Understanding IPO Market in Australia: Analysis of Initial Returns and Long Run Performance

This article provides an analysis of the IPO market in Australia, focusing on the initial returns and long run performance of companies. The article evaluates the descriptive statistics of different sectors and calculates the two-year holding period return of the IPOs. The analysis indicates that the returns provided by the Information Technology Sector is negative, while the Telecommunication Services sector has the maximum average returns with high risk involved. The article also provides insights into the valuation methods used by investors to identify investment options.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question:....................................................................................................................................2
1. Understanding the calculation of initial returns, while analysing and interpreting the
Australian IPO market:..............................................................................................................2
2. Calculating and comparing the percentage return on the long run IPO performance:.........11
3. Understanding the reason for the occurrence of short run IPO under-pricing and contrasting
the results with empirical study:..............................................................................................12
Reference and Bibliography:....................................................................................................16

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Question:
1. Understanding the calculation of initial returns, while analysing and interpreting the
Australian IPO market:
Descriptive analysis of the initial public listing:
Initial return
Mean 0.094234
Standard Error 0.049411
Median 0.057778
Mode 0
Standard Deviation 0.261457
Sample Variance 0.06836
Kurtosis 6.076875
Skewness 1.44621
Range 1.548429
Minimum -0.55143
Maximum 0.997
Sum 2.638556
Count 28
The above table represent the descriptive analysis of the overall IPO listing, which is
been conducted between the 1 April 2015 to 31 July 2015. In addition, the analysis relevantly
evaluates the mean, median, mode and standard deviation of the overall initial public offering
conducted in the Australian capital market. The number of companies used in the evaluation

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is 28, which helps in understanding the overall valuation and risk involved in the investment
of IPO. In addition, the overall evaluation mainly indicated an average return of all the
companies provided from the IPO at the level of 9.42%. In addition, the median is relevantly
calculated at the levels of 5.78%, while the mode is calculated at 0. The median value mainly
indicates that 50% of the IPO companies are having returns higher than 53.78%, while the
overall 50% are not achieving the median returns. Moreover, standard deviation of the return
provided by the IPO on the initial day is calculated at the levels of 26.15%. This relevantly
indicates that risk and return of the IPO is higher in the initial day, which could hamper return
generation capability of the investors. Judge et al. (2015) mentioned that investors use the
initial valuation of the company to identify the relevant investment options, which could
increase their chance to generate higher return from investment.
1ST
ADH
AER
AFG
ALI
AXP
AYS
BMH
CGC
ECX
FFT
FRX
GDF
GNX
GTY
IQ3
KSL
MDC
MUA
MYO
NCL
PIQ
PPL
QMS
RFN
SHM
SLC
WDE
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Initi al return
The figure relevantly helps in depicting the overall initial return of the companies
conducting their IPO. Maximum of the companies on the day of their IPO has made losses,
while some of the companies made exponential gains. The inconsistency in the returns of the
IPO companies is due the valuation conducted by investors. Kotlar et al. (2017) stated that
investor use different valuation method to derive the accurate share price valuation of a

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company conducting their IPOs. Therefore, the high return generated by some of the
companies mainly concealed the losses incurred by companies doing the initial public
offering.
Relevant assumptions are made before segregating the companies according to their
sector, where the sector with only one company is ignored, as the overall descriptive analysis
would not be conducted for the concern sector. The sector with more than one stock is taken
into consideration to understand the risk and retune provided from the IPO initiation. The
sector such as Consumer staples, Industrials, and Utilities are not evaluated under the
descriptive statistics, as they have only one stock and the analysis will not be feasible. The
overall descriptive analysis on different GICS sector are depicted as follows.
Descriptive analysis of Consumer Discretionary:
Consumer Discretionary
Mean 0.099311
Standard Error 0.018883
Median 0.092083
Mode #N/A
Standard Deviation 0.037766
Sample Variance 0.001426
Kurtosis 0.371157
Skewness 0.935463
Range 0.086923
Minimum 0.063077
Maximum 0.15
Sum 0.397244

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Count 4
From the evaluation of above tables, the overall mean, media, and standard deviation
of Consumer Discretionary sector could be identified. The calculation mainly indicates that
average return provided by Consumer Discretionary sector is at the levels of 9.93%, while the
median returns 9.21% with an observation of 4 companies in the sector. The overall valuation
mainly indicates that 50% of the stock falling in Consumer Discretionary sector has provided
a return of 9.21% during the initial public offering. Moreover, the standard deviation of the
overall sector falls at the only 3.78%, which is relevantly lower than the returns provided by
Consumer Discretionary sector. This relevantly indicates that risk involved in the initial
public offering of Consumer Discretionary sector is relevantly low and could provide higher
return to the investors. Therefore, from the evaluation it could be detected that IPOs
conducted by Consumer Discretionary sector could eventually help investor to generate high
return from investment (Leitterstorf and Rau 2014).
Descriptive analysis of Financials:
Financials
Mean 0.170175
Standard Error 0.118424
Median 0.099348
Mode #N/A
Standard Deviation 0.290079
Sample Variance 0.084146
Kurtosis 0.781574

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Skewness 1.056729
Range 0.793478
Minimum -0.12681
Maximum 0.666667
Sum 1.021051
Count 6
The companies taken under valuation of Financials sector is relatively under 6, which
is used in identifying the viability of IPO option conducted by companies in the sector. In
addition, the overall average returns provided by the IPO companies are at the level of
17.02%, while 50% of the company’s overall return on the day of IPO is higher than 9.93%.
The overall standard deviation is mainly at the levels of 29.01%, which is relevantly high in
comparison to the return provided by the IPO. The high average returns provided by the
Financials sector mainly helps in improving the level of retunes, which could be generated by
the investor on the initial public offerings. The high average return also indicates the
valuation of financial companies in ASX is relevantly high due to the demand of the investors
(Boulton, Smart and Zutter 2017).
Descriptive analysis of Healthcare:
Health Care
Mean -0.12536
Standard Error 0.143212
Median -0.005
Mode #N/A
Standard Deviation 0.286424

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Sample Variance 0.082039
Kurtosis 3.66862
Skewness -1.90205
Range 0.611429
Minimum -0.55143
Maximum 0.06
Sum -0.50143
Count 4
The calculation relevantly evaluates mean, median, and standard deviation of
Healthcare companies conducting IPO in Australian market. from the overall evaluation it
could be identified that the average returns provided by IPO companies is relatively at -
12.53%, while 50% of the stocks have achieved returns above -5%. Moreover, standard
deviation is at the levels of 28.6%, which is relatively high in comparison to other stocks. The
overall returns provided by Healthcare sector is negative, which indicates the demand of
investors regarding the stocks of Healthcare companies. Maximum of the companies listed in
the healthcare sector is relatively providing negative returns on the day of their IPOs. This
relatively indicates that the companies listed in IPO during 2015 under Healthcare sector was
not valued according the company’s actual valuation or the investors did not find the
company could provide the anticipated returns (Khurana, Ni and Shi 2017).
Descriptive analysis of Information Technology:
Information Technology
Mean 0.089689

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Standard Error 0.055195
Median 0.06621
Mode #N/A
Standard Deviation 0.135198
Sample Variance 0.018279
Kurtosis -0.09907
Skewness 0.552859
Range 0.38
Minimum -0.08
Maximum 0.3
Sum 0.538134
Count 6
After evaluating the descriptive statistics of Information Technology Sector, the
overall mean, median, and standard deviation could be identified. Moreover, six companies in
the sector mainly conducted the IPO session, which helped in identifying the overall returns
provided by the companies. The overall average returns provided by Information Technology
is at the levels of 8.96%, which relatively indicates the positive price movement of stocks on
the day of IPO. moreover 50% of the stocks listed in Information Technology Sector
provided return of more than 6.62%, which is relatively higher and indicates the possibility of
increased returns provided by the newly listed company. However, from the valuation the
standard deviation is calculated at the levels of 13.51%, which is relatively low in comparison
to the returns provided by the information technology stocks. Therefore, it could be

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understood that successful IPO initiation could be conducted by companies listed in
information technology sector (Beck 2017).
Descriptive analysis of Real Estate:
Real Estate
Mean 0.028
Standard Error 0.003
Median 0.028
Mode #N/A
Standard Deviation 0.004243
Sample Variance 0.000018
Kurtosis #DIV/0!
Skewness #DIV/0!
Range 0.006
Minimum 0.025
Maximum 0.031
Sum 0.056
Count 2
The above calculations mainly indicate the overall average returns provided by real
estate sector companies are at the levels of 2.8%, where only 2 stocks are evaluated purpose
for descriptive analysis. The median value is relatively at the levels of 2.8%, which is
common as there are only two stocks included in the evaluation. However, the overall risk
involved in price movement of the IPO companies is at the levels of 4.24%. this relatively
indicates that real estate sector IPO are conducted effectively in the Australian market.

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Descriptive analysis of Telecommunications Services:
Telecommunication Services
Mean 0.350852
Standard Error 0.323472
Median 0.055556
Mode #N/A
Standard Deviation 0.56027
Sample Variance 0.313902
Kurtosis #DIV/0!
Skewness 1.712911
Range 0.997
Minimum 0
Maximum 0.997
Sum 1.052556
Count 3
The maximum average returns are calculated from telecommunication service IPOs,
while increasing the level of risk involved during the IPO session. the average returns from
the telecommunications services IPO is at the levels of 35.08%, while 50% of the stock has
the return above 5.56% with an overall standard deviation of 56.02%. This relatively
indicates that risk involved in IPOs of Telecommunication service companies is relatively
higher than any other sector, which is evaluated in the assessment.

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2. Calculating and comparing the percentage return on the long run IPO performance:
ASX
Code
Company Name Adjusted trading
close price
Price after 2
years
Holding period
return
AER Aeeris Ltd 0.23 0.068 -70.43%
FFT Future Fibre
Technologies Limited
0.83 0.120 -85.54%
MUA Mitula Group Limited 0.8 1.010 26.25%
MYO MYOB Group Limited 3.89 3.590 -7.71%
PPL Pureprofile Ltd 0.5 0.330 -34.00%
RFN Reffind Limited 0.26 0.010 -96.15%
^AORD All Ordinary Index 5,869.700 5,773.900 -1.63%
AER FFT MUA MYO PPL RFN ^AORD
-120.00%
-100.00%
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
2 year Holding period return
From the overall evaluation of the above figure and table, two year holding period
return of the IPOs can be calculated for the information technology sector companies. This
relatively indicates that the overall returns provided by the Information Technology Sector is
negative, as 5 out of 6 companies has provided negative returns during the 2-year holding

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period. However, the evaluation of all ordinary index also indicates a decline of only -1.63%,
which relatively indicates the problems related to the investment during IPOs (Wales, Mousa
and Stein 2015).
Therefore, it could be understood that conducting investments during the IPO
initiation is not advisable to the investor, after evaluating the overall track record. On the day
of IPOs, volatility in stock is relatively high, where the accurate prices for the particular
company is not identified. After the IPO initiation progress of the company is evaluated by
the investors, which helps in deriving the actual prices of the company and he prices investors
are willing to pay. Moreover, the 2-year holding period evaluation also indicated a loss
incurred by investors who traded on the day of the IPO. Hence, the investor needs to find
more information on the company before investing and ignore the investment process on the
day of IPO (Francis 2017).
3. Understanding the reason for the occurrence of short run IPO under-pricing and
contrasting the results with empirical study:
From the overall evaluation in short run IPO underpricing can be identified by
evaluating different empirical research, as it helps in gauging into the reasons behind the
occurrence of short run IPO underpricing. In addition, IPO underpricing is mainly conducted
when the increase in stock value from the initial offering price is seen after the successful
completion of the first day trading. This relevantly indicates that underpriced IPOs provide
adequate potential to the investors for generating higher returns from investment on the first
trading day. The empirical research paper mainly used for evaluating the implication of IPO
underpricing, which is conducted in UK. The research paper completed by Unlu, Ferris and
Noronha in 2004 relatively evaluates the IPO underpricing overtime in evident to UK.
Research paper adequately evaluates the performance of IPOs after the completion of 1st day

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trading, while detecting the possibility of short run and Uprising occurrence on IPOs. In this
context, Filatotchev, Chahine and Bruton (2016) mentioned that investors conduct company
analysis to identify the actual share value, which might help in generating higher rate of
return from investment.
The empirical research paper relatively evaluates the initial public offerings using 513
IPOs launched in UK from 1993 to 2001. From the overall evaluation of the research paper it
could be identified that underpricing of IPOs has relatively increased from 7% to 15%. the
research paper relatively evaluates the impact of different factors in conducting the
underpricing of a particular IPO on the day of its initiation. the research paper relevantly
demonstrate how analyst coverage and media reporting could be used by companies who are
conducting the initial public offering in UK. The presence of underpricing during the IPO is
relatively evident, where that valuation of a particular stock changes with the performance of
the company (Unlu, Ferris and Noronha 2004).
The empirical results used in the research relatively uses time series analysis of
enterprising, multivariate analysis of underpricing, underpricing and firm’s characteristics to
identify the overall change in closing price of the IPO. The comparative time series of Mean
(Median) is relatively conducted in the research to identify the change in underpricing of
IPOs in the UK market. The calculation relatively indicates that the underpricing percentage
relatively increased to 64.5% in 2000, which increased from 3.2% in 1994. This relatively
indicates that the underpricing of a particular IPO relatively increased during 2000, as more
and more companies who are commencing the initial public offering. the post issuance value
relatively increased during the process, which indicated that money left on the table was
relatively higher, while it allowed the investors to generate a higher return from investment
(Unlu, Ferris and Noronha 2004).

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The empirical research also evaluates that underwriter prestige as it is considered to
be one of the major factors behind underpricing of a particular IPO. Moreover, it is detected
that Low Prestige of underwriters relatively increases the underpricing of a particular IPO in
UK. Therefore, it could be understood that companies that appoint high rank underwriters for
their IPO initiation are able to reduce the level of underpricing conducted during the IPO
commencement. The overall mean underpricing categories are conducted to characterize the
IPO, which helps in determining the different level of characteristics, which could influence
the overall underpricing of a particular IPO. From the overall evaluation process of small
industry, having technological front, where no secondary sales are conducted and has low
prestige underwriters are identified to have the highest underpricing impact (Unlu, Ferris and
Noronha 2004).
The multivariate analysis is relatively used to evaluate the underpricing impact on
IPS, which was issued in UK from 1993 to 2003. The multivariate analysis relatively
evaluates the intercept of different segments for identifying the overall impact of
underpricing on the IPOs. the evaluation indicates that from the sub period of 1996 to 2001
the overall underpricing percentage relatively increased in UK due to the continuous IPOs,
which was initiated by companies in the UK market. Researcher relatively indicates that
underpricing of a particular IPO is conducted for a short duration, where the investors are
able to generate higher returns from investment. After evaluating the UK IPOs from 1993 to
2003 the impact of short term underpricing can be identified in the UK market (Unlu, Ferris
and Noronha 2004). Hence, it could be understood that both us and Australian economy have
the underpricing mechanism for IPOs, as it allows investors to increase their returns from
investment. Therefore, underwriters and characteristics of the company could be identified, as
the main reasons behind the occurrence of short run IPO underpricing. Due to the adoption of
low-grade underwriters during the IPO process negative impact of underpricing on the share

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are conducted. Henceforth, it could be assumed that Australia and US both has the short-run
IPO under-pricing conduction in their stock market.

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