Is the Abnormal Post-IPO Underperformance Really Abnormal? The Evidence from CEE Emerging Markets

No, it is not. Using sorting, cross-sectional tests, regression, and tests of a monotonic relation, we investigate the long-run post-IPO performance and its sources in the Central and Eastern European (CEE) markets. We examine over 1100 stocks from 11 CEE countries for the period 2002-2014. Controlling for value, size, momentum, and the influence of microcaps, we test the performance of portfolios of age-sorted stocks. We document that “old stocks” perform significantly better than “young stocks”, but only if a market beta is the sole risk factor considered. After accounting for the size and value effects, the IPO firms do not perform either better, or worse than non-issuing companies. The sources of initial low B/M ratios of debuting companies may lie in a time-varying financial quality. The market newcomers are in much better financial shape than their older counterparts. However, over 2-5 years the fundamentals deteriorate and the financial quality regresses to the mean