Long-term performance of post-bankruptcy IPOs
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School of Business |
Master's thesis
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Date
2017
Department
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Mcode
Degree programme
Finance
Language
en
Pages
66
Series
Abstract
Purpose of the study The purpose of this study is to research stock market performance of 232 previous public companies emerging from bankruptcy and Chapter 11. Motivated by the contradicting evidence regarding performance of post-bankruptcy companies and the widely documented long-term underperformance of traditional IPOs, I study the long-term stock market performance and riskiness of post-bankruptcy IPOs. My first research question is whether the post-bankruptcy companies generate long-term returns that differ from long-term returns earned by non-post-bankruptcy companies. Further, motivated by the risk and return theory, I study whether the volatility of long-term returns produced by post-bankruptcy companies differs from the volatility of long-term returns gained by traditional IPOs. Data and methodology I construct the post-bankruptcy sample by employing Compustat to identify companies that appeared on US stock exchange twice during the years 1970-2016 and emerged from bankruptcy or Chapter 11. The control group, employed for the comparison of returns of a post-bankruptcy sample, consists of all the US IPOs undertaken during 1970-2016, which are collected from the SDC database. As a result, I study a post-bankruptcy sample of 232 companies and a control group sample of 8131 companies. The stock market data for both samples is collected from the CRSP database. I am examining return and volatility estimations within holding periods of 6, 12, 24, 36, 48, and 60 months after an IPO. First, returns and volatility variables of post-bankruptcy and non-post-bankruptcy companies are analyzed by a mean raw analysis. In the second stage, I continue with a simple linear regression analysis studying raw return and volatility variables, further extending the analysis to multivariate regression modelling by including control variables. In the third stage, I run robustness checks by researching market-adjusted return and volatility estimates to ensure robustness of results. Results By studying mean raw returns, simple linear and multivariable raw regression estimates, I find that the post-bankruptcy companies generate positive abnormal returns that are statistically insignificant. However, when examining market-adjusted returns, I do not find positive abnormal returns produced by post-bankruptcy companies. Thus, based on my analysis I conclude that post-bankruptcy companies generate long-term returns that are indifferent from long-term returns generated by traditional IPOs. Even more interestingly, studying both raw and market-adjusted estimates the analysis shows that post-bankruptcy companies are statistically significantly riskier compared to traditional IPOs, not supporting the risk and return equilibrium.Description
Thesis advisor
Jylhä, PetriKeywords
post-bankruptcy companies, abnormal returns, market-adjusted return, market-adjusted volatility