טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentElias Amiram
SubjectInitial Public Offerings in Israel in the Years 1998-2006
DepartmentDepartment of Industrial Engineering and Management
Supervisor Professor Uri Ben-Zion
Full Thesis text - in Hebrew Full thesis text - Hebrew Version


Abstract

Reviewing international literature in the issue of initial offerings, demonstrates that when a company first becomes public (IPO), it offers its shares to the public at a reduced price, which on average results in excess return on the first day of trade compared to the market, hereinafter "first day return" and on the other hand - deficient return in the long term.


When reviewing literature based on details from Israel, we witness a decline tendency in first day returns from an excess return of 42% in the 1980's to 12% in the early 1990's, which continues to decline until reaching an excess return of approx. 4.6% in the late 1990's. We also learn that even when the average first day returns are positive, private investors, who are at a disadvantage in terms of information compared to institutional investors, achieve negative first day returns as a result of low allocation in strong offerings and high allocation in weak offerings.


This paper examines the market of IPO in Israel during 1998-2006. In 2001-2006, the average first day returns resulted in a deficit return of -1.2%. The first day return for the entire period amounted to an excess return of 1.2%. After adjusting the returns of high tech companies to the Tel-Tech Index, the one year return improved from a deficit return of -33.3% in 1998-2000 to -12% in 2001-2006 and the excess one year return during 2001-2006 increased from 10.5% to 17.2%. The average one year return for the entire sample increased from deficit returns of -10% to an excess return of 3.6%, contrary to most findings in literature.


There are four possible explanations:

1.         Increased involvement of institutional investors, due to changing the investment regulations for some of the institutional bodies in 2001-2002, leads to greater accuracy in pricing the offering, delaying exercising the risk premium to a later date than the first day of trade and decreasing the risk of underwriters.

2.         An increase in the size and profitability of companies between the two periods.

3.         A competition between underwriters based on the consideration of the offering price instead of the underwriting commission, as expressed in the decline in the differences between underwriting commissions.

4.         Company owners in the Israeli market do not like to "leave money on the table", as expressed by the non-existence of deficient pricing.