IPO effects on the issuing firm's closest peers

Abstract

OBJECTIVES OF THE STUDY:

In this thesis, I analyze the impact of an IPO on the share prices of its closest peers. Furthermore, I examine whether the possible valuation effect diverges between a market-based and hierarchy-based method used for peer company definition. Finally, I study the nature of the information conveyed through an IPO and subsequently examine what kinds of impacts it might have on the of peer companies' price reactions.

DATA AND METHODOLOGY:

The sample consist of 1,200 IPOs occurring in the AMEX, NASDAQ and NYSE stock exchanges between 2000 and 2012. The IPO data is obtained from Securities Data Corporation (SDC) Platinum. Further, each IPO needs to have data available from the Center for Research in Security Prices (CRSP), Institutional Brokers' Estimate System (IBES) as well as Standard & Poor's Capital IQ's COMPUSTAT. Finally, each IPO needs to have at least one analyst following them during the issue year who is also following one other publicly traded company as well as at least one publicly traded company operating under the same four-digit SIC industry. To test the hypotheses, I apply the traditional industry-based method for peer company definition as well as a new market-based approach, namely the joint analyst-based method. Thereafter, I compare the cumulative abnormal returns of peer companies obtained by the two above mentioned approaches. In addition, I employed an ordinary least squares (OLS) regression in order to test the impact of the information conveyed through the IPO.

FINDINGS OF THE STUDY:

I find that IPOs cause significant valuation effects on their peer firms. The magnitude and sign of the price reaction varies significantly depending on the method used to define the peer companies for the issuing company. Peers, which are obtained by the joint analyst method, experience significant negative price reactions in response to an IPO. Whereas, peer companies which share the same SIC industry experience positive valuation effects, though not significant during the immediate days subsequent to the issue. Furthermore, I find that competitive effects enhances the negative price reaction for peer companies obtained by the joint analyst approach, whereas information effects have an opposite impact.