The Aftermarket Performance of Initial Public Offerings in Canada

In this paper, we empirically investigate Canadian initial public offerings (IPOs) to providing one case of international evidence of the long-run performance of IPOs. By considering a non-US dataset, we hope to shed further light on existing research findings in this area. In a sample of over 445 Canadian IPOs between 1991 and 1998, we find that investors who buy immediately after listing and who hold shares for five years will incur a loss of 24.66%, on an equally weighted basis (or 15.16% on a value-weighted basis) relative to an investment in the control firms. Moreover, using the cumulative abnormal returns as an alternative measurement for long-run performance, the underperformance of Canadian IPOs persists. A calendar-time analysis confirms that Canadian IPOs significantly underperform the sample of seasoned firms with the same market capitalization. Several explanations for the poor subsequent performance of Canadian issuing firms are explored. While the divergence of opinions hypothesis does not apply in explaining the aftermarket performance of Canadian IPOs, our evidence is consistent with the hot issue market story. We also find some evidence of the fads hypothesis to explain the long-run behavior of large IPOs.

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