Three Decades of IPO Markets in Canada: Evolution, Risk and Return

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.

Foreign Direct Investment and Initial Public Offerings: Exploring the Roads Less Travelled

“…Long-run performance is in line with the existing studies and adds to the literature that IPOs underperform in the long run (Aggarwal & Rivoli, 1990; Carpentier & Suret, 2018; Dhamija & Arora, 2017; Jain & Kini, 1994; Loughran & Ritter, 1995; Ritter, 1991). The primary sector performs better in comparison to the rest of the two sectors giving an average BHAR of -5 per cent, while the secondary sector performs worse and gives different results for market indices with a difference of about 4 per cent.…”

“…Many studies have supported the view of long-run underperformance (Carpentier & Suret, 2018; Dhamija & Arora, 2017a; Ritter, 1991). The negative relationship between underpricing and long-run performance is supported by Loughran and Ritter (1995), Shiller (1990), Sehgal and Singh (2008).…”

Mandatory adoption of IFRS and its effect on international stock listings in Canada

“…According to a survey conducted by Bancel and Mittoo (2001), companies place stringent disclosure requirements among the chief disadvantages of cross-listing decisions. Listing costs are also a significant concern in Canada as most of the Initial Public Offerings (IPOs) are generally smaller in size (smaller companies) than those in the USA (Carpentier and Suret, 2018). Smaller firms that cross-list in public markets proportionately face higher accounting costs than larger firms do.…”

El papel de los mercados alternativos como herramientas que favorecen la financiación de las pymes y su sostenibilidad

“…• La disminución del rendimiento de las pymes cotizadas, derivada de la adquisición realizada por las grandes empresas sobre las pymes de calidad (Carpentier y Suret, 2018). Esto ha supuesto una menor rentabilidad para los inversores, lo que los ha incentivado a abandonar el mercado.…”