IPO Behavior in GCC Countries: Goody-Two-Shoes or Bad-to-the-Bone?

IMF Working Papers, July 1, 2007

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Study documents underpricing of initial public offerings (IPOs) for 47 firms that went public between 2001 and 2006 in the equity markets of the six Gulf Cooperation Council (GCC) countries.
Focus on initial abnormal returns, one-year horizon performance, drivers of abnormal returns, and investor behavior over time.

The average initial abnormal returns of 290 percent exceed those found in the existing literature for both developed and emerging markets IPOs.
IPOs' returns over the one-year horizon beat the market index benchmark.
Once initial returns are excluded, IPOs present negative abnormal returns over the one-year horizon, consistent with findings in other industrial and emerging markets.
Empirical models reject the hypothesis that IPOs' performance is driven by the common independent variables employed in the literature.
Country- and industry-specific characteristics, in addition to the timing of the offers, play key roles in explaining the abnormal returns of IPOs.
Empirical findings support the hypothesis that investors initially tend to be over-optimistic about the performance of IPOs, but grow more pessimistic over time.

Sample: 47 firms, IPOs between 2001 and 2006 in the six GCC countries.
Measured outcomes:
- Initial abnormal returns: 290 percent (average).
- One-year horizon: outperformance of market index benchmark when including initial returns; negative abnormal returns when excluding initial returns.
Model conclusions:
- Common independent variables used in IPO literature do not explain GCC IPO performance in this sample.
- Significant explanatory factors identified: country-specific characteristics; industry-specific characteristics; timing of the offers.

Investor behavior dynamics:
- Initial investor over-optimism about IPO performance.
- Increasing investor pessimism over time, leading to negative abnormal returns after excluding initial gains.
Market structure implications:
- Standard cross-country IPO explanatory frameworks may not apply in the GCC context without accounting for country- and industry-specific factors and offer timing.