The Timing And Performance Of Initial Public Offerings : Insights From Securitized Real Estate New Issues

Abstract

The thesis broadly attempts to address two issues. First, does the special pricing of securitised real estate firms provide insight into the initial returns, long-run performance and timing of IPOs? Second, is inter-temporal variation in IPO activity the result of windows of opportunity that depend on business conditions? Securitised real estate IPOs are useful in understanding IPO behaviour because of the unique asset value methodology used for pricing their shares. Empirical evidence in the thesis confirms that Property Investment IPOs have more certain prices and lower initial returns than Property Development IPOs. Property Investment IPOs are found to be efficiently priced in the secondary market. These results are supportive of underpricing-efficient markets explanations of initial returns. In contrast to findings for operating firms, Property Investment company equity issuers do not underperform non-issuers. The results for Property Investment and Property Development equity issuers are consistent with pricing uncertainty and cognitive bias adversely affecting aftermarket performance. The similar long-run performance of IPOs and rights issues documented in the thesis rejects the contention that firms time issues to take advantage of new shareholders. Regression analysis of property stocks confirms that neither book-market nor size characteristics are associated with new issue effects in the UK property share market. There appears to be a real estate pricing characteristic that affects both the initial and long-run performance of securitised real estate IPOs. The thesis proposes the windows of opportunity theory to explain variations in issue activity. Firms go public when improved business conditions result in better business opportunities, weaker adverse selection costs, and lower direct issue costs. The sample of 1261 firms used to test the theory provides considerable empirical evidence of the characteristics of the UK IPO market. Using duration (the spell between IPO transactions) for the first time in the IPO literature, a positive relationship between IPO activity and both business and stockmarket conditions is confirmed. Time series regressions on the real amount raised in IPOs confirms that more money is raised when the business conditions are near a peak and when the stockmarket is relatively high. Poisson regression results suggest that IPO volume is linked to business conditions. Property Investment and Property Development IPO activity is found to increase following an increase in real estate market conditions; suggesting that variations in industry business conditions explain variations in industry IPO activity. Firms that went public in hot issue markets achieve cost savings over cold issue market firms. Firms undertaking IPOs in hot issue markets typically pay only 65% of the costs incurred by cold market issuers. Ffot issue market IPOs on average have implied costs from initial returns which are 60% less than cold issue market IPOs. Time series regression results indicate that high initial returns deter firms from going public and increased information flow attracts firms to the market. The results suggest that business opportunities, adverse selection costs and direct issue Costs determine IPO activity