Intra-Industry And Economic Consequences Of Initial Public Offerings In Pakistan

Abstract

IPO is an event which offers the firm’s ownership to the general public by purchasing IPO firm’s shares and in return contributing funds to fulfill its financial needs. The purpose of the present study is twofold; first the study examines the impact of IPO events on already existing firms operating within the same industry and second to see the relationship between IPO activity and external factors (both market and economy) prevailing in the Pakistan’s environment. A sample of 90 newly listed firms (IPOs) and 337 existing firms (rival firms in the industry where IPO take place) belongs to Pakistan Stock Exchange (PSX) from19 different industries have been taken which covering a time span of 1998 to 2016. The performance of industry counterpart has been analyzed through the proxies namely; operating performance (ROA & ROE), stock returns (CAR & BHAR), Leverage (Debt to Asset), Liquidity (Working capital ratio), volatility (Standard Deviation), Industry competitive environment (HH Index). In the first phase, the study examines the intra-industry impact of IPO event by comparing pre and post-performance of other firms operating in the same industry where IPO event take place by applying t-test. In the second phase, a performance comparison has been made between IPO firms and its industry competitors after the IPO event. Then an inter-industry impact of IPO events is examined by making a comparison among industries and see which type of industry is more affected through IPO event. In the last step, the study sees how IPO event bring changes in the external factors like (Stock market and macro-economic variables). The results indicate that existing firms operating performance ROA and ROE, stock returns (both in short and long run) and Liquidity decline after the event of IPO. In addition, rival firms leverage position incline towards more debts which is again a bad sign for rival firms in terms of more debt burden and financial risk. Herfindahl Hirschman index (HHI) is applied to see changes in industry composition in pre and post IPO event. Overall industry concentration is found as significant and negative which shows IPO helps in declining the industry concentration and discourage monopolistic competition. When comparing IPO firm with its industry counterpart in terms of performance efficiency up to 3 years after the IPO event, industry competitors outperform IPO firm in terms of operating performance (ROA, ROE), however, IPO firms performed better in terms of leverage and short term liquidity position. A multivariate regression analysis shows a significant decline in rival firm operating performance (ROA, ROE) and liquidly whereas leverage position of rival firms are ix | P a g e also affected negatively as firm debt burden shown an upward trend. IPO inter-industry comparison has been made while comparing different sectors performance by applying reference dummies. The results indicate that existing firms working in Oil & Gas from non-financial and commercial banks from financial sector are more affected through IPO event. The second part of the study analyzes the existence of long run relationship between IPOs and external factors like Foreign Direct Investment (FDI), Industrial Production (IP), Interest Rate (IR), Stock market index and trading volume. The study applied ARDL to find the association between number of IPOs and external factors. The results indicate GDP, IR and FDI shown a positive and significant relationship with number of IPOs whereas Stock Market Trading volume, Market index and IP did not associated with number of IPOs. Overall the study has theoretical, practical and policy implications. It confirms both supply and information effect which create negative impact of rival firms after the IPO event. The study suggests individual investors and portfolio managers to retain existing firm shares (in short) if firms belong to Oil & gas, Chemical, Food & personal care and Technology & communication, as they provide positive returns to existing firms after the IPO event. On the other hand, firms belong to Financial, Engineering and Textile sector show negative impact of IPO therefore it is beneficial for investors to buy IPO firms shares after the event. In long run, only Oil and gas sector offer positive returns whereas Chemical, Financial, Engineering, Food & personal care and Technology & communication offer negative returns to existing firm’s shares after the IPO event. IPO event also decrease industry concentration and industries move from monopolistic to perfect competition, except, cement, textile, fertilizer and investment bank. The possible reason for the positive concentration is due to more merger and acquisition in these sectors that results in increase the degree of concentration after the IPO event. With reference to number of IPOs and external factors, the results indicates that IPO event is more associated with growing economic needs as compared to stock market needs. This further confirms the previous notion of the researchers that there is no association between stock market growth and economic growth.