Measuring IPOs Volatility

8/3/2019 Measuring IPOs Volatility

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Measuring IPOs Volatility: IsVolatility of IPOs an indicatorof their future performance?

ByPeter Krastev

Master of Business AdministrationHawaii Pacific University

Fall 2005


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Agenda

IPOs Overview

Data

Methodology Findings

Conclusion


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First

YearSecond

YearThird

YearFourth

YearFifth

Year

IPOs

Style Matched0

2

4

6

8

10

12

14

16

18

AnnualPercentageReturns

Annual returns in the five years after going public for 7,026 IPOs from 1970-2001, with returns

through December 2002. Style-matched firms match on market cap and book-to-market.

Source: Ritter, J. (2003). What should be changed in the IPO market?


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0

100

200

300

400

500

600

700

800

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Calendar Year

NumberofIPOs

0

10

20

30

40

50

60

70

80

AverageFirst-DayReturns,%

Number of Offerings and Average First-day Returns, 1980-2002

Source: Ritter, J. (2003). What should be changed in the IPO market?


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Overview - IPO and Volatility

Three forms of risk exposure that a firm faces when raising capital

offer price risk

distribution risk

after-market risk

Volatility of individual stocks divided to three components:

industry-specific

market-related

firm-level volatility (idiosyncratic) - large upward trend


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Overview - IPO and Volatility

High-risk offerings would be underpriced more than low-risk offerings

Underpricing initially the high-risk IPOs will make thembring higher first-day return and eventually higherinvestors interest in short term

The higher the risk of the IPO, the higher the potentialshort term return!


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Data Sample: 30 stocks from 6 industry groups (2001 and 2002)

healthcare, insurance, investment bank, manufacturing, retail, andservices (personal and business)

Diversify industry specific risk

5 iShares as a benchmark iShares Dow Jones U.S. Financial Sector Index (IYF) iShares Dow Jones U.S. Healthcare Sector Index (IYH) iShares Dow Jones U.S. Consumer Cyclical Sector Index (IYC) iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index (IYK) iShares Dow Jones U.S. Total Market Index (IYY)

Data downloaded from: : http://biz.yahoo.com/ipo/
http://biz.yahoo.com/ipo/http://biz.yahoo.com/ipo/


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Table 1. Summary of the Characteristics of the Investigated IPOs

Name Ticker Indusrty Offering Date Offering Price

AMN Healthcare Services Inc AHS Healthcare 15-Nov-01 $17.00

Alliance Imaging Inc AIQ Healthcare 1-Aug-01 $13.00

Medcath Corp MDTH Healthcare 1-Aug-01 $25.00Odyssey HealthCare Inc ODSY Healthcare 1-Nov-01 $15.00

United Surgical Partners Intl USPI Healthcare 11-Jun-01 $14.00

Hub International Ltd HBG Insurance 29-Jul-02 $14.00

Max Re Capital LTD MXRE Insurance 30-Aug-01 $16.00

Platinum Underwriters

Holdings PTP Insurance 30-Oct-02 $22.50

Odyssey Re Holdings Corp ORH Insurance 20-Jun-01 $18.00

Willis Group Holdings Ltd WSH Insurance 13-Jun-01 $13.50

Investors Capital Holdings

Ltd ICH Invest Bank 20-Mar-01 $8.00

MCG Capital Corp MCGC Invest Bank 3-Dec-01 $17.00

Phoenix Cos Inc PNX Invest Bank 20-Jun-01 $17.50

Principal Financial Group Inc PFG Invest Bank 23-Oct-01 $18.50

Prudential Financial Inc PRU Invest Bank 14-Dec-01 $27.50

AU Optronics Corp AUO Manufacturing 23-May-02 $11.57

Alcon, Inc. ACL Manufacturing 22-Mar-02 $33.00Align Technology Inc ALGN Manufacturing 31-Jan-01 $13.00

Aquacell Technologies Inc AQA Manufacturing 7-Mar-01 $5.00

BioDelivery Sciences Intl Inc BDSI Manufacturing 26-Jul-02 $5.25

Aeropostale Inc ARO Retail 29-May-02 $18.00

Asbury Automotive Group Inc ABG Retail 22-Mar-02 $16.50

Big 5 Sporting Goods BGFV Retail 18-Sep-02 $13.00

Petco Animal Supplies Inc PETC Retail 26-Feb-02 $19.00

GameStop Corp GME Retail 14-Feb-02 $18.00


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Methodology

Daily returns considered

Historical volatility - the standard deviationof the intraday returns

Volatility measured twice:

1st six-month period after the offeringInitial

2nd six-month period 3 years after the offeringdateAfter


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Industry groups Initial Return After Retun Initial Standard Deviaiton After Standard Deviation

Helathcare 0.14% 0.26% 2.29% 1.73%

Insurance 0.06% 0.06% 1.84% 0.96%

Investment Bank -0.01% 0.00% 1.90% 1.31%

Manufacturing -0.30% -0.21% 3.63% 2.89%

Retail -0.19% -0.01% 3.13% 1.71%

Service 0.29% 0.10% 2.15% 1.39%

Total for IPOs 0.00% 0.03% 2.49% 1.66%

Total for ETFs -0.04% 0.02% 1.05% 0.61%


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Paired-sample T-test by Industry

Initial Volatility vs. After VolatilityInitial Volatility vs. After Return

Results: The Sig. value of .000 of all of the results indicates that theresults are statistically significant beyond the 99% confidence level.

There is a significant difference between the daily mean of the IPO stocksstandard deviation in the first six-month period versus the second six-month period after three years.


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Correlation Test by Industry

Initial return vs. Initial volatility Insurance and Retail association between the

initial return and the initial volatility

Initial Return vs. Initial Volatility Significant

Healthcare .064

Insurance .000

Investment Bank .816

Manufacturing .656

Retail .000

Services .158


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After return vs. After volatility Service sector - association between the After return

and the After volatility

After Return vs. After Volatility Significant

Healthcare .586

Insurance .122


Manufacturing .471

Retail .314

Services .001


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Initial Volatility vs. After Return

Initial Volatility vs. After Return Significant

Healthcare .846

Insurance .344


Manufacturing .893

Retail .992

Services .420


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Paired-samples T-test UsingETFs as a Benchmark

To identify if there is statistically significant differencebetween initial volatility of each IPO and initial

volatility of a relevant ETF

30 outputs summarized

For 7 stocks there is significant difference between the

daily means of the IPO stocks initial volatility and therelative ETFs volatility


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I nitial volat ility IPO Init ial volat ility ETF Significant

AMN Healthcare Services Inc IYH healthcare sector index 0.000

Alliance Imaging Inc IYH healthcare sector index 0.000

Medcath Corp IYH healthcare sector index 0.000

Odyssey HealthCare Inc IYH healthcare sector index 0.000

United Surgical Partners Intl IYH healthcare sector index 0.000

Hub International Ltd IYF financial sector index 0.510

Max Re Capital LTD IYF financial sector index 0.000

Platinum Underwriters Holdings IYF financial sector index 0.193

Odyssey Re Holdings Corp IYF financial sector index 0.003

Willis Group Holdings Ltd IYF financial sector index 0.000

Investors Capital Holdings Ltd IYF financial sector index 0.000

MCG Capital Corp IYF financial sector index 0.006

Phoenix Cos Inc IYF financial sector index 0.000

Principal Financial Group Inc IYF financial sector index 0.003

Prudential Financial Inc IYF financial sector index 0.006

AU Optronics Corp IYC consumer cyclical 0.000

Alcon, Inc. IYC consumer cyclical 0.002

Align Technology Inc IYC consumer cyclical 0.000

Aquacell Technologies Inc IYC consumer cyclical 0.000

BioDelivery Sciences Intl Inc IYC consumer cyclical 0.000

Aeropostale Inc IYK consumer non-cyclical 0.000

Asbury Automotive Group Inc IYK consumer non-cyclical 0.000

Big 5 Sporting Goods IYK consumer non-cyclical 0.000

Petco Animal Supplies Inc IYK consumer non-cyclical 0.000

GameStop Corp IYK consumer non-cyclical 0.000

Accenture Ltd IYY total market index 0.000

Advisory Board Co IYY total market index 0.000

Alliance Data Systems Corp IYY total market index 0.000Computer Programs & Systems IYY total market index 0.000

Cross Country Inc IYY total market index 0.000

Paired-sample T-test of the Initial Volatility of IPO to Initial Volatility of ETF


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Paired-sample T-test of the After Volatility of IPO to After Volatility of ETF

After volatility IPO After volatility ETF Significant

AMN Healthcare Services Inc IYH healthcare sector index 0.000

Alliance Imaging Inc IYH healthcare sector index 0.000

Medcath Corp IYH healthcare sector index 0.000

Odyssey HealthCare Inc IYH healthcare sector index 0.000

United Surgical Partners Int l IYH healthcare sector index 0.000

Hub International Ltd IYF financial sector index 0.000

Max Re Capital LTD IYF financial sector index 0.000

Platinum Underwriters Holdings IYF financial sector index 0.000

Odyssey Re Holdings Corp IYF financial sector index 0.003

Willis Group Holdings Ltd IYF financial sector index 0.000

Investors Capital Holdings Ltd IYF financial sector index 0.000

MCG Capital Corp IYF financial sector index 0.000Phoenix Cos Inc IYF financial sector index 0.000

Principal Financial Group Inc IYF financial sector index 0.000

Prudential Financial Inc IYF financial sector index 0.000

AU Optronics Corp IYC consumer cyclical 0.000

Alcon, Inc. IYC consumer cyclical 0.000

Align Technology Inc IYC consumer cyclical 0.000

Aquacell Technologies Inc IYC consumer cyclical 0.000

BioDelivery Sciences Intl Inc IYC consumer cyclical 0.000

Aeropostale Inc IYK consumer non-cyclical 0.000

Asbury Automotive Group Inc IYK consumer non-cyclical 0.000

Big 5 Sporting Goods IYK consumer non-cyclical 0.000

Petco Animal Supplies Inc IYK consumer non-cyclical 0.000

GameStop Corp IYK consumer non-cyclical 0.000

Accenture Ltd IYY total market index 0.000

Advisory Board Co IYY total market index 0.000

Alliance Data Systems Corp IYY total market index 0.000

Computer Programs & Systems IYY total market index 0.000

Cross Country Inc IYY total market index 0.000


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Findings 1/2

Overall Average Daily Data for Each Industry and Total Data of ETFs

Industry groups Initial Return After Retun Initial Standard Deviaiton After Standard Deviation

Helathcare 0.14% 0.26% 2.29% 1.73%

Insurance 0.06% 0.06% 1.84% 0.96%

Investment Bank -0.01% 0.00% 1.90% 1.31%

Manufacturing -0.30% -0.21% 3.63% 2.89%Retail -0.19% -0.01% 3.13% 1.71%

Service 0.29% 0.10% 2.15% 1.39%

Total for IPOs 0.00% 0.03% 2.49% 1.66%

Total for ETFs -0.04% 0.02% 1.05% 0.61%

Overall IPO volatility turned to be higher than the total volatility of ETFs for bothinvestigated periods

The initial return is lower than after daily return for each industry group exceptfor the Service sector

Yet, the initial volatility is higher than the after volatility for each industry group


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Findings 2/2

IPOs returns have increased from the

initial to the after period (3 years after

the offering)

Initial volatility has decreased in the

After period

IPO sample is more volatile than the ETFsample, while bringing slightly higher dailyreturns

Measuring IPOs Volatility

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