Investments to R&D and Aftermarket Performance of Initial Public Offerings - Evidence from Denmark, Finland and Sweden
Jauhiainen, Joonas (2019)
Kuvaus
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Tiivistelmä
Denmark, Finland and Sweden are research and development intensive nations. Investments in R&D have been recognized to affect positively in the cross-section of stock returns and IPOs are documented to be significantly underpriced and to realize poor market-adjusted returns in long-run. This thesis investigates whether research and development expenditure, measured as spending towards R&D scaled with revenue, can be used as a forward-looking measure in the aftermarket performance of Nordic initial public offerings with a sample of 136 IPOs from 2005 to 2015.
The aftermarket performance of IPOs in the Nordic markets is examined in event-time utilizing wealth relatives and in calendar-time setting employing time-series factor regressions of monthly excess returns for portfolios of IPO companies and various risk factors. In event-time, the performance is measured for the initial returns, 1, 3, 6, 12 and 36 months and in calendar-time for 6 and 36-month periods.
The results show that the sample IPOs are considerably underpriced and the R&D unintensive firms experience significantly higher average abnormal initial returns compared to the R&D intensive ones. Adding controversy to previous literature and initial assumptions, all IPOs outperform benchmarks in long-run event-time analysis and R&D intensive firms prove to perform worse than the R&D unintensive companies in nearly all of the measured time periods. Risk-adjusted returns further indicate that the issuers are exposed to size risk and the R&D unintensive firms’ superior long-run performance is attributable by exposure to investment risk factor. IPO literature suggests that the performance measurement is prone to time periods, which most likely also explains the loftier returns of IPO firms over the benchmark indices in the sample. Moreover, some studies argue that R&D investments cause more volatility than investments to physical assets, which could be seen as the poor performance of R&D intensive firms due to negative skew in the payoffs from R&D investments compared to investments in tangible assets.
The aftermarket performance of IPOs in the Nordic markets is examined in event-time utilizing wealth relatives and in calendar-time setting employing time-series factor regressions of monthly excess returns for portfolios of IPO companies and various risk factors. In event-time, the performance is measured for the initial returns, 1, 3, 6, 12 and 36 months and in calendar-time for 6 and 36-month periods.
The results show that the sample IPOs are considerably underpriced and the R&D unintensive firms experience significantly higher average abnormal initial returns compared to the R&D intensive ones. Adding controversy to previous literature and initial assumptions, all IPOs outperform benchmarks in long-run event-time analysis and R&D intensive firms prove to perform worse than the R&D unintensive companies in nearly all of the measured time periods. Risk-adjusted returns further indicate that the issuers are exposed to size risk and the R&D unintensive firms’ superior long-run performance is attributable by exposure to investment risk factor. IPO literature suggests that the performance measurement is prone to time periods, which most likely also explains the loftier returns of IPO firms over the benchmark indices in the sample. Moreover, some studies argue that R&D investments cause more volatility than investments to physical assets, which could be seen as the poor performance of R&D intensive firms due to negative skew in the payoffs from R&D investments compared to investments in tangible assets.