Pricing of IPOs : further evidence from South Africa

We examine the long-term performance of 225 IPOs listed on the Johannesburg Securities Index (JSE) during the period from 1996 to 2006. The buy-and-hold abnormal return (BHAR) method and the calendar time portfolio (CTP) approach have been employed to measure the long-run performance of IPO stocks. The findings reveal that IPOs are highly underpriced when the abnormal returns are estimated by BHAR methodology. However, the use of control firm approach instead of market index for measuring abnormal performances significantly reduces the magnitude of this underpricing reported in previous studies on South African IPO stocks. Our major contribution to the literature is that we apply –for the first time- the calendar time portfolio approach to assess the aftermarket performance of IPOs listed on the JSE. In addition, we use control firm approach instead of market index to estimate the abnormal returns. These are the two significant cases which were not documented in previous research on measuring long-term performance of South African IPO stocks.