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The Analysis of Effects of Initial Public Offering on the Warsaw Stock Exchange

Forschungsarbeit 2003 40 Seiten

BWL - Bank, Börse, Versicherung


Table of contents


Non-technical summary


1. Hypotheses concerning the IPO effects
1.1 Growth of firm
1.2 Decrease in leverage
1.3 Fall in profitability
1.4 Growth of investment
1.5 Company performance and the change in the structure of the property

2. Construction and estimation of model
2.1 Estimation method
2.2 One-way and two-way model
2.3 Autocorrelation
2.4 Heteroscedasticity
2.5 PCSE model
2.6 Description of panel data
2.7 Selection of variables and estimation of model

3. Verification of investigated hypotheses
3.1 Verification of hypothesis about growth of firm
3.2 Verification of hypothesis about fall in leverage
3.3 Verification of hypothesis about fall in profitability
3.4 Verification of hypothesis about growth of investment

4. Conclusions


Appendix 1

Appendix 2

Appendix 3


European integration will have a real influence on the shape of the financial market in Poland and in other former socialistic countries which undergone the transformation. To stop the tendency of weakening of Polish stock exchange it is important to recognize mechanisms influencing the decisions of companies about the public sale of shares. Decision of companies about the entry on the stock exchange is driven with the expectation that it will help them in the realization of the particular goals. There are many primary reasons for issuing shares, among other to gain the capital on investments, to acquire prestige, to increase sale etc. In Poland till now the entry on the stock exchange of some companies was a method of the privatization, however this process extinguishes. Going public companies will be owned by private businessmen. Hence, very important is to recognize the original mechanisms of initial public offering (IPO). The analysis of IPO effects, enforced with the use of panel models points, that thanks to funds from going public the company realize investment projects and use resources in compliance with declared destination, i.e. on investments, and not on the debts repayment. Public companies do not change their previous capital structure, the debts after the entry on the stock exchange grow to the level from before IPO. Listing on the stock exchange raises the size of the company, but lowers the rate of its growth and decreases the profitability. Findings from research confirm hypotheses that companies go public from the opportunistic motives and then by the way they realize investment programmes.

Non-technical summary

Initial Public Offering (IPO) is the first public offering of firm shares, causing the change in the structure of the property of the company from private to public. Usually one attends that the most obvious aim of the entry of the company on the stock exchange is gaining over of funds on new investments. However, there are many other theories on IPO as: sale of the company by original owners, the dispersion of the monitoring, gaining over of funds, equalizing the balance-sheet, the improvement of the company performance, the element of the marketing plan and other. In the case of Poland and other countries under the system transformation, the public sale of the company was also a method of the privatization of firms.

The study analyses the influence of the decision about the IPO on the results of polish companies in first three years after going public. Research was based on the panel data for individual companies in 1992 - 2001. The database includes on the whole 173 companies during 9 years, what gives 1557 observations. Data were organized according to the moment of the entry on the stock exchange. Into consideration were taken accountancy values of companies like: assets, liabilities, fixed assets, equity, net profit, revenue from sale etc. Investigated changes in accountancy values of companies depend on the moment in the life cycle of company, so how many years before or after IPO the company is found and on the calendar year. Such selection of variables makes it possible to eliminate the influence of economic situation, which was strong in the first years of the economic transformation in Poland.

Model was based on the panel corrected standard errors (PCSE) method of panel data estimation. Explained variables are the accountancy values, taken in absolute values or as the share in assets. The role of explanatory variable was fulfilled by dummy variable for the moment in relation to IPO and variable representing calendar years. The research targeted in verifying the hypotheses about influence of IPO on the growth of the firm, the fall of leverage and the profitability, and the growth of the investment. According to the research results, investments after IPO indeed grow, while debts does not change. It means that funds gained through an IPO are used to realize investment projects, announced in prospectuses. However, the capital structure stays the same. The entry on the stock exchange raises the size of the company, but lowers the rate its growth and the profitability. Findings confirm hypotheses that companies entry the stock exchange from opportunistic motives and when the opportunity occurs, they realize investment programmes.


In the world literature concerning the stock exchange, most of the articles is devoted to the behaviour of traded shares. There are a few studies answering the simple question, why companies decide to go public and how they benefit from this process. IPO cannot be treated only as one of the alternative sources of gaining the capital.

In the foundation of European Integration stay four freedoms of the internal market: free movement of capital, services, persons and goods. The flow of capital between countries accounts for the important element in the development of financial markets. The essential component of these flows can be the investments on foreign stock exchanges, and also gaining the capital by companies in abroad initial public offerings, on the other than local stock exchanges. There are no equal mechanisms in operating of stock exchanges in the world. Each of stock exchanges has its own set of written and unwritten rules. Investors try to limit the risk of the investment by collecting interesting information about companies and stock exchange. Before they take their decisions and buy shares of going public companies they often wonder, how the newly gained funds will be spent and how will performance the companies in first years after the change of the structure of the property. The answer on the question "what for companies go public" is important also for the functioning of the stock exchange and the financial system in the country. Recognizing of mechanisms and motives of public corporate issue can influence the shape of the policy of stock exchange management for acquiring new companies, creation incentives and impulses to take advantage of this source of financing. State has also the role of supporting the development of the stock exchange – the indicator of the shape of the economy in the country.

Polish stock exchange is one of the greatest stock exchanges in Central, Southeastern and Eastern Europe in regard to the quantity of noted companies. However, emissions executed on the Warsaw Stock Exchange are the lowest one in Europe. The period of great privatizations of state-owned companies followed with the weakness of the role of the stock exchange. There is a question, whether this results from poor business conditions in Poland or whether Polish firms are not interested in going public or the stock exchange do not matches their requirements. Process of the integration with the European Union can significantly influence the consolidation of these tendencies. It remains unknown, whether Polish firms will enter the Polish stock exchange to gain funds or else they will emigrate to the other European stock exchanges. This study aims to estimate what advantages were achieved by Polish firms in the IPO process, whether it was for them the profitable step, how it influenced their financial situation. The answer on these questions has a large importance for the further development of Warsaw Stock Exchange. It is important, whether the appearance of firms on this stock exchange will be the stable process or only occasional taking advantage of the business conditions. Assuming pessimistic variant, weakly developing Polish stock exchange has small chances on the further independent existence. It may be forced to meet with other European exchanges. So, the key factor of existing of the stock exchange is the calculation of businessmen about the entry on the stock exchange or gaining the capital from other source. There remains unsolved question in this study, how the decisions of firms are influenced with the policy of the stock exchange council, the government and the central bank.

Initial Public Offering is the first public offering of firm shares, causing the change in the structure of the property of the company from private to public. Though a most obvious purpose of the entry of the company on the stock exchange is gaining of funds on new investments, there exists many other theories, i.e. as the sale of the company by original owners, the dispersion of the monitoring, gaining of funds to equalize the balance-sheet, the improvement of the company performance, as the element of the marketing plan etc. In the literature concerning the goals of IPO, there are introduced such theoretical problems as supervision in the firm, the signaling or the theory of the agency and financial issues as investments, performance, valuation, the marketing of the company. These are the expectations of companies and their owners regarding effects of the public sale of shares. In case of Poland and other countries passing the system transformation, the public sale of the company was also a method of the privatization of firms. However in young capitalist economies, these IPOs seldom had the same motives, as in case of companies in the developed economies, because they were disturb by state and political affairs and were an element of constitutional changes. An example is the study on cases of the privatization of Polish firms is in Aussenegg (1999).

The basis of the decision of companies about IPO should be confrontation of targets of the firm and anticipated effects of going public. With the use of set of data it is possible to investigate the changes in companies before and after IPO. It enables concluding about effects of the entry on the stock exchange. The scope of research was determined by hypotheses on purposes of initial public offering and related problems.

One of IPO issues are the changes in the monitoring of the company resulting from the sale of the firm. According to the model by Chemmanur and Fughieri (1999), the owner can tend to sale of the company to small investors, the company carries different costs of the being in the public trading dependent on stockholders. Large partners are more expensive for firms, because usually they demand the greater return on the investment (ROI) for taking the greater risk of the small diversification. Small investors have not strength to enforce their rights in the company, and also to use confidential information. Small investors in the company imply the weaker monitoring, more freedom of the management and the lower required return on the investment.

Ellingsen and Rydqvist (1997) see the IPO as a mean of the reduction of problems of negative selection. The trade with the company at the stock exchange generates the information which help to diminish adverse selection. Then original owners can prefer to sale only a small part of company through the IPO channel and to dispose the rest of the company in following offerings on more advantageous conditions.

The entry on the stock exchange can be also viewed as a tool of the improvement in the firm value. The model of Maksimovic and Pichler (2001), based on theory of the life cycle of the firm points that the shares traded public can add value to the firm, and also enlarge credibility in contacts with customers, banks and other partners. The similar approach presents Roell (1996). Valuation of the company is shaped not only by the presence at the stock exchange, but also by investment banks conducting the corporate issue. According to Chemmanur and Fulghieri (1999) these banks can build the reputation of the company by spreading the information about company. Yet, other find the strengthening of the good-will (Mello & Parsons, 1998) where IPO is a process of disclosing of the real value of the company. This worth is used as auction card in the next corporate issue. The better price at so-called seasoned offering rises revenues from the sale of the firm. Song and Rhee (1999) see the IPO as the strict marketing effect. The possibility of the communication by IPO channel can be put-upon to strengthen the consciousness of investors, conquests of trust, improvements of the knowledge about the product, building worth for future ventures etc. Such type of the communication can be the precious component of the marketing plan. Growth of sale revenues after IPO is a proof that marketing meaning of IPO is reasonable (Song & Rhee, 1999).

The public sale of shares is also a tool of signalling. According to Leland and Pyle (1977) stocks are sold by the informed management (insiders) to uninformed investors (outsiders). When the management resolves the sale of the only slight part of property, then this can be understood as the signal of good perspectives of the company and the high valuation of the company. The following, small series of the action can be sold later at the higher price, what is an effect of differentiating. What more, large offerings are characteristic for companies with poor performance (Akerlof, 1970).

The entry on stock exchange can be also the method for selling the company. When owners of company are its founders or the Venture Capital fund, then they can seek the option of the exit from the investment through IPO (Black & Gilson, 1998).

One of financial motives of IPO can be maximizing of revenues from the sale of the company (Rydqvist & Hogholm, 1995, Zingales, 1995, Mello & Parsons, 1998, Bebchuk & Zingales 1999). First, through the IPO the original owner can sell only rights to Cash Flow, whereas to retain private benefits from possessing majority share in the firm. The owners can in turn sell control over the firm, what may bring additional profits. Second, stock exchange makes it possible to diversify the share price, mostly by the sale of shares in several series.

The purpose of IPO can be also gaining of new funds (Roell (1996). There are several hypotheses issuing with methods of using funds, which the company obtains as a result of the equity issue. In generally, public sale of the company is treated as a mean of gaining the capital on new investments (Singh, 1995, Mikkelson, Partch & Shah, 1997, Lowry & Schwert, 2000). This is usually the basic IPO motive. However, in Pagano, Panetta & Zingales (1998), firms can decide for going public for the purpose of compensations in balance-sheet after the period of the high growth and large investments.

The literature on companies performance after the entry on the stock exchange often underlines the worsening of results of the company in first years after IPO. Jain & Kini (1994) explain the fall in profitability first as the effect of market-timing and the asymmetry of the information. Companies can decide on the public sale of shares in time of their best results, being aware it cannot be sustained in the future. Decline in profitability would not be, according to this theory, an effect of IPO, but only the trend anticipated by the management. Other explanation of decrease in profitability after IPO is, according to Jain & Kini (1994), the correction of results before the initial public offering. Drop of relative profits would be a correction to prior statements shaping.

The results of companies after the entry on the stock exchange can depend on structure of the property in the company. In theoretical approaches this relationship can be positive or negative. Jensen & Meckling (1976) hypothesize that growth of the property of the management lowers transaction costs and increases value of the firm and operating- results. This would be an effect of compensation in insiders and outsiders business, as the consequence of the information asymmetry between both groups. According to Jain & Kini (1994), the entry of the company on the stock exchange causes the dispersion of the property and increase of agency costs. The reduction in property of the management, following the conversion from private on the public status of the firm, leads to the agency problems as at Jensen & Meckling (1976). Operating performance of firms can worsen when the management wants to intensify the drawing of hidden profits. Compound of both models is a basis of the approach presented by Demsetz (1983) and the Rumour & Jensen (1983). In the situation of the strong asymmetry of the information, the management with relatively strong control is willing to draw advantages at the cost of stockholders. Such model prognoses the negative dependence among the property of the management and the performance of the firm.

1. Hypotheses concerning the IPO effects

The influence of IPO on company performance was very poorly examined to date. There are many interesting aspects of company behaviour after going public. To answer the question what do firms do after IPO, there are formulated several hypotheses related to the growth of the firm, leverage, the profitability or the investment.

1.1 Growth of firm

One of the most expected effects of the entry of the company on the stock exchange is growth of the firm. In research by Pagano, Panetta & Zingales (1998) this effect proved to be statistically insignificant. They confirmed however the hypothesis about the high growth rate in period before the public sale of the company. The improvement in performance, expected by firms, can result from the two facts. First, in absence of interest rate payments and maintenance of credits firms posses the greater amount of available funds, what in consequence makes possible growth of the firm through the enlargement of assets. Growth of assets in the moment of going public is apparent, but value and the growth rate in following years after IPO cannot be determined and priori. One ought to wait that before a public sale of the company the growth rate of assets will be higher than after the sale of the company, because of the relative lower maturity of the company and the wish of attracting of investors. Moreover, current investments and the modernization of the company do not help to increase the growth rate. Second, being the public company enlarges credibility of the company in contacts with customers, trade partners and other co-operates of the company. This results from the fact, that the company is under a supervision of Polish Securities and Exchange Commission and has to satisfy rigorous requirements to be allowed to the public trading. Information on the listed companies are universally accessible, what diminishes the information asymmetry and the risk of the cooperation with the firm.

1.2 Decrease in leverage

Pagano, Panetta & Zingales (1998) proved that in period before IPO took place the large investment programme of companies, financed mainly from bank credits. The entry of companies on the stock exchange lowers the capital spending, what consequently results from the reduction of debts. The change of the capital structure depends on shifts in value of the debts and in the equity capital. Gaining the funds through the corporate issue lowers the need of taking bank credits. The drop in the share of liabilities in assets can be relative, consequent to the growth of the equity capital and assets and absolute, as a result of real repayment of liabilities.



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Uniwersytet Warszawski (Universität Warschau) – Faculty of Economic Sciences
Analysis Effects Initial Public Offering Warsaw Stock Exchange




Titel: The Analysis of Effects of Initial Public Offering on the Warsaw Stock Exchange