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7.2.1 INTRODUCTION
by the changes in the risk levels in the PIPOs. Thus, this section examines the
behaviour of one measure of risk which has had wide acceptance in the academic
community: namely the coefficient of non-diversifiable risk or more simply the beta
coefficient in the market model (i.e., systematic risk). The models of stock valuation
such as CAPM and the Sharpe’s (1963) market model determine that the returns of a
security should be commensurate with its systematic risk. In terms of IPOs, due to
the absence of share prices prior to the offer, it is thus difficult to compute the
systematic risk or beta of the issuing company. Nevertheless, it has been argued that
because of the uncertainty of their future performance, the new issues are expected to
Several studies [e.g., Finn and Higham (1988), Jacquillat et al (1978) and
Bear and Curley (1975)] have documented that the systematic risk of new issues in
the immediate period after the offering is higher than the systematic risk of a market
portfolio. This risk however declines as the issue becomes seasoned. Therefore, the
mean systematic risks of PIPOs in the aftermarket are expected to decline with
seasoning and vary around the market average of unity. This is because once the
trading price is set by the market, investors’ uncertainty about the issue is also
expected to decrease.
Two hypotheses about the risk behaviour of PIPOs in the Egyptian Capital
Market are tested. The first hypothesis states that during the primary market of
trading, the mean systematic risk of the PIPOs is higher than the market risk. The
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thesis, Strathclyde University, U.K.,1998
results of this test were summarised in Chapter six and showed that the mean
systematic risk of the PIPOs in the primary market is not statistically significant,
thus, the null hypothesis that the mean beta of PIPOs is equal to the market beta
cannot be rejected. This finding leads the investigation to the second hypothesis of
the Egyptian PIPOs risk behaviour in the aftermarket. It is hypothesised that the
mean systematic risk of such issues in the aftermarket declines as they become
seasoned. In testing this hypothesis, two null hypotheses are examined. The first null
hypothesis is that the mean beta of the PIPOs in the aftermarket equals one. The
second is that the mean beta of the PIPOs in the aftermarket equals the mean beta in
the primary market. In the following sections we test these hypotheses to evaluate the
model described in chapters two and six. The RATS model has the advantage of
allowing the contingency that the systematic risk of PIPOs may change as the issues
become seasoned. The mean beta in the aftermarket periods have been calculated in
1. To get the mean beta in the period from the second through the 30th day of
trading, an OLS regression based on pooled daily data from each firm in the
2. To get the mean beta in the period from the first through the 52nd week of
trading, an OLS regression based on pooled weekly data from each firm in the
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3. To get the mean beta during the period from day 2 to day 30 after-listing, the
same OLS regression was used on all the daily data from each company in the
sample.
4. To get the mean beta during the period from week 1 to week 52 after-listing, the
same OLS regression was used on all the weekly data from each company in the
sample.
A t-test is then used to test the significance of the above hypothesis. This t-
statistic was calculated in two different ways: first, to test the null hypothesis which
says that the mean beta of the PIPOs in the aftermarket equals unity, the t-statistic
was calculated as
t = ( i s -1)/s.e (7. 1)
where i s is the mean beta in the aftermarket, and s.e is the standard error. Second, to
test the null which says that the mean beta of the PIPOs in the aftermarket equals the
s p
t (7. 2)
2s 2p
where.
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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering Perspective, Ph.D.
thesis, Strathclyde University, U.K.,1998
This method was used also by Gheysens (1979), Lanjong (1981) and Hassan (1991)
Malaysia, respectively.
7.2.3.1 The average beta in the aftermarket periods using pooled data
Table 7-5 shows that the mean beta from day 2 through to day 30 after listing
statistics are -1.64 and -0.197 respectively. The aftermarket mean beta calculated
based on the first 29 days after-listing is thus not statistically significantly different
from market beta of 1 or from the mean beta in the initial period at the 5 % level.
Similarly, over a longer term, and in this case when beta is measured from the first
week through to week 52 after-listing, the mean beta is found to be 0.20. In testing
the hypothesis of s = 1, the t-statistic is -0.70 indicating the null hypothesis that the
mean beta in the aftermarket is equal to the mean market beta of 1 could thus not be
mean beta in the aftermarket is not statistically significantly different from the mean
beta in the initial period. The null hypothesis is thus not rejected. The results appear
to be failed in supporting the hypothesis that the mean beta declines in the
aftermarket periods and that the mean beta in the aftermarket is lower than the mean
Table 7-5 The average beta in the aftermarket periods using pooled data1
1 Note: = 0.126 and calculated from the offering to the end of the first day of trading (see Chapter
p
six). The standard error of s = 1.175, and obtained when we regressed the mean betas on the
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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering Perspective, Ph.D.
thesis, Strathclyde University, U.K.,1998
Mean Beta t-statistic t-statistic
Return from: s s = 1 s = p
day 2 to day 30 -1.72 -1.64 -0.197
week 1 to 52 0.2 -0.7 0.074
7.2.3.2 The behaviour of the mean daily and the mean weekly betas
Table 7-6 and 7-7 show the behaviour of the mean daily and mean weekly
betas measured using the RATS model. The average of the mean beta value from day
t-statistic of 5.029. The average of the mean weekly beta from week 1 to week 52 is
Therefore, the average of the mean beta in the short-term is statistically significantly
different from 1. However, in the long-term, the mean weekly beta is not statistically
significantly different from one. Thus, the results in the long-term support the
hypothesis that the mean beta in the aftermarket periods declines and varies around
To put the above findings into context, the following section determines
whether the pattern of aftermarket returns and risks noted for the Egyptian PIPOs is
constant to get the average of beta. The variance of p = (20.66)2, the variance of s = (9.37)2 for
the returns from day 2 to day 30, and the variance of s = (.977)2 for the returns from week 1 to
week 52.
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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering Perspective, Ph.D.
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Table 7-6 The mean daily beta obtained by RATS model
Day Mean Beta Day Mean Beta Day Mean Beta
( i ) t ( i ) ( i ) t ( i ) ( i ) t ( i )
2 0.01 0.06 12 2.70 2.39 22 1.84 1.82
3 6.01 1.58 13 1.56 1.46 23 1.80 1.78
4 0.64 0.39 14 1.30 1.21 24 1.81 1.82
5 -0.75 -0.43 15 1.58 1.37 25 1.85 1.87
6 -0.71 -0.32 16 1.72 1.31 26 1.83 1.91
7 -0.23 -0.29 17 2.08 3.59 27 1.83 1.91
8 0.09 0.19 18 1.30 1.19 28 1.71 1.71
9 -0.87 -0.32 19 1.55 1.42 29 1.72 1.73
10 -0.77 -0.30 20 1.41 1.60 30 1.76 1.78
11 0.24 0.72 21 1.88 1.83 Avg. 1.27 = 1.362
the PIPOs under investigation, a review of Chapter two is made for the aftermarket
market returns documented for PIPOs in other markets and time periods. Such a
review reveals that a large number of studies report negative after listing returns, on
average, between the first date of listing and the traded prices in stocks in one year
after listing. However, there is some evidence of significantly positive returns during
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thesis, Strathclyde University, U.K.,1998
the first year of listing. For example, in 1967, Merritt et al offer one of the earliest
significant analysis of aftermarket returns, for 149 UK offerings over the period
1959-1963. From the limited evidence in this study, an insignificant positive return
of 1.9 % is recorded between the initial market price in the newly listed shares and
the close of trading one month later. Such a result was taken by Merritt et al to
suggest an efficient market where the market adjusts for initial underpricing in early
trading and offers relatively small holding returns thereafter. Similar evidence, for
U.S. securities, is found in Neuberger and Hammond (1974) where an excess market
return of 8.3 % for 816 securities over the period 1965-69 was reported over the
period between the initial market price in the first day of trading and the close of
Hammond (1974), we may suggest market efficiency with relatively small positive
excess market returns of 2.3% being reported in tables 7-1 and 7-2 over the period
between the initial market price in the first day of trading and the close of trading
four weeks later. In other words, the Egyptian PIPOs market seems to adjust to
Reilly and Hatfield (1969), where larger positive returns, in the aftermarket period,
are reported for US securities over the period 1963-65. In this study, a slight decline
in stock returns of -1.8 occurs over the early aftermarket period (4 weeks). More
important is the reported stock return of 11 % over the period of one year of trading.
This rise in stock prices, after initial underpricing has been adjusted for is, according
to Reilly and Hatfield, a further gradual correction for the initial underpricing in
unseasoned stock securities. Given this interpretation of Reilly and Hatfield, we may
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generalise their results for the purpose of our study where a similar observed price
other words, large premiums, may have emerged in response to the relatively high
risk levels in the Egyptian PIPOs stocks during the first half of the first year of
trading.
On the other hand, a large number of studies record negative returns in the
aftermarket, on average, between the first day of trading and the traded prices in
stocks in one year later. Most of these negative returns findings in other markets
suggest that the average excess market-adjusted return of -1.85% in the first 52
weeks of listing in the Egyptian PIPOs market are not unusual. In other words, the
aftermarket, receives strong support in comparable studies in other markets. For the
risk behaviour, we found that the highest of the weekly mean beta value is 4.11
which is in week 18. The lowest is in week 41 with an absolute beta value of 0.03.
When the performance in week 18 and week 41 is analysed further, it is found that in
week 18, the average return of the 32 PIPOs has gone up by about 1109 % (because
it has moved up from 0.211 % in week 17 to 2.55 % in week 18). Whereas the
average market return has moved down by about 92.55 % from the previous level
(because it has dropped from 0.19 % in week 17 to -0.02 %). Therefore, the large
change of returns of the firms in the sample, compared to the large market change in
the opposite direction, could have resulted in the mean beta of the PIPOs in week 18
having the highest mean beta in the period. The large share price movements in the
disseminated into the market at that time. In the case of week 41, where the mean
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beta was the lowest in the series, it is found that in week 41, the average return of the
32 PIPOs has gone up by about 435.3 % (because it has moved up from 0.067 % in
week 40 to 0.36 % in week 41). Whereas the average market return has moved up by
about 1007.4 % from the previous level (because it has moved up from -3.264 % in
week 40 to 1.92 % in week 41). The large differences in the performance of the
PIPOs with the larger movement of the market, could have been the main reason for
the low mean beta value in that week. Consequently, attention is now turned to the
possible conclusions of the return and risk performance in the aftermarket of such
PIPOs.
7.4 CONCLUSION
The increase in PIPOs prices over the first few weeks of listing in the
Egyptian Capital Market may be consistent with some adjustment processes for the
from the results in Table 7-2 (Panel B) and 7-3 (Panel B) there is some evidence that
insignificant positive excess market returns exist, on average, between the close in
the first day of listing and the close in the 4th week of listing. These insignificant
positive returns may be caused by a number of initial subscribers selling stocks for
profit-taking purposes so that the PIPOs stocks are subjected to downward price
pressure. Due to this conclusion, the favourable return revealed over the first 30
weeks of listings [Table 7-4] may reflect adjustments for both the initial underpricing
in the offerings and the relatively weak early aftermarket performance in the stocks.
However, it is difficult to explain why this adjustment is offset in the reminder of the
52 week aftermarket period, where the downward trend in stock returns takes place
between, on average, 26 and 52 weeks of trading [see Table 7-4]. If such price
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behaviour can be attributed to a speculative factor, an explanation for this speculation
must be found. We can suggest that, first, it is claimed that Egyptian government
may attempt to place shares in strong hands rather than weak hands. The former
group retains the stock for a significant period of time and artificially decreases the
supply of stocks in the aftermarket forcing market prices upwards. Second, Egyptian
investors in the aftermarket period. Finally, the results in the long-term seem to
support the hypotheses regarding the behaviour of the mean systematic risk after-
listing. Thus, the mean beta declines after-listing and varies around the market beta
of 1. Also, the mean beta in the initial period is higher than the mean beta in the
after-market as hypothesised. The mean beta in the Egyptian PIPOs market thus
appear to behave nearly in a similar manner to the risk behaviour in other markets.
To sum up, although, in Egypt, shares are not allocated to the investment bankers to
the offerings, it seems that the market for the PIPOs is subject to considerable
speculative activity. This does not, however, imply that the Egyptian stock market is
seriously deficient relative to other markets. However, it is important for our research
to extend this analysis in the following chapter to place the documented findings of
this chapter into explicitly testing the aftermarket efficiency of the Egyptian PIPOs.
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