This section will describe the process on how, and from where the data sample was gathered.
9.1 Data collection
The data have been collected from several different sources depending on the information.
First a list of all IPOs on each of the stock exchanges was found. Each stock exchange makes a list for each year of the new companies listed. These lists were merged into one list with all IPOs in the 3 countries.
Thereafter information is found on each of the IPOs. Each of the stock exchanges has a record of announcements from each of the listed companies. Listing date, industry and often
prospectus is identified on these lists. If the prospectus is not present in the stock exchange it is found by the company website. In the prospectus, the offer price, the offer period and the offer method were identified. By the information gathering, many of the IPOs were found not to have an offer price and were therefore removed from the sample (see section 10.1 for
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further explanation). First day closing price, stock exchange index and industry index was extracted from DataStream.
The first day closing price of each IPO was compared to the offer price, and the clean initial return was calculated. In each IPO the value of the industry index was found for the day of the end of the offer period and for the first day of trading, and the industry index was calculated.
By subtracting the industry index from each of the clean initial return, the true initial return for each IPO were calculated.
Size and age of the company at the time of the IPO were found in the financial company database Orbis. In order to be able to match the size of the company between the 3 countries, all total assets have been converted to DKK.
9.1.1 Industries
In the analysis the companies performing an IPO are divided into different industries.
Therefore it is required, that the companies can be divided into industries across the 3 countries. Since all 3 exchanges use the Global Industry Classification Standard (GICS) as a standard for industry classification, this index is used.
The index has several layers and the company is located according to its principal business activities11. The GICS Index have 10 sectors: Energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecom and utilities.
9.1.2 Benchmark
To calculate abnormal return as underpricing, there is a need for a benchmark, that show what normal return is, e.g., what the investor could have earned by investing in a similar share. The initial return adjusted for the normal return is defined as abnormal returns. The way to
measure normal return can be chosen in different ways. Earlier analysis of underpricing has chosen a specific company, an industry index or a stock index.
The different measurements of the benchmark have different advantages and disadvantages.
The most optimal benchmark would be a company, that have been public for more than 3 years, that operates in the same industry, is from the same country, and that have the same size
11 If a company have business activities in more than one industry it is placed in the industry where it creates most revenue.
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as the company performing an IPO. This benchmark is often used in analysis of large samples (see Ritter 1991), but in this analysis the stock exchanges are small12 and it would be difficult to find a company that matches all 3 requirements for each of the companies in the sample.
Therefore this benchmark cannot be used in this analysis.
Another benchmark that can be used is the industry index. Here the company is matched to the index of the industry it is in. The industry index is an index that consists of all the stock‟s performance in the industry. By using this type of benchmark the IPO company is adjusted for changes in the general market, but also for the specific industry it belongs to. If the industry is highly dependent on some commodities, an increase in the price of these will be reflected in the industry index, but not necessarily in the market index.
All 3 stock exchanges in this analysis have industry indexes13, and therefore all companies in the sample can be matched to their respective industry index. To adjust the share price from the price is set to the first day of trading, for changes in both the industry and in the general market the industry index for each country is used as a benchmark in this analysis.
The disadvantage of this type of index is that when the index is small it is more affected by each single company. If the share price of one company in the industry is increasing a lot in the period of the IPO, this would affect the benchmark and therefore the price of the initial return will be adjusted down by more than the general index.
This analysis is done on 3 small exchanges; and the industry index therefore consists of few companies. To be sure that one company does not affect the industry, each industry index in each country is controlled for especially large companies and how big a percentage they account for in the index. The indexes with large companies are industries with more than 15 companies and therefore the movements in the share price of these large companies are not considered to have a significant impact on the industry index.
A third benchmark is to use the index of the stock exchange, where the company is listed. This will adjust the return by general movements in the market. The advantage is that this index consists of all stocks on the exchange. Therefore movements from one individual company will not affect this index significantly. The disadvantage by using this index is that it does not adjust for industrial specific movements.
12 20th September there are 198 companies on the CSE, 288 on SSE and 185 on OSE.
13 These indexes are adjusted for dividends.
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Some earlier analyses of first day return have argued that the period from the offer price is set to the first day of trading is so short, that there is no need to adjust for the benchmark. In this analysis the days between the settings of the offer price to the first day of trading varies between 1 to 20 days. Therefore it is considered important to correct for movements in the market.