IPOs in New Zealand: Valuation Multiples and Benchmark Adjusted Performance

This study examines the performance of 96 IPOs listed on New Zealand Stock Exchange (NZSE) during the 25-year period from July 1991 to June 2015. The NZX Gross All Index and two portfolios of matched peers based on sector/ industry and either sales forecast or book-to-market ratio are constructed as benchmarks. Compared with three benchmark portfolios, IPO firms outperform in the short term (1 year) but underperform in the medium and long term investment horizons (3-5 years). Depending on the benchmark for which the IPO returns are compared to, investors investing in the IPO portfolio and holding it for five years earn a cumulative average abnormal return (CAR) of between -5 percent and -20.4 percent and an average holding period return differential of between -2.7 percent and -20.07 percent. We conduct three sub-sample analyses to examine the association between differences in valuation multiples (E/P, EBITDA/EV, and P/S) and long term average returns. The findings are consistent with the general consensus of superior returns from value investments: IPOs with above median E/P and EBITDA/EV and below median P/S exhibit higher CAR than IPOs with below median earnings ratio (E/P and EBITDA/EV) and above median P/S. Compared with their respective peers selected based on sales forecasts, IPOs with high E/P achieve a CAR of 9.92 percent over a five-year period whereas IPOs with low E/P experience a five-year CAR of -33.16 percent.