Retail IPO in Emerging Markets XI International Academic Conference on Economic and Social Development Dmitry Kokorev Basic Research Programme of the Higher School of Economics in

IPO - issuing shares to the general public for the first time, with the expectation that a liquid market will develop. Main issues: 1) Underpricing (the price change measured from the offering price to the market price on the first trading day, 16% in US Market) [Ritter, Ibbotson] 2)Long-Run performance (poor stock price performance of IPOs in the long run, -20% 3-years abnormal return in US Market) [Ritter,Loughran] 3)Market timing (cycles existence in both the volume and the average initial returns of IPOs) [McDonald, Titman, Zingales] 2 IPO: definition and main issues

Type of owner (Private vs State Owned) [Perotti, Megginson] Type of investor (Retail vs Institutional) [Aggarwal, Ljungqvist, Wilhelm] Country [Ritter, Loughran] Other factors (IPO size, number of shares offered, company’s age, operational performance before offering, etc) 3 Key factors, which affect IPO return

IPO in emerging markets: database Basic criteria Company form one of emerging markets Time period: Shares – actively traded Market cap > $30 Mln 4 Data base 1911 offerings 15 emerging markets Source: Bloomberg, Factiva, VanDijk

IPO in emerging markets: country differences China [Guo, McGuinness] A – shares vs Other shares Government intervention Before 2001 – planning system of IPO Price regulation System of non-tradable securities High level of demand from retail investors Near 2300 companies, $1 700 bln. 5 India [Ghosh] Most of companies – private 22 stock-exchanges High level of demand from local retail investors and NRI More than 6000 companies, $700 bln. Brazil [Cigerza] Developed rules of trading Almost none of government intervention Foreign and retail investors actively participate Most of companies trade only preferred shares (family owned) Near 400 companies, $600 bln. Russia A lot of Open Joint-Stock companies through Privatization, but most of them – non-tradable Low market liquidity and level of activity of retail investors Near 200 companies, $670 bln.

IPO in emerging markets *Average Long-Run return – buy-and-hold return, adjusted by country index (BHAR)

IPO in emerging markets: country differences Country Number of IPOs Agregate Gross Proceeds, $ mln. Average IPO size Underpicing Average 1- Year return Average 2- Year return Average 3- Year return BRAZIL %-13%-18%-13% HONG KONG %2% -10% SINGAPORE %4%-9%3% MEXICO %-8%-4%-19% RUSSIA %-4%-9%19% TURKEY %-22%-18%-25% GROUP %-3%-7% CHILE %-11%-14%-3% CHINA %-11%-18%-28% EGYPT %-18%-20%-29% GROUP %-11%-18%-27% INDIA %4%13%41% THAILAND %9%3%10% POLAND %18%44%47% ROMANIA %24%1%-12% GROUP %8%16%33% CHINA(A-shares) %-19%-10%-24% CZECH %-40%-22%-13%

Retail IPO: data and methodology 8 Model for underpricing DATA : cross-section Additional data about: Oversubscription Share of retail investors in offering Owner before IPO 150 companies from 6 countries Pilot Study Model for long-run return

Retail IPO: descriptive statistic 9 Pilot Study

10 Retail IPO: privatization status Only 18 companies 11 – China 3 – Russia 2 – Poland 1 – India 1 - Egypt Pilot Study

Retail IPO: regression analysis 11 Pilot Study *** - 1% significance level ** - 5% significance level * - 10% significance level Underpricing1-Year return2-Year return3-Year return Const.238*** RetShare.0922**-.391**-.425*-.327* Option.0227 OverSub.007* LnVolume-.0465**-.064**-.003**-.080** Owner.0336*.324**.414**1.32 AbnormalDay -.271** Observations R2R2 0,230,1520,1140,122

Results In average, investor earns more from investing in emerging market IPO Country factor is crucial Retail investors are generally lose on average in LR Privatization Retail IPO generally gives more return (SR and LR) 12

Thank you for your attention! 13

IPO in Emerging Markets: descriptive statistic

Retail IPO: descriptive statistic