UNDERPRICING AND LONG-TERM PERFORMANCE OF IPOS: EVIDENCE FROM EUROPEAN INTERMEDIARY-ORIENTED MARKETS

1. Introduction

Europe is increasingly becoming a single market, but there are still some significant differences between countries, especially in the financial sector. The differences are clear between the Eurozone economies themselves, as well as between Eurozone and non-Eurozone countries.

This study therefore examines one of the most important phenomena of financial markets, Initial Public Offerings (IPOs), focusing on the European market. The paper aims to analyze two main anomalies related to IPOs: underpricing and long run underperformance.

Previous studies mainly investigated such anomalies comparing very different European markets (Berk et al., 2015). This paper, on the other hand, considers a homogeneous Eurozone context consisting of three markets: Italy, France and Germany. These countries have many features in common. They have a common currency, the Euro, and a centralized banking system supervised by the European Central Bank (ECB). Italy, France and Germany are the most populated countries in Europe and represent over 40% of the European Union (EU 28) and over 60% of the Euro Area (EA 19) in terms of population (Eurostat data). They are important developed economies, considering that their GDP jointly represents almost 50% of the European Union (EU 28) and over 65% of the Euro Area (EA 19) (Eurostat data), and their financial system is highly significant in the Eurozone (ECB, 2015). They are intermediary-oriented countries (Cobham et al., 1999; Demirguc-Kunt, 1999; Levine, 2002; WSBI-ESBG, 2015; Aggarwal and Goodell, 2016) and have over 53% of the 5,469 Euro area credit institutions (ECB data) and over 45% of the assets in EU countries (EBA data).

The study aims to answer the following research questions: What is the trend in short and long run anomalies for Italy, France and Germany? Do differences exist between these countries? Is industry a determinant of underpricing and long run performance?

Our analysis is based on the following hypotheses: Hypothesis 1: IPOs in the three main European countries are characterized by underpricing and long run underperformance.

Hypothesis 2: Geographical context impacts on differences in short term and long term anomaly.

Hypothesis 3: Industry is a determinant of underpricing and long run performance.

Our findings will make an interesting contribution of the paper to the existing literature in several ways. Unlike previous literature, the paper aims to study underpricing and long run performance over the period 1997-2011, including the recent financial crisis. Moreover, the analysis focuses on homogeneous Eurozone countries, thus providing results comparing with other international markets, such as the US. The study also aims to verify whether emerging trends show different dynamics across industries or whether they are generalized.

The paper is structured as follows. There is a review of the main literature in Section 2, followed by a description of the sample and methodology in Section 3. Section 4 shows the empirical results: in 4.1 the short term analysis of underpricing and in 4.2 long run performance by industry. Section 5 presents conclusions.

2. Literature Review

Initial Public Offerings (IPOs) have been shown to be characterized by two anomalies: underpricing in the short-term horizon and underperformance in the long-term horizon (Rhee, 2002; Khan et al., 2014).

Underpricing, the phenomenon of the market share price being higher than the offer price in the first listing days, occurs widely in many countries, and many explanations have been put forward over time. In order to determine the cause, in other words to determine whether the IPO issuer offers too low a price, or whether investors offer too high a price, market trends are usually observed immediately after the listing. It has been shown that the market does not usually lower the price after the first listing day, so the market price during the first few days can be considered "right." The difference between the offer price and the market price on the first listing day, i.e. underpricing, can thus be considered "money left on the table" (Ibbotson, 1975). In a study of 8,668 US IPOs over the period 1960-1987, Ibbotson et al. (1988) find that underpricing runs at 16.4% on average. Moreover, it tends to occur particularly on "hot issue" markets, rather than being steady over time (Ritter, 1984; Loughran and Ritter, 2002).

Previous studies have attempted to identify the precise time when the reduction in share price is made. They show that underpricing is identifiable on the first listing day (Miller and Really, 1987) and that it is already measurable at the beginning of the listing day as the difference between the opening price and the IPO price (Barry and Jennings, 1993).

Underpricing has been studied in many other countries as well as the US (Ritter, 2003). Hopp and Dreher (2007) examine 29 markets in four continents (America, Europe, Asia and Oceania) over the period 1988-2005, and find underpricing to be widespread all over the world, with very variable average values ranging between 2.45% (Austria) and 66.06% (India).

Engelen and Van Essen (2010) investigate differences between countries in their study of 2,920 IPOs in 21 countries, and find that "country-specific characteristics explain about 10% of the variation in the level of underpricing" (2010: 1967) and in countries with an effective legal system and law enforcement, i.e. a high level of investor protection, the level of underpricing in firms going public is significantly lower. On the other hand, Boulton et al. (2010) study 4,462 IPOs in 29 countries between 2000 and 2004 and show that "underpricing results suggest that IPO initial returns are greater in countries offering stronger protections to investors" (2010: 219).

No single convincing explanation for underpricing has so far been put forward, although various attempts have been made, and certain factors and variables have been identified (Katti et al., 2016; Khan et al., 2016).

One of the main causes of underpricing appears to be informational asymmetry.

Rock (1986) identifies informational asymmetry between investors, who can be either informed or uninformed about IPO shares and cannot "participate in the new issue market until the price falls enough to compensate for the 'bias' in allocation" (1986: 188).

Baron (1982) provides another explanation for underpricing, identifying information asymmetry between issuer and underwriters as a cause. He states that underwriters tend to minimize the offer price compared to the "real" price, in order to promote underwriting and minimise their commitment. Muscarella and Vetsuypens (1989), studying IPO underpricing on a large US sample, including investment banks, find no evidence of this. Regalli and Soana (2013) study IPOs on the Italian market and their results appear to support Baron's theory.

Informational asymmetry also underpins the signaling models developed to explain the underpricing phenomenon. In these models, underpricing is considered to be caused by the need of "good" firms to signal their quality (Allen and Faulhaber, 1989; Welch, 1989; Grinblatt and Hwang, 1989).

Other explanations for underpricing concern the desire to avoid the risk of not selling by issuers and banks responsible for underwriting. Tinic (1988) also points out that underpricing could be the "price to pay" to avoid litigation from investors underwriting shares in IPOs. This is confirmed by Banerjee et al. (2011) and by Lin et al. (2013), who examine 13,759 IPOs in 40 countries over the period 1991-2011.

Moreover, Chang (2011) examines 1,558 IPOs on the Taiwan market in the period 1962-2009, showing that "when issuing firm insiders cannot accurately evaluate an IPO's intrinsic value, they use the information of other IPOs in the same industry that went public earlier to determine an IPO offer price" (2011: 369).

As factors impacting on the level of underpricing, Engelen and Van Essen (2010) cite the following variables from the literature: nature of the offer (primary vs. secondary offering), company age, venture vs. non-venture backed IPO, technology industry, introduction method, year, price earning ratio, offer size and underwriter reputation.

Long run underperformance is the second anomaly characterizing IPOs. It is different from underpricing, a short-term phenomenon, as it implies an underperformance of stocks after the IPO in the long term. Underpricing reveals that markets are basically efficient, and can adjust the stock price to its "correct" level almost immediately after the IPO, whereas long run negative performance shows that financial markets find it difficult to price stock correctly, thus making periodical adjustments necessary in the long term.

Aggarwal and Rivoli (1990) make one of the first studies of long run performance. They examine 1,598 IPOs on the US market over the time horizon 1977-1987 for a period of almost a year (250 days) after each IPO, and find that stocks show a negative performance (-13.73%) compared to market performance. This can be explained by an excessive optimism, or investors' initial overestimation of stock price in what are termed "fads." These results are confirmed by Ritter (1991), who observes a negative long run performance analyzing 1,526 IPOs over 36 months in the period 1975-1984. He finds a negative long run performance compared not only to some market indexes, but also to other comparable firms. For this reason, Ritter (1991) demonstrates that "the quantitative measurement of the long-run performance of initial public offerings is very sensitive to the benchmark employed" (1991: 12).

Further explanations for long run underperformance in IPOs can be found in firm characteristics. They include the acquisition of other firms (Brau et al., 2013), the presence of independent directors (Liao et al., 2011) and the presence of venture capitalists (Brav and Gompers, 1997; Michel, 2013). On this point, Bessler and Seim (2011) find significant evidence that venture capital-backed firms are correlated with positive returns for a specific period following the IPO. Moreover, Purnanandam et al. (2004) demonstrate that "IPOs are overvalued at the offer price, tend to run up in the aftermarket and revert to fair value in the long run" (2004: 823), while Santos (2010), studying the relationship between long run performance and underpricing, states that "the average underpricing in the market determines the degree of subsequent long run performance" (2010: 2).

Long run performance has also been investigated in other countries outside the US. Levis (1993), Gregory et al. (2010) look at the UK; Thomadakis et al. (2012)--Greece; Ahmad-Zaluki and Kect (2012), Zarafat and Vejzagic (2014)--Malaysia; Abidin et al. (2012), Chan et al. (2004), Xia et al. (2014), Chi et al. (2015)--China; Shimizu (2016)--Japan; Dhamija et al. (2017) India; Ediriwickrama (2015)--Sri Lanka; Omran (2005)--Egypt; Seitibramovic (2012)--Russia, Ukraine, and Kazakhstan; Hansen and Jorgensen (2010)--Denmark, Norway, and Sweden; Alvarez and Gonzales (2001) Spain; Wen and Cao (2013)--Taiwan; Alanazi (2013)--Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman; Gaiewski and Gresse (2006) look at 15 European countries. (1)

Previous literature has also investigated both underpricing and long run underperformance for the three countries analyzed in the present study (Germany, France and Italy).

In Germany, Ljungqvist (1997) studies a sample of 189 IPOs over the period 1970-1993 and finds an underpricing of 9.2%, "neutral" performance at one year and a negative performance at three years (-12.1%) using the Buy-and-Hold methodology. Moreover, Jaskiewicz et al. (2005) analyze the long run performance of some German stocks after their IPOs over the period 1990-2000. Their results also show a negative long run performance, measured by using the Buy-and-Hold Abnormal Returns method. The underperformance varies between 32.5 and 33.8 according to the index used. Furthermore, Pryshchepa and Stehle (2011) examine 179 German IPOs over the period 1960-2004, and find that "the performance of issuing stocks does not differ from that of non-issuing stocks on average" (2011: 19). Finally, a smaller scale study limited to the NeuerMarkt on 320 IPOs in the time horizon 1996-2001 shows significant underpricing (average underpricing equal to 52.15%) and, unlike other markets, a relative unimportance of venture capitalists (Elston and Yang, 2010).

In France, Derrien and Womack (2003) examine 264 IPOs over the period 1992-1998, and find an average underpricing of 13.23%. In a further study of Small and Medium Enterprises listed on the Nouveau Marche in the time horizon 1998-2000, Sentis (2009) shows an "initial return" of 21.38%, while Goergen et al. (2009) find a first day return of 21.06% in the same market over the period 1996-2000. For the Nouveau Marche and the Second Marche, Cherrak (2012) identifies an underpricing of 4.91%, in the period 1991-2004 for firms supported by venture capital (VC), and an underpricing of 8.58% for the other firms. He finds that the long run performance is also significantly different between firms supported by VC (-23.92%) and for the other firms (10.14%). These findings for the French market conflict with findings for the US market. In France companies financed by venture capital show weaker performance in the long term, whereas in the US, VC backed companies show lower underpricing at their IPOs and a better long-term performance.

Roosenboom (2007) studies the determinants of underpricing on the French market, and like previous international literature, shows that "more reputable underwriters are associated with lower discounts" (2007: 1230). There is a relationship between companies which are forecast to be profitable in the current year and smaller price discounts. Greater uncertainty on valuation, on the other hand, is associated with larger price discounts.

Various studies have also been carried out in Italy (Aletti and Banfi, 1985; Nahmijas and Pera, 1988; Cherubini and Ratti, 1991; Fusconi, 1992; Chiabrera, 1993; Giannotta and Lanza, 1993; Basile and De Sury, 1997; Fabrizio, 1999; Giudici and Paleari, 1999; Giorgino et al., 2001; Tasca and Guizzardi, 2001; Cenni et al., 2001; Cassia et al., 2004; Celia, 2008). They confirm the presence of both underpricing and long run underperformance. Fabrizio and Sama (2001) find an average underpricing of 7.9% on a sample of 41 Italian IPOs over the period 1995-1998, and note that such underpricing is much smaller than that found in studies made in the 1980s, and consistent with international findings. Regalli and Soana (2013) show an underpricing of 9.7% on a sample of 231 IPOs in the time horizon 1985-2007, with considerable variations between years and significant differences in the banking sector. Moreover, Dell'Acqua et al. (2014) find an average underpricing of 6.75% on a sample of 129 Italian IPOs over the period 2001-2012. This result appears to be consistent with previous international evidence. The authors show that underpricing level, especially in market segments devoted to SMEs, is highly affected by firm size, aftermarket risk, demand multiple, timing of the listing and share retention. Regarding long run performance, Fabrizio and Sama (2001) observe a negative long run performance at 48 months over the period 1995-1998. These results are confirmed by Gandolfi et al. (2012) on a sample of 192 IPOs in the time horizon 1985-2007. Again, Rossi (2012) analyses 102 Italian IPOs over the period 1998-2005, and finds a negative long run performance over 36 months for firms supported by venture capitalists and for other firms.

Finally, Acconcia et al. (2014) examine the French, German and Italian markets using a sample of 1,349 IPOs in the time horizon 1996-2009, and consider the impact on underpricing of the distance between the firm and the corresponding financial centre. Underpricing is shown to be higher in companies more distant from the corresponding financial centre, as demonstrated also by Nielsson and Wojcik (2016). Our paper concentrates on the same countries investigated by Acconcia et al. (2014) but, unlike their study, our analysis focuses only on main stock markets and takes into account under-pricing and long run performance of banks and other industries.

3. Sample and Methodology

3.1 Data description

The initial sample includes all IPOs completed between January 1, 1997 and December 31, 2011 taking place in France, Germany and Italy.

Data are obtained from EurIPO[R], a dataset with information about the IPOs on all European stock exchanges since the 1990s. We extract from EurIPO[R] all IPOs taking place in the following markets: Euronext (France), Deutsche Borse and Borsa Italiana. We exclude listings without an initial public offering, listings following extraordinary operations (with previously listed companies), as well as simple transfer to the main market from other national or international markets. Our sample does therefore not include private offerings, re-admissions of previously suspended shares or listings of shares other than ordinary shares. We also exclude IPOs listed on non-regulated markets (Entry Standard, Open Market, Freiverkehr Markt, Alternext and Marche Libre) and on markets dedicated to illiquid securities (Mercato Ristretto, Mercato Expandi and Geregelter Markt), Small and Medium Enterprises (Nuovo Mercato) and growth companies (Neuer Markt and Euro.NM). This guarantees that our sample is made up of stocks listed on exchanges with high capitalization, ensuring potential for high share liquidity, and therefore allowing quoted stock prices to reflect the dominant investor's perception of the stock value.

The final sample consists of 437 IPOs taking place in France (180), Germany (133) and Italy (124) in the period 1997-2011, as shown in Table 1.

Table 1 shows that the IPOs are fairly equally distributed in terms of country, but they are not steadily distributed over the time period. The majority of the IPOs were made from 1997 to 2001 and from 2005 to 2007, thus proving that companies match the timing of IPOs with the "hot issue" market coinciding with the peaks of business cycles, as shown by previous literature (Ritter, 1984).

The sample is also segmented according to industries identified by the Industry Classification Benchmark (ICB), as shown in Table 2. Table 2 shows that the industries prevailing in the sample are "Industrial" (27% of companies), "Consumer goods" (16% of companies) and "Consumer services" (16% of companies).

3.2 Estimating underpricing and long-run performance

For each IPO, we calculate the initial return using the "simple underpricing" approach. This methodology is specifically suitable for IPOs characterized by a short interval between the offering day and the listing day, and for this reason it has been used in many previous studies (Johnson and Miller, 1988; Ritter, 1991; Mauer and Senbet, 1992; Schenone, 2004, Hopp and Dreher, 2007; Dell'Acqua et al., 2014; Damenint, 2015).

The "simple approach" determines the underpricing (U[P.sub.i]) as the difference in percentage between the official price on the first day of listing of the share i ([P.sub.i,1]) and its placement price ([P.sub.i,0]). This difference can be proxied by the logarithm of the ratio between [P.sub.i,1] and [P.sub.i,0]:

U[P.sub.i] = ([P.sub.i,1] - [P.sub.i,0]) / [P.sub.i,0] = ([P.sub.i,1] / [P.sub.i,0]) - 1 [approximately equal to] ln ([P.sub.i,1] / [P.sub.i,0]) (1)

Data on the closing official price on the first day of listing are extracted from Datastream, while data on the offer price are extracted from EurIPO[R].

The existing literature is not unanimous about the most suitable methodology to measure the long-run stock returns. Barber and Lyon (1997) state that Cumulative Abnormal Returns (CAR) are a biased predictor of long run and favor the use of Buy and Hold Abnormal Returns (BHR) to detect long-run stock performance. Fama (1998), Gompers and Lerner (2003), and Mitchell and Stafford (2000) on the other hand argue that theoretical and statistical considerations suggest that Cumulative Average Adjusted Returns should be used, rather than Buy and Hold Abnormal Returns. A limitation of the CAR methodology is that it assumes that one should periodically adjust the portfolio to equally distribute the wealth invested in the portfolio among the n IPOs.sup. (2) [6]. Thus, consistently with previous literature (Fabrizio and Sama, 2001; Ritter, 1991; Levis, 1993; Schuster, 2003; Gajewski and Gresse, 2006; Santos, 2010), we evaluate the long-run performance of IPOs using both measures: (1) Cumulative Average Adjusted Returns (CAR) and (2) Buy and Hold Returns (BHR).

Firstly, for each IPO, we calculate the abnormal returns ([ar.sub.i,t]), which are the benchmark-adjusted return for stock i in event day t:

[ar.sub.i,t] = Ln ([P.sub.i,t]/[P.sub.i,t-1]) - Ln ([I.sub.t] / [I.sub.t-1]) (2)

The benchmarks we used are the Dow Jones Global Indices[R] (DJGI) (3) [7]. These indices give the advantage that the industry mix matches that of the sample IPOs.

Secondly, we estimate the average abnormal return (ARt) on a portfolio of n stocks for event day t, which is the equally weighted arithmetic average of the benchmark-adjusted returns:

[mathematical expression not reproducible] (3)

The cumulative abnormal return ([CAR.sub.q,s]) from event day q to event day 5 is the summation of the average benchmark-adjusted returns:

[CAR.sub.q,s] = [s.summation over (t=q)] A[R.sub.t] (4)

As noted above, we also use the BHR (4) [8]:

[mathematical expression not reproducible] (5)

For both CAR and BHR, returns are calculated for the following aftermarket periods: 6 months, 1 year, 3 years, and 5 years after the date of IPO based on trading days.

Data on the market prices of IPOs and benchmarks during the period 1997-2011 are extracted from Datastream.

4. Results

4.1 Evidence of underpricing

The results obtained using the simple underpricing approach computing over 14 years are summarized in Table 3. This Table shows the arithmetic mean underpricing value, the median underpricing value and the results of the t-tests conducted in order to determine the statistical significance of the results.

First of all, Table 3 shows that French, German and Italian IPO stocks during the period 1997-2011 exhibit similar abnormal first day returns, as suggested by previous literature (for France, see Maherault and Belletante, 2004; Sentis, 2009; Goergen et al., 2009; Cherrak, 2012; for Germany, see Ljungqvist, 1997; Burhop, 2010; Elston and Yang, 2010; for Italy, see Nahmijas and Pera, 1988; Aletti and Banfi, 1985; Cherubini and Ratti, 1991; Fusconi, 1992; Chiabrera, 1993; Giannotta and Lanza, 1993; Basile and De Sury, 1997; Fabrizio 1998; Giudici and Paleari, 1999; Cenni et al., 2001; Fabrizio and Sama, 2001; Giorgino et al., 2001; Tasca and Guizzardi, 2001; Cassia et al., 2004; Celia, 2008; Dell'Acqua et al., 2014). The mean underpricing of the total sample is 6.1%, while the median underpricing is 1.5%. The results of the individual countries are however different from those found by Gajewski and Gresse (2006) in their comparative study of European countries over the period 1995-2004, where underpricing was estimated to be lower for Italy and particularly for Germany.

Focusing on the French market, the magnitude of the underpricing phenomenon is in the range from 2.3% (median underpricing) to 6.4% (mean underpricing). Underpricing is shown to be statistically significant in the period 1997-2001 and 2005-2006. This result suggests that abnormal first day returns characterize the French market specifically during the "hot issue market." This evidence is confirmed when considering the total sample.

Results on the Italian market are similar to the French ones. Mean underpricing in Italy is 6.5%, and median underpricing is 1.1%. High and statistically significant results are registered in 1998, 2005 and 2006.

However, as regards the German market, our results show relatively moderate average abnormal first day returns (5.3%) compared to the mean underpricing reported for the other countries. In Germany too, higher and statistically significant underpricing appears to occur in the "hot issue market period."

From an industry perspective, all sectors except Telecommunications show statistically significant mean underpricing, ranging from 2.8% (Consumer Services) to 14.8% (Technology). This is also confirmed considering the median underpricing, where values range from 0.00 (Consumer Services) to 13.0% (Basic Materials), as shown in Table 4.

The different trend which appears in the Telecommunications sector, although statistically insignificant, is not confirmed either by Goergen et al. (2009) for New Markets of France and Germany over the period 1996-2000, or by Damenint (2015) on a sample of European IPOs in the time horizon 1988-2008. However, our results show a high level of underpricing in the Technology sector, as suggested by previous literature (Goergen et al., 2009; Damenint, 2015; Gajewski and Gresse, 2006).

In order to test the robustness of our evidence, we conduct two OLS regressions aiming to verify the presence of differences between countries and sectors. In each case, the value of the underpricing was assumed as the independent variable, and the types of industry and the country were considered as dependent dummy variables. Our results confirm previous evidence, as they show no statistically significant differences in underpricing among countries and sectors.

Moreover, we test the existence of a possible bias related to the time horizon. For this reason, we calculate our results on a sub-sample starting from 2002, i.e. from the introduction of the euro onto financial markets. The new sample consists of 186 IPOs: 56 taking place in France, 76 in Germany and 54 in Italy.

The mean underpricing of the sub-sample is 4.8%, while the median underpricing is 2.3%. On the other hand, in the period 1997-2011, mean and median underpricing showed values equal to 6.1% and 1.5%, respectively. This result could be interpreted as evidence that, focusing on the most recent period, financial markets are probably becoming more efficient, as underpricing in IPOs appear lower and the mean and median values are closer.

Focusing on different countries, we find in France, Germany and Italy mean underpricing of 5.8%, 4.4% and 4.3%, and median underpricing of 3.5%, 1.7% and 3.1%, respectively. These results substantially confirm previous evidence, as they show no statistically significant differences in underpricing among different countries. We did not control for industry differences, as the number of our sub-sample observations makes this analysis not statistically significant.

Our results are also interesting if compared to the US data. On this point, Ritter (2017) finds that, in the period 1960-2016, the US mean underpricing was equal to 16.8%, and its minimum value (6.9%) was registered between 1980 and 1989. Moreover, the author demonstrates that mean first-day return for the major IPOs (categorized by sales) from 1980-2016 was 3.4% in the 1980s, 8.7% in the period 1990-1998, 25% between 1999 and 2000 and 11.9% in the period 2001-2016. These results, if compared to our evidence, suggest that the mean underpricing in the USA is higher than in the European market, as shown also by Dropp and Dreher (2007).

4.2 Long-term performance

The results of the CAR analysis are presented in Graphs 1 and 2 (see Appendix). Graph 1 shows the mean CARs evolution by country 6 months, 1 year and 3 years after the IPO date. Graph 2 shows the mean CARs evolution by industry 6 months, 1 year and 3 years after the IPO date.

Tables 5 and 6 show, respectively, the mean CARs by country and by industry and the results of the Welch F-test conducted in order to determine the statistical significance of the results. We examine the mean CARs for the 6 months, 1 year and 3 years after the IPO date.

Table 5 shows that French, German and Italian IPO stocks for the 6 months, 1 year and 3 years after the IPO date exhibit negative mean CARs, as suggested by previous literature (for France, see Gajewski and Gresse, 2006 and Cherrak, 2012; for Germany, see Gajewski and Gresse, 2006; for Italy, see Fabrizio and Sama, 2001; Rossi, 2012). The mean CARs of the total sample are -0.05% for the 6 months and 1 year after the IPO date and -0.06% for the 3 years after the IPO date.

Focusing on the French market, the mean CARs are, respectively, -0.02%, -0.04% and -0.06% for the 6 months, 1 year and 3 years after the IPO date. As regards the German market, the mean CARs are -0.08% for the 6 months and 1 year after the IPO date and -0.09% for the 3 years after the IPO date. Finally, on the Italian market, the mean CARs are, respectively, -0.06%, -0.03% and -0.03% for the 6 months, 1 year and 3 years after the IPO date.

These results show that Italian CARs are higher than French CARs in the shorter-term (6 months after the IPO date) and lower than French CARs for 1 year and 3 years after the IPO date. German CARs are higher than Italian and French CARs over the whole period. These findings are consistent with previous literature (Gajewski and Gresse, 2006). In order to determine the statistical significance of the results, we conduct the Welch F-test. The results of the test show that the French, German and Italian CARs are different only at 3 years after the IPO date.

From an industry perspective, Table 6 shows that mean CARs for the 6 months, 1 year and 3 years after the IPO date are negative, except for Technology and Utilities. The mean CARs of the total sample are, respectively, -0.04%, -0.05% and -0.06% at 6 months, 1 year and 3 years. The results of the Welch F-test show statistically significant mean CARs for the whole period.

The results obtained from measuring Buy-and-Hold Returns (BHR) are presented in Graphs 3 and 4 (see Appendix). Graph 3 shows the mean BHR evolution by country over the 6 months, 1 year and 3 years after the IPO date. Graph 4 shows the mean BHRs evolution by industry over the 6 months, 1 year and 3 years after the IPO date.

Tables 7 and 8 show, respectively, the mean performance by country and by industry and the results of the Welch F-test conducted in order to determine the statistical significance of the results. We examine the mean BHR for the 6 months, 1 year and 3 years after the IPO date.

Table 7 shows that French, German and Italian IPO stocks for the 6 months, 1 year and 3 years after the IPO date exhibit negative mean BHRs. BHRs have been studied in France by Sentis (2009); Gajewski and Gresse (2006); Cherrak (2012); for Germany, by Liungqvist (1997); Jaskiewicz et al. (2005); Gajewski and Gresse (2006); Pryshchepa and Stehle (2011); for Italy, see Fabrizio and Sama (2001); Rossi (2012). The mean BHRs of the total sample are 0.05% for the 6 months, 1 year and 3 years after the IPO date.

Focusing on the French market, the mean BHRs are, respectively, -0.009%, -0.04%and -0.05% for the 6 months, 1 year and 3 years after the IPO date. As regards the German market, the mean BHR are -0.08% for the 6 months and -0.07% for the 1 year and 3 years after the IPO date. Finally, on the Italian market the mean BHRs are -0.06% for the 6 months and -0.03% for the 1 year and 3 years after the IPO date.

These results show that Italian BHRs are higher than French BHRs in the shorter run (6 months after the IPO date) and lower than French BHRs for the 1 year and 3 years after the IPO date. German BHRs are higher than Italian and French BHRs over the whole period. These findings are not consistent with previous literature (Gajewski and Gresse, 2006).

In order to determine the statistical significance of the results, we conduct the Welch F-test. The results of the test show that the French, German and Italian BHRs are different only at 3 years after the IPO date.

From an industry perspective, Table 8 shows that mean BHRs for the 6 months, 1 year and 3 years after the IPO date are negative, except for Technology and Utilities. This is in line with the findings of Schuster (2003) looking at New Economy firms in Europe for the period 1988-1998. The mean BHRs of the total sample are -0.05% for the 6 months, 1 year and 3 years after the IPO date. The results of the Welch F-test show statistically significant mean BHRs only for the 1 year after the IPO date.

Our results on the medium-long term demonstrate the existence of the underperformance phenomenon. In particular, long term performance appears to be quite low and does not allow retrieving the initial underpricing. This could be interpreted as evidence that Italian, French, and German financial markets are rather efficient.

5. Conclusions

Initial Public Offerings (IPOs) are a key moment in the life of a company. They are complex operations and have been extensively studied. A great deal of evidence of short run underpricing and long run underperformance has been found. However, much evidence has been found at European level in single country studies, which are usually based on statistical universes too small for significant analysis, and in aggregations of countries, which include countries with characteristics which differ too widely.

The specific contributions of this paper to the existing literature are the following: a) the study of underpricing and long run performance over the period 1997-2011, including the recent financial crisis; b) the analysis of IPOs in homogeneous Eurozone countries, thus providing results comparing with other international markets, such as the US. The study also aims to verify whether emerging trends show different dynamics across industries or whether they are generalized.

As stated above, this paper focuses on a homogenous sample of 437 IPOs in three European countries: Italy, France and Germany. These countries are all characterized by mature markets, which are however not highly developed, and are all countries where firms frequently use underwriters and intermediaries.

The short run analysis identifies a mean underpricing of 6.1% (median 1.5%) which is, as expected, fairly similar between the three countries: France 6.4% (median 2.3%), Germany 5.3% (median 1.2%) and Italy 6.1% (median 1.5%).

Overpricing occurred only in one of the years, 2003, but the result is statistically insignificant as no IPOs took place in France or Germany in that year. The statistically significant annual averages are fairly homogeneous and vary between 4.1% in 2007 and 10.1% in 1999.

Statistically significant underpricing is found in all sectors except for Telecommunications, where however only three IPOs took place, so that the finding cannot be generalized. There are however significant differences in levels of underpricing between sectors: Consumer Services shows mean underpricing of 2.8%, while Technology shows 14.8%.

Our results, even if referred to intermediary-oriented markets, demonstrate that Italian, French and German financial markets are quite efficient. Mean underpricing in these countries is in fact very low if compared to data on the USA.

The long run analysis uses both Cumulative and Abnormal Returns and Buy-and-Hold Returns. Both measurements reveal overall negative trends after 6 months, which are confirmed at 1 and at 3 years, even if quite low when compared to other countries. The overall trend however includes trends which differ between countries: IPO shares in Germany tend to maintain their returns after the first 6 months; in France performance gradually worsened, and in Italy performance gradually improved over time.

At 3 years, a negative trend in BHR is found in all sectors. After 6 months, Technology and Utilities show an opposite trend at 6 months and one year. CARs give the same results except for Utilities, which shows a positive performance at 3 years.

Two findings of this study can be emphasized. On one hand, the three countries which are the most developed in mainland Europe show consistent trends in underpricing, the main short term anomaly shown by IPOs. There are however significant differences in long-term trends, which highlights the impact of geographical context. On the other hand, although technological sectors show slightly higher trends, the study confirms previous findings that industry is not a determinant of underpricing or long run underperformance.

Finally, our results do not show significant differences between IPOs taking place in market-oriented and intermediary-oriented financial markets, as suggested by Beck and Levine (2002). In other words, the financial development of Eurozone countries (proxied in the paper by Italy, France and Germany) appears good if compared to the USA.

doi: 10.22381/EMFM13320181

NOTES

(1.) Austria, Belgium, Finland, France, Germany, Greece, Italy, the Netherlands, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.

(2.) For further information about the statistical problems with the application of the CAR methodology, see Conrad and Kaul (1993).

(3.) The DJGI family is a comprehensive global index series designed to be broad, targeting 95% market capitalization coverage (e.g. the Country Indices cover 95% of float-adjusted market capitalization at the country level).

(4.) When using CAR, the abnormal returns (ari,t) are the benchmark-adjusted return for stock i in event day t.

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Table 1 presents the 437 French, German and Italian firms listed on domestic markets in the period 1997-2011, subdivided by country and year of listing.

Table 2 presents the 437 French, German and Italian firms listed on domestic markets in the period 1997-2011, subdivided by industry.

Table 3 presents the 437 firms listed on French, German and Italian markets from 1997 to 2011 subdivided by country and year of listing. For each year, both mean and median underpricing (UP) are shown. The underpricing of each share i is calculated by means of the formula [UP.sub.t,i] = ln ([P.sub.i,t]/[P.sub.i,0]), with t=1. The significance of the mean underpricing is expressed with one, two or three asterisks, i.e. the rejection of the hypothesis of values equivalent to 0 with a probability level equal to 10%, 5% or 1%.

Table 4 presents the 437 firms listed on French, German and Italian markets from 1997 to 2011 subdivided by industry. The underpricing of each share i is calculated by means of the formula [UP.sub.t,i] = ln ([P.sub.i,t]/ [P.sub.i,0]), with t=1. The significance of the mean underpricing is expressed with one, two or three asterisks, i.e. the rejection of the hypothesis of values equivalent to 0 with a probability level equal to 10%, 5% or 1%.

Table 5 presents the mean CARs by country for the 6 months, 1 year and 3 years after the IPO date. For each IPO the mean CAR is calculated by adjusting the performance to the market index. The significance of the results is determined by the Welch F-test.

Table 6 presents the mean CARs by industry for the 6 months, 1 year and 3 years after the IPO date. For each IPO the mean CAR is calculated by adjusting the performance to the market index. The significance of the results is determined by the Welch F-test.

Table 7 presents the mean performance by country for the 6 months, 1 year and 3 years after the IPO date. For each IPO the mean BHR is calculated by adjusting the performance to the market index. The significance of the results is determined by the Welch F-test.

Table 8 presents the mean performance by industry for the 6 months, 1 year and 3 years after the IPO date. For each IPO the mean BHRs are calculated by adjusting the performance to the market index. The significance of the results is determined by the Welch F-test.

Appendix

Long-run performance by country and by industry over the 6 months, 1 year and 3 years after the IPO date

Caption: Figure 1 CAR by country Graph 1 shows the mean CARs evolution by country over the 6 months, 1 year and 3 years after the IPO date. The horizontal axis shows the number of days, and the vertical axis the mean CARs.

Caption: Figure 2 CAR by industry Graph 2 shows the mean CARs evolution by industry over the 6 months, 1 year and 3 years after the IPO date. The horizontal axis shows the number of days and the vertical axis the mean CARs.

Legend: CAR_1 (Basic materials); CAR_2 (Consumer goods); CAR_3 (Consumer services); CAR_4 (Financials); CAR_5 (Health care); CAR_6 (Industrial); CAR_7 (Oil and gas); CAR_8 (Technology); CAR_9 (Telecommunications); CAR_10 (Utilities).

Caption: Figure 3 BHR by country Graph 3 shows the mean BHRs evolution by country over the 6 months, 1 year and 3 years after the IPO date. The horizontal axis shows the number of days, and the vertical axis the mean BHRs.

Caption: Figure 4 BHR by industry Graph 4 shows the mean BHRs by industry over the 6 months, 1 year and 3 years after the IPO date. The horizontal axis shows the number of days and the vertical axis the mean BHRs. Legend: BHR_1 (Basic materials); BHR_2 (Consumer goods); BHR_3 (Consumer services); BHR_4 (Financials); BHR_5 (Health care); BHR_6 (Industrial); BHR_7 (Oil and gas); BHR_8 (Technology); BHR_9 (Telecommunications); BHR_10 (Utilities).

GINO GANDOLFI

University of Parma; SDA Bocconi School of Management, Milan

MASSIMO REGALLI University of Parma

MARIA-GAIA SOANA

University of Parma; SDA Bocconi School of Management, Milan

MARIA CRISTINA ARCURI

mariacristina.arcuri@gmail.com SDA Bocconi School of Management, Milan (corresponding author)

Received 13 April 2017 * Received in revised form 19 August 2017

Accepted 19 August 2017 * Available online 10 September 2017