The paper studies the pricing of PSIPOs (privatization second initial public offerings) PIPOs of companies that had been public in the past. A dataset comprising all the Portuguese companies nationalized in 1975 and privatized in the late eighties and nineties is used. Findings on short- and long-run pricing of IPOs and PIPOs are summarized, and implications for the pricing of PSIPOs are discussed. Short- and long-run returns are computed, using three alternative methods (buy and hold abnormal returns, wealth relatives, and cumulative abnormal returns) in the long-run analysis. Short-run overpricing is identified, unlike the underpricing pattern revealed by most IPO research. This initial overpricing is essentially found to be corrected in the first trading month. In the long-run, no evidence of overpricing is found, again unlike the usual conclusion of the IPO literature, and more in line with empirical evidence on second IPOs. Results provide support to the conclusion that privatization IPOs tend to be less underpriced than standard IPOs and that firms coming back to the market for a second IPO tend to be less underpriced than pure IPOs and provide a good rating for the performance of the Portuguese Republic pricing stocks in the Portuguese privatization program.
Initial public offerings (IPOs) are the first public offering of shares by a company. Although an IPO occurs, by definition, once in the life cycle of a company, it is possible that a firm reenters the public equity markets after an IPO and a subsequent delisting. In these cases, a “second” IPO takes place, termed a SIPO (second initial public offering). The privatization wave that swept the financial markets from the seventies on created a special category of IPO, the PIPO (privatization initial public offerings), IPOs where the offering firm is held by the State. Since privatized firms through PIPOs were, in some cases, listed firms when their nationalization took place, their PIPOs were, in reality, second IPOs. This paper studies the price performance of these twice special offerings, privatization second initial public offerings, or PSIPOs. Organization is as follows: Section
It is a well-established fact that IPOs are underpriced; that is, that a wealth transfer from original shareholders to new shareholders occurs when a firm’s shares are offered to the public for the first time. This underpricing is a function of the offering price. By definition, a firm going public is previously unlisted, so its pre-IPO market price
Several empirical studies, carried out in different markets and within various institutional frames, point to the fact that these implicit costs of going public are significant (Ritter [
This generalized empirical evidence of underpricing is confirmed by the analysis of PIPO (Jenkinson and Mayer [
All these authors suggest, more or less assertively, that PIPO initial underpricing tends to exceed IPO underpricing. Some of these papers explicitly test and confirm this relation, namely, Jenkinson and Mayer [
Regarding SIPO samples, Muscarella and Vetsuypens [
Summing up, we have empirical evidence pointing to underpricing in IPOs generally speaking, larger underpricing in PIPOs than in IPOs unrelated to privatization programmes, and smaller underpricing in SIPOs than in truly initial IPOs.
Theories accounting for the generalized presence of underpricing are widely surveyed in the literature; Ljungqvist [
Generally speaking, one would expect to find, in asymmetric information models, underpricing varying with uncertainty over the offering. This being the case, and given that PIPOs are offerings of more mature companies than IPOs, a lower underpricing in PIPOs relatively to IPOs should be expected. Nevertheless, given the emerging nature of most of the capital markets in economies where privatizations are in the agenda, the hypothesis that potential PIPO underpricing in emerging markets should be lower than IPO underpricing in emerging markets but higher than IPO underpricing in mature markets should not be discarded.
Biais and Perotti [
Also relevant is the fact that the several goals, both economic and political, usually linked to privatization programmes give to policy-makers incentives to underprice which are significantly higher than the ones faced by a corporate issuer: underpricing can trigger popular support for a broad privatization programme, and underpricing helps popular capitalism. Given the fact that a Government pursuing a privatization programme will be a frequent issuer, unlike a corporation which taps the IPO market only once, Governments’ investment in reputation built through underpricing tends to be more valuable and thus generates a greater appetite for underpricing.
Size of stock markets also matters. Frequently, privatization programmes are carried out in small, emerging markets. As the privatized companies are frequently the biggest in their home markets (Boutchkova and Megginson [
Jones et al. [
For SIPOs in general, information asymmetry models should predict lower underpricing than for IPOs, since the previous track record of the company in the market should drive uncertainty down. This being the case, expected underpricing in PSIPOs should be lower than the ones posted by PIPOs.
The Portuguese IPO initial returns have been documented in previous research. Alpalhão [
Portuguese IPO research.
Period | Borges [ |
Almeida and Duque [ |
Vieira and Serra [ |
Alpalhão [ |
---|---|---|---|---|
1987–2004 | 1992–1998 | 1989–2001 | 1986-1987 | |
Offer category | 57 IPO in 1987, 43 after 1987, the former either with the State or private shareholders as issuers, including Portugal Telecom, notwithstanding the Companhia Portuguesa Rádio Marconi previous listing | All IPO listed in the Lisbon Official Market, either with the State or private shareholders as issuers, including Portugal Telecom | All privatizations, both primary and secondary offers, including Portugal Telecom | All IPO |
Sample size | 100 (19 PIPO) | 21 (11 PIPO) | 42 (19 PIPO) | 62 (0 PIPO) |
Time frame | 1 day, 36 months | 1 year (247 days) | 1, 7, 30 days; 6, 12, 18, 24, 30, and 36 months | 30 days |
Return definition | Daily, log | Daily, log | Daily, log | Daily, level |
Performance measure | CAR | CAR, WR | CAR | CAR |
Benchmark index | BTA (1987), PSI Geral (1988 on) | PSI Geral | PSI Geral, S&P500 | BTA |
Weightings | EW | EW, VW (weights formed with initial prices) | EW | EW |
This table summarizes the results of Portuguese IPO research. IPO stands for initial public offers. PIPO means initial public offers which are privatizations. CAR are cumulative abnormal returns, with the market proxied by the benchmark index. WR means wealth relatives. EW means equal weights for each security and VW weights given by the initial prices of the shares offered in IPO.
Almeida and Duque [
The Almeida and Duque [
Vieira and Serra [
It is well established in the literature that the generally applicable initial underpricing is reverted in the long-run in a similarly general way (Shaw [
This pattern is not reported in most studies of PIPO buy-and-hold strategies (Levis [
The available SIPO research (Degeorge and Zeckhauser [
To the best of our knowledge, no PSIPO research was ever produced (although the Almeida and Duque [
Theories offering explanations for the generally found initial underpricing cannot account for the generally found long-run overpricing. The signalling theories would even point in the opposite direction. Although before Ritter [
Miller [
To the best of our knowledge, the higher sustainability of the prices of privatization offers and of “second” initial offers has not generated rationalizations in the literature. However, the history of “second” initial offers, however remote in time, does suggest, at least, a lower divergence of opinion and, thus, a smaller reversion of returns as time goes by.
Alpalhão and Alves [
For
Taking the average of
We define the cumulative returns between day 1 and day
We defer a discussion of the methodology for cumulating returns to the next section, since the short twenty-day horizon under analysis is adequately treated without need for more elaborate techniques.
We also define initial abnormal return,
For
The average return of an equally weighted
Finally, and as done with the gross returns, we define cumulative abnormal returns between day 1 and day
For each security, the corresponding abnormal return is
To test the null hypothesis of zero CAR, we use the parametric test statistic (on the properties of this test statistic, see Kothari and Warner [
The literature (Barber and Lyon [
One alternative, preferred by Barber and Lyon [
The daily returns of the
We continue to use the PSI Geral index as our benchmark portfolio, like we did when computing initial returns. Alternatives such as size-matching methods (as in, e.g., Loughran and Ritter [
The PSI Geral daily return is defined as
Like in (
When delisting generates absence of data for one of the sample constituents, we follow Gompers and Lerner [
Each month
A security’s return over an
The buy and hold return in our benchmark portfolio for the period
With reference to
The portfolio mean return for the homologous period is
To test the hypothesis of zero BHAR in an
Ritter [
A WR above one indicates outperformance, whilst a WR below one means underperformance.
Fama [
The most common alternative to BHAR is the cumulative abnormal returns (CAR) preferred by Fama [
The choice of one method over the other, taking into consideration their respective pros and cons, is usually based on the assumed trading strategy and on the hypothesis meant to be tested. Specifically, a 12-month CAR allows testing if the abnormal monthly return of the sample companies for the year under appreciation is equal to zero, while annual BHAR allow testing if the annual mean abnormal return is equal to zero. On other words, CAR ignore the capitalization of returns, while BHAR include this factor.
We define the abnormal returns of the
For the portfolio of
The abnormal cumulative returns from month 1 to month
For each security, the corresponding adjusted return is
As mentioned above, to test the null hypothesis of zero CAR, we use the parametric test statistic as follows:
When a company is delisted before the end of the period, the next month’s portfolio return becomes the weighted average return of the remaining shares; that is, monthly portfolio rebalancing applies, with the proceeds from delisting(s) being allocated to the surviving offerings (this restriction can, as previously stated, be lifted using the computation of buy and hold returns).
The sample includes the 15 PSIPO made between 1989 and 1997 (Figure
Time series of Portuguese PSIPO and annual returns of the PSI Geral index.
Given the time span covered, long-run performance is assessed over 12-, 36-, and 60-month intervals.
All companies in the sample have available aftermarkets of, at least, 12 months. The Banco de Fomento e Exterior return series is too short to allow the computation of 36-month returns (and, naturally, of 60-month returns), due to being taken private, after roughly 28 months in the market, following the acquisition offer placed by BPI in December 1996, after winning, in August 1996, the bid for the second stage of the Banco Fonsecas & Burnay privatization. This being the case, sample size drops to 14 for the 36-month time frame. Two additional offers—Bonança and UBP—produced return series of more than 36, but less than 60 months. Bonança, controlled by Banco Português do Atlântico after its privatization, was taken private in 1995 following the 1995 bid for Atlântico by BCP and Império, which made its free float minuscule. UBP also exited the market in 1996, for the same reason and following the same bid, which eventually put the bank under the influence of José de Mello SGPS, parent company of Império. Sample size for the 60-month time frame is thus reduced to 12.
Table
Initial returns.
Equally weighted | Value-weighted | |||
---|---|---|---|---|
Gross | Abnormal | Gross | Abnormal | |
Mean | 0,10% | −1,94% | 24,31% | 23,05% |
|
−2,033** | 14,236*** | ||
Median | 0,16% | −0,10% | ||
Minimum | −24,14% | −27,26% | ||
Maximum | 37,75% | 37,84% | ||
Number of PSIPO with initial returns | ||||
Positive | 8 | 7 | ||
Negative | 7 | 8 | ||
Total |
|
|
This table reports the fifteen privatization second initial public offerings (PSIPO) statistics. Asterisks show statistical significance: *** shows difference from zero with a 1% significance, and ** shows difference from zero for a 5% significance level. Equally weightedshows means computed with equal weights; value-weighted shows means weighted by the value of the initial privatization offer.
Initial abnormal returns (case by case, across time, 1989–97).
Initial returns, both gross and abnormal, are similar and significantly different from zero for a 5% significance level when adjusted for market movement. They vary between a highly adverse for the investor minimum of −24.14% gross and −27.26% after adjustment in the UBP offer and a maximum of 37.75% gross and 37.84% adjusted in the EDP offer. The high weight of the EDP offer, given the high underpricing posted, causes significantly positive mean value-weighted initial returns. We do not, however, grant this weighted mean particular relevance, both because its value is attributable essentially to a single offer and because an analysis based on equal weights shows the results of a strategy of investing equal amounts in every privatization offer, which we find to be more realistic than a value-weighted investment strategy.
Our PSIPO sample produces results which are different from available PIPO studies, with statistically different from zero overpricing. We fail to find evidence that the Portuguese Government behaved in a way consistent with the underpricing mode usually attributed to private issuers. Our results, although different from previous research results, both Portuguese and international, are fully consistent with the expectation of lower PSIPO underpricing relative to PIPO underpricing and show that the negative return found for the investment in these companies while their capital remained private (Alpalhão and Alves [
It is important to find out if this effect remained in the aftermarket. Figure
Time series of short aftermarket returns.
Day | RP | RPC | AR | CAR |
|
---|---|---|---|---|---|
1 | 0,10% | 0,10% | −1,94% | −1,94% | −3,4223*** |
2 | −0,29% | −0,20% | −0,30% | −2,24% | −2,79607*** |
3 | 0,57% | 0,37% | 0,66% | −1,58% | −1,61227* |
4 | −0,56% | −0,19% | −0,58% | −2,16% | −1,91131** |
5 | −0,61% | −0,80% | −0,64% | −2,80% | −2,21277** |
6 | −0,10% | −0,91% | −0,07% | −2,87% | −2,07011** |
7 | 0,11% | −0,79% | 0,14% | −2,73% | −1,82266** |
8 | −0,32% | −1,11% | −0,34% | −3,06% | −1,91544** |
9 | −1,19% | −2,29% | −1,15% | −4,21% | −2,48126** |
10 | −0,55% | −2,84% | −0,32% | −4,52% | −2,53021** |
11 | 0,05% | −2,79% | 0,14% | −4,39% | −2,33869** |
12 | 0,16% | −2,63% | −0,11% | −4,49% | −2,29428** |
13 | −0,60% | −3,23% | −0,73% | −5,22% | −2,56099*** |
14 | −0,56% | −3,79% | −0,98% | −6,20% | −2,92888*** |
15 | −0,79% | −4,57% | −0,34% | −6,54% | −2,98669*** |
16 | −0,20% | −4,78% | −0,86% | −7,40% | −3,27031*** |
17 | 0,13% | −4,64% | −0,17% | −7,57% | −3,24524*** |
18 | −0,10% | −4,74% | −0,22% | −7,79% | −3,24546*** |
19 | −0,08% | −4,82% | 0,05% | −7,73% | −3,13736*** |
20 | 0,08% | −4,74% | 0,07% | −7,66% | −3,02886*** |
The table reports values of average return of EW PSIPO portfolio, gross (RP and RPC) and abnormal (AR and CAR), period (RP and AR) and cumulative (RPC and CAR), for days 1 to 20. ***, **, and * denote, respectively, a return statistically different from zero for 1%, 5%, and 10% significance levels.
Short-run aftermarket of Portuguese PSIPO.
The pattern of cumulative returns is similar, both before and after adjustment for market movement. The peak is registered on the third day, following a correction of the initial return in the second trading day. Abnormal cumulative returns are never positive, and cumulative raw returns are positive on the first and third day only. Cumulative raw returns are not significantly different from zero, for a 5% significance level, on the third day only, and are statistically different from zero, for a 1% significance level, for every day from the 13th on.
One can conclude that the initial overpricing, while being moderately reversed immediately after the initial trades, is not reverted in aftermarket. The negative abnormal returns earned by the Republic during the years in which companies remained private were partially corrected during the initial market trades of the shares. Evidence thus exists of wealth transfers from all Portuguese citizens to investors in privatization offers and among secondary market investors, from the slower to buy PSIPO to the faster.
In absolute terms, the identified abnormal return is of −6.128.368.014$71, calculated applying to the Republic’s investment the average abnormal mean annual return of −28.25% for an average holding period of 19.4 years. This amount represents a wealth loss equivalent to 34.2% of the 1997 GDP, the process’s final year, or 5.1% of the cumulative GDP from 1989 to 1997 or 140.7% of the proceeds of privatization offers between 1989 and 2003.
Alpalhão [
The investors who benefited from this wealth transfer saw their holdings loose value during the securities’ initial trades, making, in the short run, a PSIPO flipping strategy more profitable than a buy and hold strategy.
The last section showed that the behaviour of the stock prices of Portuguese reprivatized companies generated negative abnormal returns. This section extends the analysis’ time frame, to quantify possible wealth transfers between investors who purchased shares from the Republic in privatization offers and investors who, having been absent from the privatization offers, bought holdings in the privatized companies in the secondary market.
The sample’s BHR and BHAR are posted in Table
1 to 12-, 36-, and 60-month BHR and BHAR.
Months |
|
BHR | BHAR | # BHAR > 0 |
| |
---|---|---|---|---|---|---|
Short-run Aftermarket | 1 | 15 | −5,4% | −7,1% | 3 | −3,20767*** |
2 | 15 | −9,9% | −12,1% | 1 | −3,91777*** | |
3 | 15 | −7,2% | −10,1% | 3 | −3,631*** | |
4 | 15 | −8,7% | −11,9% | 3 | −3,8785*** | |
5 | 15 | −2,2% | −6,8% | 2 | −0,72954 | |
6 | 15 | 0,1% | −5,0% | 4 | −0,48288 | |
7 | 15 | 2,5% | −5,2% | 4 | −0,45987 | |
8 | 15 | 2,3% | −8,2% | 4 | −0,72498 | |
9 | 15 | 1,9% | −10,2% | 2 | −0,86628 | |
10 | 15 | 5,7% | −6,4% | 6 | −0,50836 | |
11 | 15 | 5,5% | −6,3% | 5 | −0,50836 | |
12 | 15 | 4,8% | −7,0% | 4 | −0,57442 | |
|
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( |
( |
( |
( |
( |
( | |
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Aftermarket | 36 | 14 | 56,5% | −4,8% | 5 | −0,27282 |
( |
( |
( |
( |
( |
( | |
60 | 12 | 76,5% | −9,0% | 5 | −0,42775 |
The table reports returns earned with a buy and hold strategy of the equally weighted Portuguese PSIPO portfolio for 1 to 12, 36, and 60 months following the first (or only) public offer, both with (BHAR) and without (BHR) adjustment for market movements. ***, **, and * denote, respectively, a return statistically different from zero for a significance level of 1%, 5%, and 10%.
BHR and BHAR time series.
We find negative and statistically different from zero returns in the first months, and we cannot reject, for a 10% significance level, the null hypothesis of zero returns from the 5th month on. The number of months with positive returns, with this methodology, is 13 (the 16th to the 19th, the 23th to the 28th, the 43rd, the 44th, and the 51th).
Figure
BHAR 60 months after the PSIPO held between July 1989 and June 1997 (for the 12 companies that remained listed for at least 60 months).
The individual analysis of offers suggests interesting patterns, the small sample size notwithstanding. The statistically not different from zero portfolio BHAR, when broken down offer by offer, reveals less positive BHAR (
The offer method used in PSIPO varied significantly and consistently over time. The eight first offers were auctions (all Dutch auctions, except for Mundial-Confiança, in which a single block was auctioned), followed by two fixed price offers and two bookbuilt offers. The eight auctions translated into only three positive BHAR (37.5%), while the (two) fixed price offers produced (two) positive BHAR and the (two) bookbuilt offers generated (two) negative BHAR. With the caution that the small sample size recommends, one is led to conclude that results match expectations, pointing to higher capacity of the offer methods which extract information from investors to generate pricings less prone to translate into positive long run abnormal returns. Curiously, this pattern is not present in initial returns: the relation between these and long-run returns is inverse, with a correlation coefficient of −0.196. Only in four cases (BPA, Centralcer, Império, and CPP) does one find returns sharing the same sign, positive in BPA’s case and negative in the remaining ones. In the other eight offers, initial underpricing is matched by negative 5-year BHAR and vice versa, with the two fixed price offers posting initial overpricings and long-run positive BHAR and the two bookbuilt offers producing opposite results.
The evolution of wealth relatives over time is depicted in Figure
Wealth relatives over time.
In the first month, the WR is 0.93, and although the maximum value (0.99) is posted in month 26, the unit value is never reached. After twelve months, the WR is 0.90, after 36 months 0.96, and after 60 months 0.82. The analysis of WR thus points to the underperformance of Portuguese PSIPO in the long run.
We have based our analysis of the Portuguese PSIPO’s initial aftermarket, which, in the first twenty trading days, produced negative cumulative abnormal returns, in this method. To capture long-run patterns, we now turn to monthly periods for analysis. Computed monthly AR and CAR are posted in Table
AR and CAR for 1 to 12, 36, and 60 months.
Months |
|
AR | CAR |
| |
---|---|---|---|---|---|
Short-run Aftermarket | 1 | 15 | −7,1% | −7,0% | −3,20767*** |
2 | 15 | −5,5% | −12,5% | −3,7942*** | |
3 | 15 | 2,4% | −10,1% | −3,5513*** | |
4 | 15 | −2,0% | −12,1% | −3,7294*** | |
5 | 15 | 5,4% | −6,7% | −0,65324 | |
6 | 15 | 1,1% | −5,5% | −0,50533 | |
7 | 15 | −0,7% | −6,2% | −0,53367 | |
8 | 15 | −3,5% | −9,8% | −0,81478 | |
9 | 15 | −2,5% | −12,2% | −0,96539 | |
10 | 15 | 3,1% | −9,1% | −0,6576 | |
11 | 15 | 0,4% | −8,7% | −0,62113 | |
12 | 15 | −1,7% | −10,4% | −0,67213 | |
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( |
( |
( |
( |
( | |
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Long-run Aftermarket | 36 | 14 | 0,6% | −5,7% | −0,31579 |
( |
( |
( |
( |
( | |
60 | 12 | −0,02% | −13,5% | −0,54349 |
The table reports cumulative returns on the equally weighted Portuguese PSIPOportfolio for 1 to 12, 36, and 60 months after the first (or only) public offer (CAR) as well as the corresponding monthly returns (AR). ***, **, and * denote, respectively, a return statistically different from zero for 1%, 5%, and 10% significance levels.
Time series of the cumulative monthly returns, gross and abnormal, on an equally weighted PSIPO portfolio.
The long-run analysis does not reverse the results stemming from the analysis of short-run aftermarket. The pattern of negative, and significantly different from zero, returns is sustained initially, but immediately after the 5th month it is no longer possible to reject the null hypothesis of zero cumulative returns for a significance level of 10%. This pattern is upheld during the 60 months under scrutiny. Thus, the long-run analysis of PSIPO CAR, like the short-run results, produces negative returns (with only six exceptions in 60 months, in months 19, and 24 to 28, as depicted in Figures 4). However, in a long horizon the cumulative returns, although negative on average, are not statistically different from zero.
The analysis of Portuguese PSIPO’s long-run returns generates robust conclusions, independent of the elected methodology. Abnormal returns are nonpositive, although not sufficiently negative to allow one to reject the hypothesis of zero returns.
These results are different from the ones made available by the IPO literature (no clear evidence of overpricing is found) and contrast even more with the results found for PIPO in international markets, since no evidence of long run underpricing is detected. On the contrary, our results are consistent with SIPO research, as well with the results of the Portuguese PIPO previous research, namely, Almeida and Duque [
Our results show that no significant wealth transfer occurred between investors that participated in the share offers carried out by the Portuguese Republic and those who accepted exposure to privatized companies only in the secondary market. The former earned negative abnormal returns and the latter essentially zero abnormal returns. The price adjustment occurred in the first month of trading. Divergence of opinion or exaggerated optimism on the PSIPO offers was eliminated relatively quickly; after all, the issuers, although coming to the market after long absences and under new names, were old acquaintances of investors.
The author declares that there is no conflict of interests regarding the publication of this paper.
This paper draws upon the author’s doctoral dissertation. The author acknowledges the support and helpful comments of the thesis supervisor, António Gomes Mota, and of thesis committee members António Nogueira Leite, Miguel Athayde Marques, Clara Raposo, and José Paulo Esperança. All remaining errors are the author’s sole responsibility.