) relative to an investment in the control firms. Using the calendar-time returns method, we find that the 5 years underperformance is 25,6% on EW basis (19,22% on VW basis). We have entertained a number of possible explanations for the poor subsequent performance of issuing firms. While, the fads or investor's overreactions and divergence of opinions hypotheses do not apply in explaining the aftermarket performance of Canadian IPOs, our evidence is consistent with the hot issue market story. La presente etude contribue a l'analyse internationale de la performance a long terme des emissions initiales, menee dans differents pays, en analysant les emissions canadiennes de la periode 1992-1998. Nous examinons en particulier dans quelle mesure le choix des mesures de performance influence a la fois l'amplitude des resultats et la puissance des tests statistiques, comme l'affirment plusieurs auteurs tels Mitchell and Stafford (2000), Loughran and Ritter (2000) ainsi que Brav, Geczy et Gompers (2000). L'echantillon inclut 445 emissions initiales realisees entre0101 1991 et1101 1991. Lorsque la methode des residus cumules est utilisee pour mesurer la performance anormale, nous observons que les emissions initiales canadiennes ont une performance significativement inferieure a celle d'entreprises pairees, de taille semblable qui n'ont pas procede a des emissions. Les residus moyens ponderes calcules apres 3 ou 5 ans sont negatifs lorsque ces rendements sont ponderes par les valeurs des produits bruts. L'effet n'est donc pas imputable uniquement aux petites emissions. Lorsque la methode de la detention passive est utilisee, nous estimons la perte de richesses des acquereur des emissions qui les detiennent pendant 5 ans a 24,66% de leur richesse initiale. L'examen des facteurs explicatifs de la performance a moyen et long terme semble confirmer l'hypothese des fenetres d'opportunite, alors que les hypotheses basees sur l'irrationalite ou la sur reaction ne semblent pas confirmees.