The initial return performance of UK property company IPOs
| DOI | https://doi.org/10.1108/14635780110383677 |
| Date | 01 April 2001 |
| Pages | 127-139 |
| Published date | 01 April 2001 |
| Author | Winston Sahi,Stephen L. Lee |
| Subject Matter | Property management & built environment |
Academic
papers: Initial
return
127
Journal of Property Investment &
Finance, Vol. 19 No. 2, 2001,
pp. 127-138. #MCB University
Press, 1463-578X
Received July 1999
Revised July 2000
ACADEMIC PAPERS
The initial return performance
of UK property company IPOs
Winston Sahi and Stephen L. Lee
Department of Land Management and Development,
The University of Reading, Reading, UK
Keywords Property, Going public, Trading companies, Investment
Abstract Presents empirical evidence for a sample of 48 UK property company initial public
offerings over the period 1986 to 1995. Several conclusions can be drawn. First, property
companies in general show a significantly positive average first day return. Second, property
investment companies' average first day return is not significantly different from zero. Third,
property trading companies' average first day return is significantly positive. Fourth, the higher
average first day return of property trading companies over property investment companies is
significant.
Introduction
Shares of companies going public for the first time are typically at a price
below that achieved on their first day of trading, giving subscribing investors
large positive returns (for international evidence of this phenomenon, see
Ibbotson and Ritter, 1995; Loughran et al., 1994). Therefore, either the offering
price is set too low or the investors systematically overvalue initial public
offerings (IPOs) on the first trading day. Since the results of studies indicate
few if any departures from efficiency in the aftermarket (Ibbotson, 1975)
positive initial returns can be attributed to a downward bias in the offering
price, that is, IPOs are underpriced. No complete explanation of the
underpricing phenomenon exists, though various theories based on different
rationales shed light on the factors that may be influential:
.information asymmetry (Baron, 1982; Rock, 1986);
.second signalling (Allen and Faulhaber, 1989; Grinblatt and Hwang,
1989; Welch, 1989; Benveniste and Spindt, 1989);
.legal liability and litigation risk (Tinic, 1988; Hughes and Thakor, 1992);
and
.information cascade effects (Welch, 1992).
In Baron's information asymmetry theory, it is argued that underwriters are
better informed about the appropriate price for IPO shares than the issuers,
because they possess greater information about investor demand for the
securities. In addition underwriters have an incentive to recommend an offering
price below the true market value to reduce the marketing effort and to avoid
unsold shares. Thus the theory predicts larger average underpricing for IPOs
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