Journal of Finance and Banking • Volume 9, Number 2 • December 2011

LONG RUN PRICE PERFORMANCE OF IPO STOCKS IN

BANGLADESH

M. Sadiqul Islam1
Mahfuja Malik
Mohammad Riaz Uddin

Abstract:
This study was conducted to analyze the short and long run price performance of
IPOs in Bangladesh. Based on a sample of 163 IPOs that were issued during the
period between 1992 and 2006, this study documents short run out-performance
and long run underperformance of IPOs in the secondary market. The short run
out-performance of IPOs peaks in the first month of trading in the secondary
market. In the long run IPOs under perform the industry and the market in general.
But the underperformance to industry is much severe than underperformance to
market. Further analyses reveal that the long run underperformance is much higher
for IPOs issued in few years, particularly the hot issue periods. IPOs belonging to
Leather, Engineering, Paper, Ceramic and Food industries underperform their
respective industry and the market severely in the long run. On the other hand,
IPOs belonging to Banking and Non-bank Financial Institutions industries
outperformed the industry and the market significantly.

Keywords: IPO, Stock Return, Primary Market, Price Performance.

INTRODUCTION
The behavior of IPO stock price had been widely researched in many countries over
the last two decades. The issue that puzzles the financial economists is why these
anomalies in IPO price behavior occur in markets that are considered to be
competitive. Researchers have documented three major anomalies in the IPO price
behavior. First, IPOs provide abnormal initial return. That means investors buying
IPOs from the primary market can sell at a significantly higher price in the initial
secondary market. Second, IPO stocks in general outperformed the market and
industry in the short run aftermarket. Third, IPO stocks underperform the market
and their industry counterpart in the long run. It is perplexing in deed why these
inefficiencies continue to exist in markets which are considered to be relatively
efficient. Many financial economists view these as initial overreaction followed by a

1 The authors are respectively Professor and Lecturers, Department of Finance, University
of Dhaka

Electronic copy available at: http://ssrn.com/abstract=2128522

2 Islam, Malik and Uddin

correction in the long run aftermarket. But there is no logical explanation why
investors would consistently make abnormal initial return or befooled in the long run
aftermarket. In Bangladesh as well IPOs produced initial abnormal return (Islam,
2001). However there is hardly any study on the long run price performance of IPO
stocks in Bangladesh. The anomalies in the price performance have policy
implications for the investors, companies, regulators, policy markers and researchers.
In this backdrop, in this study an attempt has been made to analyze the long run
price performance of IPO stocks in Bangladesh.

LEGAL AND INSTITUTIONAL FRAMEWORK FOR IPOs

The legal and institutional framework for the securities market in Bangladesh had
been reshaped in the 1990s. The reform in the securities market started with the
enactment of the Securities and Commission Act and subsequent formation of the
Securities and Exchange Commission (SEC) in 1993. With this enactment, the SEC
had been empowered to frames rules and regulations, and to take actions against any
party for non-compliance with the rules. Within next few years, a number of rules
and regulations were framed to develop the market and to protect the interest of
investors. The major rules relate to merchant bankers and portfolio managers, insider
trading, mutual funds, IPOs, right offering, stock broker and dealers, credit rating
and substantial acquisition. Many of these rules were amended several times to match
the needs of the market. In Bangladesh, firms intending to make public offering of
shares have to prepare and submit draft prospectus to the SEC. The prospectus must
include separate due diligence certificates from issue manager and underwriter. All
public issues must be underwritten on firm commitment basis. The Securities and
Exchange Commission (Public Issue) Rules, 2006 define the contents of a
prospectus. The prospectus must include the project, use of issue proceeds, financial
statements, risk factors of the firm, directors’ relationships and related party
transactions, executive compensation and executive options. There is restriction on
the use of issue proceeds. The issuing firms cannot use the issue proceeds for any
purpose other than those mentioned in the prospectus. The shares held by the pre-
public owners are subject to a lock in period of three years. This means that sponsors
and directors cannot take advantage of a hot issue market for their personal benefit.
Also, all shares purchased from the issuing firm through private placement during
the immediate preceding two years shall be subject to a lock-in period of one year.
Formally there is no restriction on the issue price, but the issuers have to provide a
justification for the issue price by the price-earning multiple or price to book-value
ratio of similar firms. In practice, issuers cannot take advantage of market bubbles to
charge a high price of issued shares. The final offer price of IPO must be announced
in the prospectus. In 2010, public issue of securities through book building method
was introduced. Under this method, an issuing firm can discover the issue price
through book building with participation of institutional investors. This creates

Electronic copy available at: http://ssrn.com/abstract=2128522

Journal of Finace and Banking 3

greater possibility to maximize the issue proceeds of the company and reduce their
cost of capital. Of the IPO issue, there is 10 percent quota for the non-resident
Bangladeshi investors and there is another 10 percent quota for mutual funds.

In Bangladesh, there are presently 31 merchant banks, but their activities are mostly
limited to primary market making activities. Many of them have yet to develop
professionals to manage portfolios. The market for issue management and
underwriting is extremely competitive primarily because of limited number of IPO
issues. There is full separation between merchant banking and stock broking and
dealing. Lately, merchant banking had been separated from commercial banking. But
commercial banks can conduct merchant banking through their subsidiaries. In
Bangladesh there is absence of retail outlets for distribution of shares. Subscription
of all public issues is usually made through the designated branches of commercial
banks. There are two stock exchanges in Bangladesh – Dhaka Stock Exchange and
Chittagong Stock Exchange. The Dhaka Stock Exchange is the largest stock
exchange of the country. Most of the stocks listed with the Chittagong Stock
Exchange are also co-listed with the Dhaka Stock Exchange. Only recently the
process of demutualization of both exchanges has started. The Central Depository
Bangladesh Limited (CDBL) facilitates paperless trading of securities. There had
been only two credit rating agencies, but lately six more credit rating agencies started
their operations or are in the process of starting their operations.

LITERATURE REVIEW
The anomalies of IPO returns have been widely researched. These studies focused
on the abnormal initial return of IPO stocks, price performance in the aftermarket
and hot issue markets. Financial economists developed different models to explain
the abnormal initial return of IPOs. Some of them consider information asymmetry
as the major reason for abnormal initial return of IPOs. Baron (1982) attributes the
IPO initial return to information asymmetry between the issuer and the investment
banker. But Muscarella and Vetsupens (1989) contradict this hypothesis and
document that self marketed IPOs of securities firms produced similar initial return.
Also Bary, Muscarella, Peavy and Vetsuypens (1990) provide similar findings. Rock
(1986) develops the winner’s curse hypothesis and attributes the abnormal initial return
to information asymmetry between informed and uninformed investors. Levis (1990)
provides evidences to support the winner’s curse problem in the UK market. Koh
and Walter (1989) and Keloharju (1993) also find evidences to support Rock’s
model. However, Ruud (1993) and Welch (1989) contradict the validity of Rock’s
model. Beatty and Ritter (1986) extended Rock’s model and argue that uninformed
investors will demand more money left on the table because of uncertainty of the initial
price of IPO share in the secondary market. Benveniste and Spindt (1989) argue that
underpricing arises as a cost of compensating investors with positive information.
4 Islam, Malik and Uddin

Allen and Faulhaber (1989) argue that only good firms can signal their type by
underpricing of IPOs and firms having no information asymmetry do not
underprice. Welch (1989) also develops a signaling model where high quality firms
signal their superior information to investors by underpricing their IPOs. Jagadeesh,
Weinstein and Welch (1993) provide evidence to support the signaling hypothesis.
Booth and Chua (1996) have attributed the IPO underpricing to the issuer’s demand
for ownership dispersion. Brennan and Franks (1995) also have a similar hypothesis.
Welch (1992) developed the cascade theory of IPO underpricing which assumes that
later potential investors imitate the actions of earlier investors, which leads to a
cascade that may succeed or fail rapidly. Issuers underprice their IPOs to avoid issue
failure.

Some financial economists attempted to explain the hot issue markets of IPOs. These
hot issues provide more than the average rate of return in the aftermarket. Economists
document that there are periods when the average performance of new issues is
abnormally high. These periods are known as hot issue periods (Ibbotson and Jaffe,
1975). Hot issue market has been a periodic phenomenon almost in every market
throughout the world. Ritter (1984) develops the changing risk composition
hypothesis as a plausible explanation for the hot issue market. Riskier firms are more
underpriced than less risky firms and it is very likely that periods of risky issues will
experience higher average initial return. Allen and Faulhaber (1989) argue that
exogenous shocks in some industries substantially improve the profitability and this
may create a hot issue market. According to their hypothesis, hot issue market
continues until the number of firms in the industry adjusts to new conditions.

There is a wide body of literature on the aftermarket price performance of IPOs in

different markets. These studies document that IPO stocks, in general, underperform
the market or industry in the long run aftermarket. Many studies provide evidences
to indicate that higher underpricing in the initial market is, in some way or other,
related to the underperformance in the aftermarket. Krigman, Shaw and Womack
(1999) provide evidence that first day “winner IPOs” continue to be winners in the
short run aftermarket and first day dogs continue to be relative dogs. Only
exceptions are extra-hot IPOs which provide the worst aftermarket performance.
Mcdonald and Fisher (1972) found significant negative return during the first year
after the issue. Ibbotson (1975) finds that there is generally positive performance
during the first year, negative performance during the next three years and generally
positive performance during the last (fifth) year. Ritter (1991) documents
underperformance of US IPOs relative to their matching firms. Also, IPO stocks
with high adjusted initial returns tend to have the worst aftermarket performance. In
addition, smaller issues and young firms had the worst aftermarket performance.
Journal of Finace and Banking 5

Loughran and Ritter (1995) document that investors had to invest 44 percent more
money to have the same wealth five years after the issue. Firms issuing equity during
years of little issuing activity do not underperform much at all. They view that the
market appears to overweight the recent improvement and underweight long-term,
mean-reverting tendencies in the operating performance measures. Brav and
Gompers (1997) find that the venture backed firms outperform the non-venture
backed IPOs over a period of five years. The underperformance of non-venture
backed IPOs is primarily driven by small issues. Teoh, Welch and Wong (1998)
examine the relation between the long run post-IPO return underperformance and
the IPO firms’ earnings management. Using discretionary current asset accruals as
the proxy for earnings management, they document that issuers with higher
discretionary accruals have poorer stock return performance in the subsequent three
years. Chaney and Lewis (1998) provide evidence of a positive association between a
proxy for income smoothing and the IPO performance. They document that IPO
firms performing well tend to report earnings with less variability relative to
operating cash flow, while firms that perform poorly tend to report earnings with
greater variability relative to operating cash flow. Carter, Dark and Singh (1998) find
that IPO stocks underperformed the market during next three years. They document
that the long run underperformance is less severe for IPO stocks having more
prestigious underwriter. Michaely and Shaw (1994) also find that IPOs managed by
high prestige investment bankers tend to have smaller initial return and less negative
long run returns than do IPOs handled by lower reputation underwriters. Fields
(1995) finds that in the long run, IPOs having larger institutional shareholding
significantly outperform those with smaller institutional shareholdings. Dong, Michel
and Pandes (2011) also examined the relationship between underwriter quality and
the long run performance of IPOs. They find that IPOs with underwriters with
better quality and reputation perform better than others. Rajan and Servaes (1995)
develop a model to explain the three anomalies associated with the IPO market –
underpricing of IPOs, windows of opportunities for new issues and long term
underperformance of IPOs. Their empirical results indicate that common factors
appear to partially explain all three phenomena and with these, they suggest a
disciplined way of investigating potential irregularities in the IPO market.

Similar to the US market, many other markets experienced long run

underperformance of IPO stocks. Levis (1993) reveals that British IPOs under-
performed significantly in the long run. He documents that small issues, which had
high initial returns, experienced the worst aftermarket performance in the long run.
He provides evidences that are consistent with the proposition that a certain portion
of first day returns is the result of deliberate underpricing, but much of the
underperformance is due to market overreaction. This is consistent with the findings
of Ritter (1991) that investors are periodically overoptimistic over the earnings
6 Islam, Malik and Uddin

potential of at least some of the newly listed companies. Finn and Higham (1988)
find that the average aftermarket performance of Australian IPOs was negative
during the first year, but not statistically significant. Lee, Taylor and Walter (1996)
provide evidence that the underperformance of Australian IPOs is not confined to
the first year aftermarket, rather continues in the ensuing three years. The IPOs lost
half of their values on an average within a three-year period. The underperformance
of IPOs in the first and second year is related to the degree of initial return of IPOs,
but Lee, Taylor and Walter (1996) argue that long run returns are not associated with
underpricing in the manner that the overreaction or fad explanation suggests.

Li and Hovey (2009) analyzed the relationship between IPO performance and
corporate governance in China. They document that ownership structure has an
impact on the long run performance of IPOs. In China, foreign and legal person
ownership has a positive influence on the long performance of IPOs. Ahmed-Zaluki,
Campbell and Goodacre (2009) examined the relationship between earnings
management and IPO performance in Malaysian market. They document that IPO
issuers who are aggressively engaged in earnings management have worst aftermarket
performance. Page and Reyneke (1997) document underperformance of South
African IPOs relative to sized-matched portfolio, price-earning ratio matched
portfolio and sector matched portfolio at the end of fourth year after the issue.
Their analyses indicate that the small issues underperformed more than the larger
issues. McGuinness (1993) find positive return of IPOs in Hong Kong during first
few months, which was reversed leading to a long-term decline in returns. Aggarwal,
Leal and Hernandez (1993) analyzed the long run price-performance of IPOs in
Brazil, Chile and Mexico. In the Brazilian market, IPOs did not underperform in the
first year, but significantly underperform in the second and third year. In the Chilean
market, IPOs outperformed the market during the first two years, but
underperformed in the third year, although neither the out-performance nor the
underperformance was statistically significant. Unlike the other two markets,
Mexican IPOs underperformed in the first year. They also document a general
negative relationship between the IPO initial return and the first and third year
returns in the Brazilian market.

Affleck-Graves, Hegde and Miller (1996) document that IPOs providing abnormal
initial return also provide abnormal return relative to matched firms of same size in
the short run aftermarket. They also provide evidence that the observed conditional
price trend can not be satisfactorily explained by underwriter price stabilization. The
underperformance of IPOs is consistent with the fact that the operating
performance of IPO firms decline substantially subsequent to the public offering.
Jain and Kini (1994) document that the operating profit on assets of IPO firms
decline significantly compared to their pre-IPO levels. Their analysis also indicates
Journal of Finace and Banking 7

that there is a positive relation between the managerial ownership retention and the
post issue operative performance. Jain and Kini (1994) suggest that investors have
very high expectations of future earnings growth, which are not subsequently
realized. Mikkelson, Partch and Shah (1997) find that the operating performance of
IPO firms exceeds the performance of matched publicly traded firms before going
public, but after going public, their operating performance declines to a level below
the performance of matched firms.

The underperformance of IPOs in the long run aftermarket indicates that investors
are overoptimistic about the long run performance of IPO firms. Rajan and Servaes
(1997) document that investment analysts are overoptimistic about the earning
potential and the long term growth prospects of IPO firms. They find that firms
with higher projected growth underperform the market and their matched firms,
while firms with lowest projected growth outperform the market and their matched
firms.

The significant initial return of IPOs, short run out-performance and long run
underperformance contradict the efficient market paradigm. A high initial return
followed by under-performance apparently indicates the existence of overvaluation,
over-reaction or speculative factor in the secondary market. This is consistent with
Shiller’s (1990) view that investors’ psychology is important in the decision to buy
IPOs. He documents that a vast majority of IPO investors did not make their own
estimate of the value of stock. Also, investors are encouraged by the positive price
change and discouraged by the negative price change.

The long run underperformance of IPO stocks documented in different markets

questions the efficiency of securities markets in both developed and emerging
markets. Do the IPOs issued in Bangladesh behave the same way? There is dearth of
study on the performance of IPOs in Bangladesh. In this backdrop, this study
attempts to analyze the short and long run price performance of IPOs in Bangladesh.

RESEARCH METHODS
In this study, two performance measures have been taken for analysis –the
cumulative wealth relative to the DSE general index (CWRX) and the cumulative
wealth relative to industry (CWRI). A two-month period has been considered as the
short run period. The long run price performance measures have been prepared for a
maximum period of five years. The cumulative wealth relative (CWRIjm) to the
industry for the period between the first trading of IPO and the end of m-th month
has been estimated as follows:
8 Islam, Malik and Uddin

1 HPR jm 
CWRI jm  1 ARI  
 km 

where, HPRjm is the holding period return of j-th IPO for the period until m-th
month and ARIkm is the average return on k-th industry matching firms for the
period until the end of m-th month in the aftermarket. The cumulative wealth
relative to the DSE general index CWRXjm for the period until m-th month has been
estimated as:
1 HPR jm 
CWRX jm  1 ARM  
 m 

where, ARM m stands for the change in the DSE general index during the
corresponding period until the end of m-th month in the aftermarket of j-th stock.

For estimating holding period returns of IPO stocks and matching firms, a return
index for each stock has been prepared after adjusting cash dividends, stock
dividends, right issues and splits. All the adjustments were made with reinvestment
assumption. From the return index of each stock, cumulative returns from the first
day of trading were estimated. These returns were taken to prepare industrial stock
return indexes on equally weighted basis. For preparing the industrial return indexes,
all stocks belonging to the industry at least three years before the listing of IPO stock
have been included.

The IPO short run and long run price performance has been analyzed by
categorizing the IPO stocks by size of issue, year of issue and industrial sector. First,
the mean and median wealth relatives to industry and to market were estimated for
all IPOs. Second, IPOs were categorized by the size quartiles and the mean and
median wealth relatives to industry and to market were estimated for each size
quartile. Third, IPOs were categorized by the year of issue and the same wealth
relatives were estimated for each year of issue. Finally, IPOs were categorized by
industry and the mean and median wealth relatives of IPOs belonging to each
industry were estimated.

The sample includes 163 IPOs that were issued in Bangladesh during the period
between 1992 and 2006. A few IPOs issued during this period were not included in
the sample due to non-availability of data. The sample IPOs represent almost all
industries including Food, Engineering, Pharmaceuticals, Ceramic, Cement, Textile,
Leather, Bank, Non-Bank Financial Institutions, Insurance, Mutual Funds, Paper and
Miscellaneous sectors.
Journal of Finace and Banking 9

The aftermarket price performance of IPOs has been followed up for a maximum
period of five years. Firm specific data requirements include the size of equity issue,
the number of equity shares, the issue price, cash dividends, stock dividends during
the period between the year of public issue and five years after issue. In addition, the
additional equity raised by rights and conversions, IPO stock prices and stock price
index subsequent to the issue were collected for a period of eight years. During the
period under study, few IPOs got delisted from the exchange due to bad
performance and there was possibility of survival bias. A survival bias is likely to
cause underestimation of the average return of IPOs in the aftermarket. To minimize
the effect of survival bias, the last wealth relatives of delisted IPOs were continued
till the end of study period.

The data relating to the IPOs in the Bangladesh market have been collected from the
Monthly Reviews and Annual Reports and other publications of the Dhaka Stock
Exchange (DSE). The first day prices of IPO stocks have been taken from the
electronic data provided by the DSE and from the records of the DSE and from the
website of the DSE. Firm-specific data of IPO stocks have been taken from their
prospectuses, publications of DSE and the website of the Securities and Exchange
Commission of Bangladesh.

ANALYSIS AND FINDINGS

This study is based on the IPOs that were issued in Bangladesh during the period
between 1992 and 2004. During this period, an average of about 11 IPOs entered the
capital market every year. Among them 67 IPOs were issued during the three year
period between 1994 and 1996. The highest number of 24 IPOs entered the market
in 1994. In Bangladesh, there is no consistent pattern of growth in the number of
IPO issues over the years. However, as observed in other countries, IPO issues had
been relatively higher surrounding the period of bubbles and hot issues.

Table 1
Descriptive Statistics

Variable Mean Std. Dev.

Size of IPO Issue (Million Taka) 64.72 81.22
Initial Return (Percent) 103.97 216.38
Sponsors Capital (Million Taka) 154.99 547.28
10 Islam, Malik and Uddin

In general the average size of IPO issue has an increasing trend over time. Whereas
the average size of the issue had been Taka 64.72 million during the period under
study, the average size had been more than Taka 123 million during the period
between 2003 and 2006. The sponsors’ capital at the time of IPO had been Taka
154.99 million with a standard deviation of Taka 547.28 million.

The sample IPOs provided an average initial (first trading day) return of 103.97
percent on the issue price. The highest initial return had been observed in 1996 with
an average of 291.75 percent. This was followed by 209.75 percent in 2005 and
194.43 percent in 2004. The variation of initial return in different years is statistically
significant. Among different industries as well, the initial return has wide variation.
The initial return had been highest in the Engineering industry with an average of
333.76 percent. This is followed by Leather industry with an average of 207.74 per
cent. The variation of initial return in different industries is statistically significant.
Further analysis reveals that IPO initial return had been consistently relatively higher
for the smaller issues and relatively lower for the larger issues. The average initial
return of smallest, smaller, larger and largest quartiles of IPOs had been 152.06
percent, 136.31 percent, 71.51 percent and 39.55 percent respectively. The variation
of initial return among IPOs in different size groups is statistically significant.

Table 2
Short and Long Run Price Performance of IPO Stocks in Bangladesh

Wealth Relative to Industry Wealth Relative to Market

Cohort Month
Mean Median Mean Median
1 1.0266 1.0091 1.0350 1.0016
2 1.0113 0.9842 1.0348 0.9890
12 0.9492 0.8539 1.0823 0.9303
24 0.8904 0.8038 1.1670 0.9373
36 0.7925 0.7382 1.1209 0.9048
48 0.7679 0.6282 1.1373 0.8841
60 0.7889 0.6289 1.3222 0.9155

The relative performance of IPOs stocks has been analyzed by estimating the wealth
relative to industry and the wealth relative to market. Analysis of post-issue price
Journal of Finace and Banking 11

performance indicates that IPO stocks continue to provide positive return in the
short run. In Bangladesh, the short run price performance reached its peak in the
first month of trading in the secondary market. This is a bit shorter than the IPO
price rally in other markets. In many markets IPO price performance reaches its peak
in the second month of secondary market trading. The mean wealth relative to
industry reached its peak in the first month with a mean of 1.0266 and median of
1.0091. In the same period, the median wealth relative to market reached its peak.
The mean wealth relative to the market however continued to rise in the long run.

The relative performance to industry in the long run has been shown in Figure 1.
The median wealth relative to industry continued to slide down till the fourth year.
The median wealth relative had been less than unity throughout the period under
study. This indicates that majority of IPO stocks underperformed the comparable
firms within the same industry. The median wealth relative reached its worst in
month 44 with a value of 0.616. This means that the IPO investors lost 38.4 percent
compared to their industry comparables. There had been slight recovery of wealth
relative in the fifth year. But within few months, the recovery lost its momentum and
started to slide down again during the last few months of fifth year. The mean wealth
relative to industry also showed a similar pattern of performance.

The relative performance over the market had not as sliding as it had been over the
industry. Figure 2 shows the mean and median wealth relative of IPO stocks to
market. The median wealth relative to market continued to be less than unity till the
fourth year. It reached its bottom in month 49 when median wealth relative had been
0.8710. The median value hovered around 0.90 from the second year till the fourth
year. This means that the IPO investors had been 10 percent worse than investors
who invested in other securities. A temporary recovery of median wealth relative for
few months in the fifth year lost its momentum and started to fall again. The mean
wealth relative to market however remained greater than unity throughout the period
under study. The mean value hovered around 1.10 from second year till the fourth
year. A higher mean coupled with low median indicates that few IPOs had
outstanding performance compared to the market although the majority IPOs
underperformed the market. This provides indications why investors possibly buy
IPO stocks that underperform in the aftermarket. It is likely that investors are
overwhelmed by the abnormal performance of few IPO stocks and consistently
overestimate the value of other IPO stocks.
12 Islam, Malik and Uddin

Figure 1
Wealth Relative of IPOs to Industry
1.10

1.00

0.90

0.80

0.70

0.60

0.50

0.40
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60

Mean Median Cohort Month

Figure 2
Wealth Relative of IPOs to Market
1.40

1.30

1.20
1.10

1.00
0.90
0.80

0.70

0.60
0.50

0.40
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60

Mean Median Cohort Month

Journal of Finace and Banking 13

Performance by Size of IPO:

Empirical evidences in other countries indicate that the performance of IPO stocks
in the aftermarket vary significantly by size of issue. Smaller issues underperform
their industry counterpart and the market much more than larger issues. Do IPO
stocks behave the same way in the aftermarket in Bangladesh? This has been
examined by categorizing IPO stocks of each year into size quartiles. This
categorization has been done on yearly basis because the size of IPOs increased over
time significantly with the growth of the market and the largest IPO of an earlier year
is likely to appear as a smaller IPO in the later year. The performance of IPO stocks
by size quartiles has been presented in Table 3.

Analysis of wealth relative to industry by size quartile indicates that majority IPOs
belonging to the fourth (largest) quartile outperformed the market marginally in the
first month in the secondary market. In the long run IPOs of all quartiles
underperformed their industry counterpart during the entire period under study.
However, IPOs belonging to the first three quartiles underperformed the industry
more than those belonging to the fourth quartile. Performance of IPOs belonging to
the first two quartiles continued to slide down till the fourth year, while that of third
quartile continued to slide down till the end of fifth year. The median wealth relatives
to industry came down to 0.6414 and 0.5680 at the end of fourth year respectively
for the first and second quartile. This means that IPO investors are worse off by
35.86 percent and 43.20 percent respectively compared to their industry counterpart.
The median wealth relative for the third quartile went down to 0.5350 at the end of
fifth year. The performance of IPOs belonging to the fourth (largest) quartile
continued to decline during the first two years and started to recover thereafter. The
median wealth relative to industry of this quartile came down to 0.7237 at the end of
second year, but recovered to 0.7884 by the end of fifth year. Three findings emerge
from the analysis of wealth relatives to industry by size quartile. First, IPOs
belonging to all size quartiles underperformed the industry in the long run. Both
median and mean wealth relatives of all quartiles remained less than unity in the long
run aftermarket. Second, the variation of IPO performance among different size
groups in Bangladesh is not as high as it had been documented in other countries.
Only IPOs belonging to fourth (largest) quartile perform better than those belonging
to other three quartiles. This is different from the evidences in other markets where
only the smallest IPOs perform the worst in the aftermarket. Third, the median
wealth relatives to industry for the first three quartiles reached their worst in the
third or fourth year, but the same for the fourth quartile reached its worst in the
second year.
14 Islam, Malik and Uddin

Table 3
Performance of IPO Stocks by Size Quartiles

Wealth Relative to Industry by Size Quartile

Quartile 1 Quartile 2 Quartile 3 Quartile 4
Month
(Smallest) (Largest)
Median Mean Median Mean Median Mean Median Mean
1 0.9980 1.0446 1.0098 0.9985 0.9966 0.9958 1.0109 1.0466
2 0.9939 1.0332 0.9633 0.9643 0.9829 1.0080 0.9856 1.0128
12 0.8634 0.9422 0.8744 0.9501 0.8523 0.9711 0.8627 0.9799
24 0.8799 0.9524 0.7079 0.8635 0.8335 0.9297 0.7237 0.8360
36 0.7182 0.7980 0.7127 0.8209 0.7612 0.7934 0.7382 0.7797
48 0.6414 0.7753 0.5680 0.7398 0.6285 0.7662 0.7934 0.8651
60 0.6598 0.8821 0.5815 0.6867 0.5350 0.7800 0.7884 0.9275

Wealth Relative to Market by Size Quartile

Quartile 1 Quartile 2 Quartile 3 Quartile 4
Month
(Smallest) (Largest)
Median Mean Median Mean Median Mean Median Mean
1 0.9788 1.0541 0.9938 1.0126 1.0013 0.9998 1.0203 1.0762
2 0.9536 1.0584 0.9761 0.9994 0.9858 1.0255 1.0186 1.0451
12 1.0610 1.1971 0.9118 1.0133 0.8945 1.0791 1.0418 1.0759
24 1.0503 1.3959 0.8876 0.9693 1.0903 1.2980 0.8694 0.9800
36 0.9135 1.2430 0.8396 0.9927 1.0114 1.2886 0.9067 0.9158
48 0.7089 1.2753 0.9718 1.0513 0.8922 1.2016 1.0564 1.0290
60 1.0607 1.5578 1.1008 1.1952 0.7365 1.3311 1.1809 1.3179

Analysis of wealth relative to market indicates that in the short run, the majority
IPOs of smallest quartile underperformed the market marginally. Their median
wealth relative to market declined to 0.9536 at the end of second month. This means
that investors lost about 5 percent compared to the market. Similarly, the median
wealth relative to market for IPOs belonging to quartile two and quartile three
declined to 0.9761 and 0.9858 respectively at the end of second month. Interestingly
IPOs belonging to fourth quartile outperformed the market marginally by the same
Journal of Finace and Banking 15

time. This contrary to the evidences in other markets where smallest IPOs
outperformed the market and largest IPOs underperformed the market in the short
run.

In the long run, there is no consistent pattern of IPO price performance when they
are classified by size. During the first two years, IPOs belonging to the smallest
quartile outperformed the market by around 5 percent. In the third and fourth years,
these IPOs underperformed the market significantly. Their median wealth relative to
market declined to 0.7089 by the end of fourth year. In other words, investors of
these IPOs lost about 30 percent compared to the market. In the fifth year, however,
they recovered fully. It is notable that the mean wealth relative to market continued
to be well above unity throughout the period under study. This implies that the
outstanding performance of few IPOs in this quartile contributed to their high
average performance.

Majority IPOs belonging to the second quartile underperformed the market

significantly till the end of fourth year. The median wealth relative of these IPOs to
market reached its worst to 0.8396 at the end of third year. These IPOs however
started to recover in the fourth year. By the end of fifth year they outperformed the
market by about 10 percent. Majority IPOs belonging to the third quartile
underperformed the market in the first year, but outperformed the market in the
second year. Their median wealth relative to market reached values of 0.8945 and
1.0903 at the end of first year and second year respectively. Till then, their
performance started to decline again and reached a median value of 0.7365 at the end
of fifth year. However, their mean wealth relative to market remained well above 1
throughout the period under study. By the end of fifth year, their mean wealth
relative to market reached 1.3311. This essentially indicates that the outstanding
performance of few IPOs in this quartile contributed to a high mean wealth relative
to market. The fourth quartile IPOs outperformed the market excepting in the
second and third year. These large IPOs had a median wealth relative of 0.8694 at
the end of second year, but started to recover in the third year. Two findings appear
from the analysis of wealth relative to market by size of IPOs. First, there is no
consistent pattern of IPO price performance relative to the market by the size of
issue. Second, the majority IPOs in all but third quartile recovered in the long run
and outperformed the market by the end of fifth year.

Performance by Year of Issue:

In many countries, it has been documented that IPOs issued in a hot issue market
performed the worst in the long run while IPOs issued in a cold issue market
outperformed the market. In Bangladesh, the majority IPOs in all years of issue
underperformed their industry counterpart till the fifth year aftermarket. The degree
16 Islam, Malik and Uddin

Table 4
Long Run Price Performance of IPO Stocks by Year of Issue

Wealth Relative to Industry by Year of Issue

Month 1994 1995 1996 1997 1998 1999 2000 2001
Median
1 0.9945 1.0032 1.0688 1.0107 0.9850 0.9715 0.9345 0.9280
2 0.9987 0.9668 0.9649 0.9965 1.0408 0.9662 0.9554 0.8958
12 0.7770 0.8287 0.8555 1.1739 1.0715 1.1214 0.9738 0.7936
24 0.5935 0.7946 0.7079 1.2501 1.1133 1.1198 0.8335 0.6403
36 0.6249 0.9319 0.5705 0.9464 0.9190 0.9212 0.5559 0.3773
48 0.5783 0.8176 0.5350 0.9742 0.7307 0.9098 0.4081 0.3882
60 0.6221 0.7899 0.5294 0.7647 0.7325 0.9362 0.4608
Mean
1 1.0127 1.0424 1.0422 1.0855 0.9968 0.9729 0.9848 0.9718
2 0.9998 1.0074 1.0268 1.0607 1.0477 0.9539 0.9917 0.9525
12 0.8514 0.9962 0.8182 1.2689 1.1947 1.1227 0.9393 0.8134
24 0.7920 0.9471 0.8344 1.1829 1.1929 1.0568 0.7742 0.5924
36 0.7538 0.9379 0.7459 0.9556 1.2077 0.9584 0.5637 0.5499
48 0.7671 0.8361 0.7288 0.9856 1.1129 0.8967 0.4802 0.6880
60 0.7698 0.8709 0.7968 0.7986 0.8944 0.9104 0.4335
Wealth Relative to Market by Year of Issue
Median
1 0.9643 1.0185 1.0735 1.0164 0.9762 0.9597 0.9451 0.9576
2 0.9760 0.9864 1.0170 1.0280 1.0255 0.9230 0.8896 0.9247
12 0.8878 0.8755 0.9299 1.1577 1.1181 1.2333 0.8667 0.9219
24 0.7011 0.9206 1.1086 1.0502 1.5390 0.9734 0.8061 0.5712
36 0.8594 1.5101 0.9048 0.9360 1.7506 1.1047 0.6157 0.3813
48 1.0392 1.2056 0.7560 0.8901 1.3378 1.0962 0.5898 0.2165
60 1.2100 1.0824 0.6199 0.7174 1.1278 0.7430 0.5033
Mean
1 1.0383 1.0624 1.0546 1.0945 0.9764 0.9757 0.9727 0.9910
2 1.0468 1.0423 1.1174 1.0544 1.0406 0.9348 0.9555 0.9928
12 1.0183 1.1318 1.0945 1.1944 1.2046 1.2298 1.0007 1.0090
24 1.0936 1.2893 1.2248 1.2154 1.5275 1.5377 0.9464 0.7920
36 1.1721 1.5401 1.1377 0.9964 1.6011 1.4388 0.8568 0.5535
48 1.2875 1.4805 1.0207 0.9820 1.3550 1.4689 0.9222 0.8357
60 1.5090 1.4272 0.9888 0.9039 1.2253 2.2214 0.7838

Note: The performance of IPOs issued before 1994 and after 2001 had not been
reported in this table.
Journal of Finace and Banking 17

of long run underperformance relative to the industry had been worst for IPOs
issued in 1994, 1996, 2000 and 2001. In Bangladesh there had been a hot issue
market in 1996. The performance of IPOs issued in 1996 continued to slide down till
the fifth year and by then, the median wealth relative declined to 0.5294. This means
that investors of these IPOs are around 47 percent worse off the comparable firms
in the industry. IPOs issued in 2000 and 2001 experienced even worse performance
compared to other firms within the same industry. The median wealth relative of
IPOs issued in 2000 to industry reached a low of 0.4081 in the fourth year while the
same for IPOs issued in 2001 reached their low of 0.3773 at the end of third year.

After the market crash in 1996, the stock market in Bangladesh remained depressed
for a few years. IPOs issued performed relatively better for two years in the
aftermarket. Their median wealth relative to market at the end of second year
reached 1.2501, 1.1133 and 1.1198 respectively for the IPOs issued in 1997, 1998
and 1999. However, they could not sustain their performance and their median
wealth relative to industry continued to decline for the next few years. The mean
wealth relative to industry also had similar values.

When compared to the market, the IPOs issued in the hot issue market
underperformed in the long run. The median wealth relative to market of IPOs
issued in 1996 continued to decline till the end of fifth year and reached 0.6199.
Similar decline had been observed for IPOs issued in 2000 and 2001. The median
wealth relative of IPOs issued in 2000 reached 0.5033 at the end of fifth year while
the same for IPOs issued in 2001 reached as low as 0.2165 at the end of fourth year.
On the other hand, IPOs issued in the cold issue period did not underperform the
market by the same extent. In fact IPOs issued in 1998 outperformed the market
significantly throughout the period under study. Their median wealth relative to
market reached as high as 1.7506 at the end of third year, but declined to 1.1278 at
the end of fifth year. IPOs issued in 1999 outperformed the market till the fourth
year, while IPOs issued in 1996 outperformed the market till the second year.
Similarly IPOs issued in 1994 and 1995 underperformed the market till the third and
second year respectively, but recovered significantly during the later years. However
their mean wealth relative to market remained more than unity throughout the
period under study.

Performance of IPO Stocks by Industry:

Empirical studies document that few industries had been subject exogenous shocks
and IPOs in these industries provided high return in the short run, but eventually
underperformed in the long run. For this reason, the performance of IPO stocks in
the aftermarket has been analyzed by industry. Analysis of wealth relative to industry
by industrial sector reveals startling findings.
18 Islam, Malik and Uddin

Table 5
Short and Long Run Price Performance of IPOs by Industry
Month Leather MF Insurance NBFI Textile Food Pharma Cement Paper Misc Engin. Ceramic Bank
Median Wealth Relative to Industry
1 0.9737 1.0120 0.9929 0.9711 1.0253 0.9858 1.1090 0.9585 0.9509 1.1169 0.8631 1.0449 0.9845
2 0.9789 0.9554 0.9706 1.0018 0.9897 0.9083 1.0862 0.9874 0.8185 1.0594 0.8797 1.0553 1.0060
12 0.4987 0.9145 0.8519 1.0049 0.7770 0.8188 0.7619 0.8509 0.8350 1.0421 0.7762 1.0448 1.1301
24 0.3427 0.7079 0.7068 1.1180 0.7179 0.6627 1.0276 0.9701 0.6372 1.0336 0.3810 0.4640 0.9658
36 0.2590 0.5880 0.7692 0.8191 0.5683 0.5453 0.8489 0.7403 0.6919 1.0109 0.4727 0.4785 0.9140
48 0.1526 0.6657 0.8027 1.4079 0.5704 0.3663 1.0510 0.6228 0.3755 0.7576 0.3012 0.3793 1.2657
60 0.1020 0.8116 0.8355 1.1379 0.6515 0.4636 0.8745 0.8314 0.4191 0.5412 0.3607 0.4304 1.0920
Mean Wealth Relative to Industry
1 1.0255 0.9752 1.0089 0.9622 1.0266 1.0018 1.1377 1.0429 0.9253 1.1871 0.8090 1.1547 0.9694
2 1.0983 0.9203 0.9956 0.9868 1.0113 1.0080 1.0749 1.0351 0.8184 1.1064 0.8667 1.0649 0.9735
12 0.5578 1.0155 1.0049 0.9919 0.9492 0.9489 0.8334 0.9918 0.9207 1.1625 0.5649 1.1953 1.1331
24 0.3804 0.9988 0.9434 1.3368 0.8904 0.7926 1.0061 1.0600 0.6304 1.0578 0.7070 0.9056 1.0287
36 0.2904 0.7306 0.9360 1.2554 0.7925 0.5871 0.8422 0.7170 0.5816 1.0206 0.8966 1.0586 0.9712
48 0.2139 0.7167 0.8855 1.4079 0.7679 0.5234 0.9827 0.7449 0.5339 0.9748 0.7453 1.0146 1.1181
60 0.1561 0.8055 0.9092 1.1379 0.7889 0.6305 1.0388 0.7833 0.4191 0.5387 0.8414 0.8268 1.1832
Median Wealth Relative to Market
1 0.9866 1.0307 0.9650 1.0148 1.0158 0.9613 1.1504 0.9628 0.9619 1.0950 0.8366 1.2305 0.9809
2 1.0202 0.9288 0.9584 0.9573 0.9864 0.9254 1.1116 1.0319 0.9615 0.9718 0.8565 1.0354 1.0060
12 0.8683 0.8611 0.8994 1.1051 0.8024 0.8562 0.8159 1.1750 0.9095 1.0460 0.5903 1.6896 1.5022
24 0.7180 0.8273 1.1570 1.7646 0.7125 0.5899 1.1710 1.8280 0.8876 0.9767 0.3691 0.8485 1.7493
36 0.5744 0.7838 1.3047 1.0262 0.7638 0.6188 0.9575 1.6929 0.6762 0.9494 0.3872 0.8371 2.1438
48 0.3325 1.0281 1.4174 2.4547 0.8549 0.5062 1.2889 1.2463 0.4882 0.7103 0.2992 0.8606 2.9839
60 0.2558 1.2997 1.5024 2.1719 0.8270 0.6641 1.1890 1.7877 0.7529 0.4032 0.2148 0.7483 3.9045
Mean Wealth Relative to Market
1 1.0331 0.9528 1.0039 0.9680 1.0350 1.0199 1.1767 1.0204 0.9579 1.2104 0.7750 1.2624 0.9914
2 1.1337 0.9129 0.9887 1.0087 1.0348 1.0303 1.1730 1.0186 0.9554 1.0717 0.8353 1.2374 1.0191
12 0.9474 0.9829 1.1773 1.1143 1.0823 1.0254 1.0219 1.1305 0.7905 1.1799 0.6885 1.4751 1.5338
24 0.7563 1.0605 1.3153 2.0579 1.1670 0.8933 1.1958 1.9390 0.8281 0.9718 0.7621 1.0419 1.9908
36 0.5750 1.0041 1.5809 2.1476 1.1209 0.6804 1.1104 1.4836 0.7206 0.9117 0.9010 1.2238 2.1634
48 0.4609 1.0866 1.5982 2.4547 1.1373 0.5924 1.2938 1.3103 0.6326 0.9103 0.8031 1.0936 2.7420
60 0.3556 1.3049 1.6352 2.1719 1.3222 0.7731 1.4891 2.4133 0.7529 0.4780 0.7407 0.8862 4.1330
Journal of Finance and Banking • Volume 9, Number 2 • December 2011

There have been strong evidences of IPO underperformance that can be attributed
to specific industries. IPOs belonging to five industries are underperformed severely
in the aftermarket. These are Leather, Engineering, Paper, Ceramic and Food.
Wealth relative of IPOs in the Leather sector to industry continued to decline
gradually till the end of fifth year. The median wealth relative to industry came down
to as low as 0.1020 in the fifth year. That means, investors in these stocks were
worse off their industry counterpart by about 90 percent. Similarly, the median
wealth relatives of IPOs in the Engineering, Paper and Ceramic sector declined to
0.3607, 0.4191, 0.4306 and 0.4636 respectively at the end of fifth year. In other
words, IPO investors in these sectors were worse off their industry counterpart by
more than 50 percent. IPOs of textile, mutual fund and cement industries declined
gradually till the third year but recovered slightly in the next two years. Their median
wealth relatives came down to 0.5683, 0.5880 and 0.7403 respectively at the end of
third year but increased to 0.6515, 0.8116 and 0.8314 respectively at the end of fifth
year. Similarly IPOs of insurance industry declined till the second year but recovered
significantly by the end of fifth year. Their median wealth relative to industry came
down to 0.7060 in the second year but recovered gradually to 0.8355 at the end fifth
year.

On the other hand, in few sectors IPOs outperformed the industry in most of the
years. The median wealth relative to industry of IPOs in the banking sector remained
above unity in all years excepting for second and third years. Their median wealth
relative to industry went up to 1.2657 at the end of fourth year. Similarly, in the non-
bank financial institution sector the median wealth relative remained above unity in
all years excepting for third year. Their median wealth relative also reached its peak at
1.4079 in the fourth year.

Analysis of wealth relatives of IPOs to market by industrial sector also reveals similar
industry specific performance, but few industries distinctly outperformed the market.
IPOs of engineering, leather, food, paper and textile underperformed the market
throughout the period under study. Their median wealth relatives to market declined
to 0.2148, 0.2558, 0.6641, 0.7521 and 0.8270 respectively at the end of fifth year. On
the other hand, IPOs of bank, non-bank financial institutions and cement industry
outperformed the market significantly throughout the period under study. Their
median wealth relative to market reached as high as 3.9045, 2.1719 and 1.7877
respectively at the end of fifth year. In addition to these, IPOs of insurance and
pharmaceutical industries outperformed the market mostly during the period under
study.

Analysis of wealth relatives to market reveals two major findings. First, IPO price
performance is attributable mostly to industry. IPOs of few industries were extreme
20 Islam, Malik and Uddin

out-performers while IPOs of few other industries were severe under-performers in

the long run. Second, IPOs of most of the industrial sectors, particularly the long run
out-performers, underperformed in the short run. These findings indicate that IPO
investors were overwhelmed by the exogenous shocks in particular industries which
led to frustrations in the long run.

CONCLUSIONS AND POLICY IMPLICATIONS

This study had been conducted to analyze the short and long run price performance
of IPO stocks in the aftermarket in Bangladesh. In the short run, IPOs provide
abnormal return that peaks in the first month after the issue. This is a bit shorter
than other markets where short run price rally peaks in the second month. In the
long run IPOs severely underperform their respective industry till the fourth year.
Majority IPOs also underperform the market, but the degree of underperformance is
not as severe as it is to market. The long run underperformance of IPOs is
attributable to the hot issue markets and few industries. In Bangladesh, IPOs in
Leather, Engineering, Paper, Ceramic and Food industries severely underperformed
while IPOs in banks and non-bank financial institutions industries outperformed in
the long run. The findings are consistent with the evidences in other markets. The
behavior of IPO price performance has significant policy implications for investors,
firms, regulators and policymakers. It appears that IPO investors are overwhelmed
by the exogenous shocks in few industries that dry up in the long run. There is scope
for research why investors make the same mistake and the inefficiency continues to
exist in the market. It is possible that firms resorts to earnings management
immediately before the IPO issue, which creates over-optimism among the investors
about the long run performances of IPOs. In that case, the regulators and
policymakers have to frame the rules to minimize the possibility of earnings
management by issuing firms.

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