Mario Levis

The Long-Run Performance of Initial Public Offerings: The UK Experience 1980-1988

Conventional wisdom suggests that the presence of positive first day returns for initial public offerings (IPOs). documented for almost every capital market in the world, constitutes evidence of deliberate underpricing. A number of recent studies, however, appear to cast doubt on this long-established position. They show that firms that obtained a public listing during the 1970s and 1980s underperformed similar size and industry firms by as much as 29% by the third anniversary of their first day of trading.

The Winner's Curse Problem, Interest Costs and the Underpricing of Initial Public Offerings

This paper provides the first direct test of the winners curse problem proposed by K. Rock (1986) as an explanation to the underpricing of initial public offerings. Moreover, it tests the proposition that the underpricing of initial public offerings in the United Kingdom is due to the combined effect of the winners curse problem and the particular nature of the settlement mechanism applicable in the British new issues market. The evidence demonstrates that when these two factors--winners curse problems and interest rate costs--are taken into consideration, the emerging first day net returns are, on average, markedly lower than the level of actual underpricing. Consistently, superior performance can only be achieved by predicting the markets response to the individual new issue. The results, however, indicate that such predictive ability is largely unattainable. Copyright 1990 by Royal Economic Society.

The Profitability of Style Rotation Strategies in the United Kingdom

The authors investigate the profitability of size and value/growth rotation strategies in the United Kingdom over the last thirty years after adjusting for various levels of forecasting skills and transaction costs. Furthermore, the authors link the size and the value/growth style spreads with a number of business cycle variables, and assess trading rules built upon their ex ante predictions. Their findings provide strong support for small versus large, but not value versus growth style rotation strategies.

The Determinants of the Leasing Decision of Small and Large Companies

We analyse the leasing decision of more than 3000 UK quoted and unquoted companies over the sample period 1982-1996. We show that, for the sample as a whole, companies that use leasing are more likely to have tax losses, high fixed capital investment, high debt-to-equity ratio and to be larger than companies that do not use leasing. We show, however, that the determinants of leasing are not homogeneous across firms of different size. For large companies, leasing, profitability, leverage and taxation are positively correlated. In contrast, for small companies, the leasing decision is not driven by taxation or by profitability, but by growth opportunities. We show that small firms with high Tobins q and those that are less profitable are more likely to use leasing.

Stock market anomalies: A re-assessment based on the UK evidence

Abstract This paper reports evidence documenting the presence of a number of irregularities in stock price behaviour of firms on the London Stock Exchange. The size effect is not only not the sole anomaly but is not even the most dominant one. Specifically, investment strategies based on dividend yield, PE ratios and share prices appear as profitable, if not more, as a strategy concentrating on firm size. Although there is a large degree of interdependency between all four effects, it is still apparent that the dividend yield and PE ratios subsume the size and share price effects.

Investment trust IPOs: Issuing behaviour and price performance Evidence from the London Stock Exchange

Abstract In this paper, we document an average first day return of 1.91 percent for the population of 105 investment trust IPOs during the period from January 1984 through August 1992 on the London Stock Exchange. This is the first study that finds evidence of significant first day returns for a sample of closed-end fund IPOs. The results also suggest that investment trust IPOs are subject to ‘hot’ issue periods. These tend to occur when there is a marked narrowing in the discounts of seasoned investment trusts. Initial gains are, however, short lived; by the end of their first year, investment trust IPOs substantially underperform a number of relevant benchmarks and, on average, trade at discounts to their underlying net asset values.

Style Rotation Strategies

Effective implementation of market-timing and style rotation strategies is challenging for an active fund manager. Problem #1 is devising a truly viable forecasting model. Problem #2 is that style rotation has direct implications for portfolio risk constraints and transaction costs; implementation depends moreover on institutional constraints and in-house investment philosophy. Applied using a variety of implementation rules that explicitly control for risk, style rotation strategies can be profitable for investors with different benchmarks and various risk constraints. More specifically, style rotation is as feasible for hedge fund managers who target absolute returns as it is for traditional fund managers who face tight risk constraints. The break-even transaction costs before style rotation strategies become unprofitable are reasonable, especially for fund managers who invest in medium-sized companies.

Property Investment and Property Development Firm Performance Around Initial Public Offerings and Rights Offerings: U.K. Evidence

In contrast to the well-documented underperformance of equity issuers, property investment firms undertaking initial public offerings and rights issues have performed indistinguishably from similar nonissuing firms. Property development companies that issued equity over the same period performed significantly worse than nonissuing firms. The major difference between property development and property investment firms is that property investment firms hold portfolios of real estate assets and thus have more certain prices. The lower pricing uncertainty of property investment firms results in normal long-run performance. Tests of the cognitive bias hypothesis provide only weak support of this explanation, while size and book-market effects are unable to account for the performance of property investment and development companies. The findings of underperformance for rights issues suggest that timing equity issues to take advantage of new shareholders may not be linked to the existence of cognitive bias. An important finding for the international growth in securitized real estate markets is that no evidence is found suggesting equity issues of securitized real estate firms should be avoided.

Property initial public offerings: regulations, costs and price reactions

Summarizes the regulatory environment and practices for providing a property company with a public listing. Furthermore, reports evidence of the direct and implied costs of undertaking a property initial public offering. The results indicate that choice of issue method and timing are key decisions to be made by property company financial managers.

Market Size, PE Ratios, Dividend Yield and Share Prices: The UK Evidence

This paper reports evidence documenting the presence of a number of irregularities in stock price behaviour of firms on the London Stock Exchange. The size effect not only is not the sole anomaly but is not even the most dominant one. Specifically, investment strategies based on dividend yield, PE ratios and share prices appear as profitable, if not more, as a strategy concentrating on firm size. Although there is a large degree of interdependency between all four effects, it is still apparent that the dividend yield and PE ratios subsume the size and share price effects.