1. Retail IPO in Emerging Markets XI International Academic Conference on Economic and Social Development Dmitry Kokorev www.cfcenter.ru http://en.cfcenter.ru/ www.cfjournal.ru Basic Research Programme of the Higher School of Economics in 2010 1

2. 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

3. 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

4. IPO in emerging markets: database Basic criteria Company form one of emerging markets Time period: 2003-2010 Shares – actively traded Market cap > $30 Mln 4 Data base 1911 offerings 15 emerging markets Source: Bloomberg, Factiva, VanDijk

5. 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.

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

7. 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 BRAZIL10236 9153624%-13%-18%-13% HONG KONG19338 09219713%2% -10% SINGAPORE12712 80510113%4%-9%3% MEXICO2295 0984 3239%-8%-4%-19% RUSSIA3236 7471 1483%-4%-9%19% TURKEY308 525284-26%-22%-18%-25% GROUP 1506228 1824518%-3%-7% CHILE1126 8112 43720%-11%-14%-3% CHINA384169 70744221%-11%-18%-28% EGYPT82 80935131%-18%-20%-29% GROUP 2403199 32849521%-11%-18%-27% INDIA22133 17915036%4%13%41% THAILAND1046 3496112%9%3%10% POLAND716 9699820%18%44%47% ROMANIA31806020%24%1%-12% GROUP 339946 67711727%8%16%33% CHINA(A-shares)60183 15913889%-19%-10%-24% CZECH2687344240%-40%-22%-13%

8. Retail IPO: data and methodology 8 Model for underpricing DATA : 2003-2008 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

9. Retail IPO: descriptive statistic 9 Pilot Study

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

11. 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***-.662-.061.035 RetShare.0922**-.391**-.425*-.327* Option.0227 OverSub.007*.003-.001-.004 LnVolume-.0465**-.064**-.003**-.080** Owner.0336*.324**.414**1.32 AbnormalDay -.271**-.518-.341 Observations1501489057 R2R2 0,230,1520,1140,122

12. 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

13. Thank you for your attention! 13

14. IPO in Emerging Markets: descriptive statistic

15. Retail IPO: descriptive statistic