Brahim Saadouni

The accuracy of earnings forecasts in IPO prospectuses on the Kuala Lumpur Stock Exchange

Abstract This paper examines the accuracy of earnings forecasts made by managers of Malaysian initial public offerings (IPOs) during the period 1984–1995. It is a mandatory requirement for Malaysian IPOs to furnish earnings forecasts together with the opinions thereon of the auditors and the lead underwriter in their prospectuses. Their accuracy is measured by forecast errors, absolute forecast errors, squared forecast errors and standardised forecast errors. The results suggest that, on average, managers under-forecast earnings by 33.37%. A comparison with the naive no change model in earnings suggests that 96 out of 122 companies outperform this model. A number of company specific characteristics (size, age, forecast interval, gearing, proportion of shares retained by owners, auditor reputation and industry) are tested. The results reveal that both the age and industry classification of the company are statistically significant, and that management earnings forecasts are particularly inaccurate where fi...

The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal?

We examine short- and the long-term price effect associated with the FTSE 100 index revisions. We control for both heteroskedastic nature of the residual and the change, between the estimation and the test period, in the beta coefficient of the standard market model. Our findings reveal no relationship between the long-term price reversals and the change in the discount rate, as approximated by the beta coefficient of the market model. Overall, we provide strong evidence in favour of the price pressure hypothesis, where the price increase (decrease) gradually starting before the announcement an inclusion (exclusion) and reverses completely in less than two weeks after the index revision date.

A comparison of factors affecting UK and US analyst forecast revisions

Abstract An important task of the sell-side financial analyst is to provide investors with estimates of corporate earnings per share (EPS). In this study, we examine if analysts from countries with comparable equities markets, regulatory requirements, accounting standards, and disclosure policies are influenced by similar factors in revising an earnings estimate. The results of a survey sent to UK and US financial analysts indicate that in general the two groups do consider the same factors to be important. However, there are significant differences in the relative importance of some of the factors examined. These differences are most likely attributable to the more international focus of the UK analyst and the greater reliance of the US analyst on guidance from management.

Security price reaction to divestments by healthy and financially distressed firms: The case of MBOs

This paper examines the response of security prices to management buy out (MBOs) divestments and the difference in abnormal returns to shareholders of financially distressed and healthy divestors. It is hypothesized that healthy firms divesting businesses will experience a higher abnormal return than those divesting for reasons of financial distress. Excess returns are significantly both negative and higher for financially distressed firms than for healthy firms. The results suggest that, in examining the effect of corporate restructuring announcements on shareholders wealth, a distinction needs to be made between voluntary and involuntary divestments.

Detecting Underwriters Stabilisation Trades: A Clinical Study

In this study, we examine the stabilisation trades of United Rusal Company IPO’s shares listed on the Hong Kong Stock Exchange (HKEx) and of its Global Depository Shares (GDS) that were simultaneously listed on Euronext Paris. Using both Thomson Reuters Tick History data and the HKEx rules and regulation relating to stabilisation, we identify and analyse the trades that were very likely to have been executed by the stabilisation manager (Credit Suisse) on both markets. We identify nearly 95% of the stabilisation trades on the Euronext Paris, with somewhat less accurate results for Hong Kong. Our results show that the stabilisation trades generated a profit equivalent to about 2.72% of the gross proceeds for the two lead underwriters, a profit which is bigger than their total underwriting commission of 2.31%.

Initial Public Offerings on the UK When-Issued Market

We examine the determinants of an initial public offering (IPO) firm’s choice to trade on a when-issued market and find that better quality firms are more likely to trade on this market. Our ‘what-if’ analysis shows that for companies choosing when-issued trading, the actual offer price is almost 25% higher than it would have been had these firms chosen not to trade on this market. We interpret this higher offer price as ‘rent’ that investors pay to acquire shares of such companies. Interestingly, this rent is paid mostly in those IPOs in which retail investors are allowed to participate.

The Role of Cornerstone and Strategic Investors in IPO Survival

We examine the impact of the allocation of initial public offerings (IPOs) to specific investor groups on post-IPO performance in terms of how long an IPO remains listed. We focus on the Hong Kong IPO market, where detailed data on share allocation are publicly available. In this context, we assess the roles of so-called cornerstone and strategic investors in IPOs, who agree with the issuers a specified investment in the IPO and enter into lock-up periods. We find that the presence, number and lock-up periods of strategic investors, and the prevalence of foreign strategic investors, significantly increase IPO survival (delay the time to delisting). By contrast, the impact of cornerstone investors is at best marginally significant. Our results are robust to using different measures of survival.

Why Do IPO Firms Choose to Trade on the When-Issued Market?

We examine the determinants of an IPO firm’s choice to trade on a when-issued market and if the decision to trade on this market has any impact on the pricing of IPO shares. We find that companies that are larger, less risky, have higher future growth opportunities and are underwritten by reputable underwriters are more likely to choose to trade on the when-issued market. Our ‘what-if’ analysis shows that the decision to have a when-issued market affects the setting of the offer price. For companies that have when-issued trading, the actual offer price is 25% higher than it it would have been had these firms not had a when-issued market. We interpret this higher offer price as a ‘rent’ that investors pay to acquire shares of such companies. Interestingly this rent is paid mostly in those IPOs where retail investors are allowed to participate in the offer. When-issued market appears to be highly informative for investors and has a positive impact on the trading volume on the first day of unconditional trading.

Underwriters’ allocation power and adverse selection costs in the IPO process

This study uses a unique and extensive data set of over 28.2 million investors’ applications to examine the theory of adverse selection under two distinct regulatory regimes (discretionary against mandatory clawback provision) in relation to IPO share allocation. Consistent with Rock’s (1996) theory of adverse selection, we show that, prior to the implementation of the regulation; the probability of receiving an allocation in overpriced IPOs is significantly higher than that of receiving an allocation in underpriced hot issues. However, we find that the probability of an uninformed investor receiving an allocation in an underpriced issue increases significantly following the adoption of the mandatory clawback provision. We also report a significant increase in allocation-adjusted returns earned by uninformed investors in the period following introduction of the mandatory clawback provision. These findings imply that the mandatory clawback provision brings an element of fairness between different investor groups and reduces the winner’s curse in the IPO market.

IPO Survival and Institutional Investment

This study examines the survival rates of initial public offerings (IPOs) listed on the Hong Kong stock exchange between 1990 and 2010 and tracked until the end of 2013. The results show that the average survival rates on the Hong Kong market are high compared to other developed markets and the lowest is 78 percent over five years post listing. Furthermore, we find that the IPO firms are exposed to low failure risks even during and after financial crises. Investigating the determinants of survival rates, we find that the proportions of shares allocated to institutional investors and investor demand at the time of listing, along with initial investors’ retained ownership, significantly increase survival rates. In addition, the survival rates are high when the IPO is family controlled and investors have long term investment horizon.