Initial Public Offerings
Jay R. Ritter
Warrington College of Business Administration University of Florida
December 2015
Number of Offerings (bars) and First-day Returns on Turkish IPOs, 1990-2015
-5%
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25%
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35%
40%
0190001900r1l 5190001900r1l 10190001900r1l 15190001900r1l 20190001900r1l 25190001900r1l 30190001900r1l 4190001900r2l 9190001900r2l
Average First-day Returns
Number of IPOs
Sources: Halil Kitmaz, Banu Durukan, Guray Kucukkocaoglu, Orhan Emre Elma, Dealogic, and the Borsa Istanbul. 2015 numbers are for the first six months only.
Number of Offerings and Average First-day Returns on Chinese IPOs, 1990-2014 (There were no IPOs in 2013, due to a CSRC moratorium starting in October 2012)
Source: Jia, Xie, and Zhang (2014)
Number of Offerings and Average First-day Returns on Japanese IPOs, 1980-2014
Source: Takashi Kaneko and others
Number of Offerings and Average First-Day Returns on German IPOs, 1980-2015
For 2015, the numbers are for January-November
IPO volume has been very low in the U.S. since 2000
6 In 1980-2000, an average of 310 firms went public every year
In 2001-2014, an average of 110 firms went public every year
Number of Offerings (bars) and Average First-day Returns (yellow) on US IPOs, 1980-2014
U.S. IPO Volume has been particularly low for small firms
Small firm IPOs are defined as IPOs with less than $50 million in LTM sales ($2009)
7 Number of U.S. IPOs with pre-IPO Annual Sales less than or greater than $50m/Year ($2009)
0190001900r1l 19190001900r2l 9190001900r4l 29190001900r5l 18190001900r7l 6190001900r9l 26190001900r10l 15190001900r12l 3190101901r2l
small
big
0190001900r1l 26190201902r9l 22190501905r6l 18190801908r3l 13191001910r12l 8191301913r9l 4191601916r6l 1191901919r3l 25192101921r11l
29281 29646 30011 30376 30742 31107 31472 31837 32203 32568 32933 33298 33664 34029 34394 34759 35125 35490 35855 36220 36586 36951 37316 37681 38047 38412 38777 39142 39508 39873 40238 40603 40969 41334 41699
Number of Domestic Companies Listed on CRSP
Date
Note: Operating companies only (i.e., no limited partnerships, closed-end funds, REITs, ETFs) listed on Nasdaq, NYSE, and Amex (now NYSE MKT) Source: University of Chicago Center for Research in Security Prices
Number of U.S. Domestic Companies Listed on Nasdaq, the NYSE, and NYSE MKT
Why Has IPO Volume Been So Low?
Figure 2: The Shiller P/E ratio is taken from Robert Shiller’s website and is computed as the ratio of the S&P 500 index divided by the inflation- adjusted ten-year moving average of S&P 500 earnings. Scaled IPO volume is quarterly IPO volume divided by annual real GDP, in trillions of 2009 dollars.
0190001900r1l 5190001900r1l 10190001900r1l 15190001900r1l 20190001900r1l 25190001900r1l
0190001900r1l 10190001900r1l 20190001900r1l 30190001900r1l 9190001900r2l 19190001900r2l
S c a l e d
Q u a r t e r l y
V o l u m e S
h i l l e r
P E
Shiller P/E Scaled IPO Volume
11
IPO Exits for VC-backed Firms Have Been Limited
Source: NVCA 2015 Yearbook Figures 9 and 10
Conventional Wisdom: The IPO Market Is Broken Sarbanes-Oxley Act of 2002 (SOX) has
imposed costs on publicly traded firms, especially small firms
Decimalization, Reg FD in 2000, and the
Global Settlement in 2003 have led to a drop in analyst coverage for small firms, lowering their P/E ratios, and the collapse of the IPO
ecosystem
The Economies of Scope Hypothesis Increased economies of scope
Increased importance of speed to market
Getting big fast is more important than in the past
13
The profitability of small independent firms has declined relative to the value created as part of a larger organization that can quickly implement new technology and benefit from economies of scope
14
Changes in the Product Market
Evidence from the U.S.
The percentage of small firms that are unprofitable has increased
15 Percentage of seasoned public companies with negative EPS, 1980-2009
0%
10%
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30%
40%
50%
60%
70%
Large firms
Without SOX costs Small firms
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100%
Small firm IPOs Large firm IPOs
Small firm IPOs have become less profitable
16 Percentage of IPOs from the prior 3 years with negative EPS in fiscal year t
Source: Table 2, columns 2 and 4 of Gao, Ritter, and Zhu “Where Have All the IPOs Gone?”
December 2013 Journal of Financial and Quantitative Analysis
Large firm IPOs Small firm IPOs
Figure 2. Price-earnings ratio of small company (annual sales less than $1 billion, 2011 purchasing power) and big company stocks with positive EPS (Before extraordinary items) traded on the Amex, Nasdaq, or NYSE with Compustat EPS data available. The price-earnings ratios are computed as the sum of the market values divided by the sum of the earnings for, respectively, small and big companies with positive EPS.
Are recent IPOs going private more frequently?
18
Source: Table 3 (both LBOs and acquisitions by private firms)
Young growth firms are more likely to be involved in an M&A transaction
Either as an acquirer or being acquired
Uptrend started in early 1990s
Family businesses are more likely to sell out,
possibly in a cross-border transaction, than remain independent and go public
Technology has resulted in greater economies of scope and scale
Cheaper transportation costs and lower tariffs have resulted in more globalization
Is going public too costly?
Fees paid to investment bankers
Regulatory costs including auditing costs Money left on the table due to underpricing
IPOs are underpriced in every country
In the U.S. from 1980-2014, the average first-day return is 18%
-10%
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Average first-day returns
Average first-day returns on (mostly) European IPOs
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120%
Average first-day returns
Average first-day returns on non-European IPOs
Should there be a separate market for
small companies?
Long-run Performance of IPOs
While IPOs tend to go up on the first day of trading, in the long run, on average they have tended to underperform.
But there is a strong cross-sectional pattern in the U.S.: IPOs that had annual sales of less than $50 million severely underperform, whereas those that had achieved annual sales of $50 million don’t underperform.
Buy-and-hold stock returns are skewed: there are some big winners, but most stocks underperform. This is especially true with young companies, where there is even greater right
skewness.
IPOs
Style Matched 0190001900r1l
2190001900r1l 4190001900r1l 6190001900r1l 8190001900r1l 10190001900r1l 12190001900r1l 14190001900r1l 16190001900r1l 18190001900r1l 20190001900r1l
First Year
Second Year
Third Year
Fourth Year
Fifth Year
Annual Percentage Returns
Annual returns in the five years after going public for U.S. 8,278 IPOs from 1970-2011. Style-matched firms match on market cap and book-to-market.
Annual Sales, $millions (2005 purchasing power)
3-year Buy-and-hold Style-adjusted Returns
7,700 U.S. IPOs from 1980-2012. Style-adjusted returns exclude the opening day return Style controls for market capitalization and book-to-market
US small firm IPO returns have been disappointing
$60 million in pre-IPO annual sales cutoff, returns not including first-day return and ending in Dec. 2014)
30
0%
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45%
Small firm IPOs Large firm IPOs
Mean 3-year buy-and-hold returns on IPOs (blue) and style-matched seasoned firms (red)
1980–2000 2001–2012 1980–2000 2001–2012
31 Small firm (<€30m in sales) IPO 3-year buy-and-hold returns are lower than for large firm IPOs (returns are measured from the 22nd trading day closing market price)
European small firm IPOs returns have also been low
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1995-2000 2001-2008 1995-2000 2001-2008
Small firms Large firms
BHR Benchmark (FTSE EuroMID)
Source: Vismara, Paleari, and Ritter, June 2012, European Financial Management
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IPOs FTSE Euromid IPOs FTSE Euromid
AIM Official List
3-year buy-and-hold returns of London IPOs, 1995-2006
Markets for Small and Medium Enterprises (SMEs)
Small company IPOs rarely achieve success with large expansions of
profits, disappointing investors
Efficient Allocation of Capital Benefits an Economy
Investors in publicly traded firms must have the power to remove managers that are not acting in the best interest of shareholders
U.S. firms in the S&P 500 paid $375 billion in dividends in 2014, and about twice
that in share repurchases ($1 trillion total) Russian firms paid out almost nothing
The market cap of Russia is less than that of Apple
