An analysis of the extent of initial underpricing and the determinants of long-run underperformance of IPOs on the Johannesburg Stock Exchange (JSE)

Abstract

This study examines the performance of initial public offerings (IPOs) on the Johannesburg Stock Exchange (JSE) from 2011 to 2021, focusing on the extent of initial underpricing, long-term share price performance, and the impact of pre-listing firm-level characteristics and market conditions on aftermarket performance. Using the complete set of IPOs on the JSE from 2011 to 2021, the research employs event-study methodology and regression analysis to evaluate short-term and long- term share price performance. The findings of this study indicate a presence of initial underpricing that persists for subsequent trading days post the listing date which is consistent with global IPO literature. Long-term share price returns exhibit underperformance relative to market benchmarks. The findings are consistent with the “fads and overoptimism” hypothesis of Aggarwal and Rivoli (1990) and Ritter (1991) as well as the “hot issue market” theory according to Ibbotson and Jaffe (1975) as IPOs issued during high- volume years underperformed the market in the long term. Industry related factors appear to play a role in the extent of underpricing. Moreover, IPOs priced below R10 per share tended to yield the highest market-adjust returns in the short-term. Furthermore, the study identifies key firm-specific factors that appear to influence long-term share price performance. Short-term, over-optimism and high initial returns on average lead to market rebalancing within the first six-months post-IPO. Firm-level characteristics play a role in long-term share price performance such as how older and more established companies performed better over the long-term. Similarly, large board sizes and higher listing costs relative to market capitalisation tended to result in worse long-term share price performance. Moreover, the use of an international investment bank or a Big 4 audit firm was linked to lower long-term market-adjusted share price returns. The research contributes to the ongoing discourse on IPO efficiency and provides practical insights for investors, issuers and policymakers in South Africa’s equity capital markets.