Three Decades of IPO Markets in Canada: Evolution, Risk and Return1. (25th March 2018)

• Record Type: Journal Article
• Authors: Carpentier, Cécile; Suret, Jean‐Marc
• Is Part Of: Accounting perspectives. Volume 17:Number 1(2018)
• Page Start: 123
• Page End: 161
• Publication Date: 2018-03-25
• Subjects: Initial public offering -- Long‐run performance -- Lottery stock -- Stock exchange -- Small firm; Premier appel public à l'épargne -- Performance à long terme -- Action de type loterie -- Marché boursier -- Petite entreprise; Accounting -- Research -- Periodicals; Accounting -- Periodicals; 657.05
• DOI: 10.1111/1911-3838.12160
• Languages: English
• ISSNs: 1911-382X

Abstract

Abstract: This article explores the extent that the long‐run returns following initial public offerings (IPOs) can explain the asserted decrease in IPOs in Canada. The causes of such a decrease remain controversial, in part because of our limited knowledge of this market. We first describe in detail the evolution of Canadian IPOs on the senior and the venture stock exchanges over three decades (1986–2016). This evolution differs considerably between natural resource and non‐natural resource firms. Second, using other junior markets as a benchmark, we show that the Canadian IPO market is very particular, mainly because it lists very small firms at an early development stage. Third, using 2, 145 Canadian IPOs, we provide evidence that these IPOs generate three‐year negative average abnormal returns, and more than 70 percent report negative abnormal returns. Large issuers reporting profits constitute the only subsample that provides fair returns, but they account for less than 5 percent of IPOs. Such a market probably survived for many decades because of investors' preference for skewness and the characteristics of the returns' distribution. We observe a high level of skewness of abnormal returns, consistent with the behavioral finance proposition that investors are often unduly optimistic when valuing lottery stocks.