A new study from The University of Western Australia is filling data gaps by directly comparing the short-term first-day discounts, long-term return performance and the effect of underwriting and delisted initial public offerings (IPOs), from all listings on the Australian Securities Exchange (ASX) over two decades.
PhD student Kylie Gilbey, from UWA’s Business School, was co-author of ASX small firm/microcap listings: the IPO ‘Pop’ and two decades of subsequent returns, with Terry Marsh, from the University of California Berkeley Haas and Professor Sharon Purchase, also from UWA Business School.
The research directly compares IPO returns across three size issue of small, mid and large IPOs and for the first time includes the impact of delisted IPOs.
The examination of all ASX IPOs from 1 January 1999 to 31 December 2019 found 78.7 per cent were small – raising only 17 per cent of all capital – and 63 per cent of all IPOs had delisted. The research further deconstructed findings by industry sector and location.
Over this period, long-term, large, listed IPOs generally underperformed (-6.39 per cent) but the study found evidence of strong small/micro-IPO returns (12.04 per cent).
Ms Gilbey said this size related differential is a ‘wrinkle’ largely missed in current literature.
Additionally, overall portfolio returns increased from 1.25 per cent to a further 12.95 per cent upon inclusion of delisted IPOs, with the highest IPO performance for listings filed in WA and the mining and tech sectors.
The inclusion of delisted IPOs saw increased portfolio returns across all IPO issue sizes (large: 2.28 per cent, mid: 17.4 per cent, small: 18.62 per cent) indicating for the first time, that on average, IPOs delist for positive reasons rather than the more widely accepted presumptions of failure.
There was also major structural differences between the US and Australia investor ownership - institutional investors (72 per cent versus 27 per cent), and free-float investors (19 per cent versus 62 per cent) respectively.
Australia’s large 62 per cent free-float investors are one of the highest rates globally, yet despite the investor differentials, and concentrated small cap IPO listings, the Australia and US first-day closing price average discounts were comparable (Australia: 18.45 per cent versus US:16 per cent).
The study found ASX ‘main board’ listing appear to provide benefits to small/micro early-stage IPOs and public equity returns are on average above those reported for US Venture Capital and Public Equity funding.
“With a drop in US-listed companies of over 47 per cent over the past two decades, coupled with a similar increase in in Australia over the same period – both as a result of small, early-stage firm listings - this research discusses that in the absence of a large venture capital market, whether the ASX early-stage listings function as a ‘hybrid’ substitute for venture capital funding,” Ms Gilbey said.
The results of the study have important implications for policymakers, regulators, investors and IPO firms.