Initial Public Offerings in the Cyprus Stock Exchange

The academic literature is quite rich in exploring Initial Public Offerings (IPOs) in developed markets and to a lesser degree in emerging markets. However, seldom one can find research on IPOs in start-up stock exchanges. Such is the case of the Cyprus Stock Exchange which was inaugurated in March 1996 and this thesis looks at IPOs that took place over a period of six years (1997-2002). Therefore, the first motivation is to explore this setting for IPOs. Moreover, the Cyprus Stock Exchange is probably the least researched stock exchange in the European Union. Out of the 12 countries that joined the European Union between 2004 and today, only Polish, Bulgarian and Hungarian IPOs are researched. Due to the comparatively young age of the Cyprus Stock Exchange and the Capital Markets in Cyprus in general at the time of the sample, the various players (underwriters, auditors, regulators, investors) were relatively inexperienced vis-à-vis the IPO process and outcomes of their actions (or rather their lack of action) affected the development of the primary market. Therefore, the second motivation stems from the specific institutional and regulatory characteristics of the CSE at the time of the sample. Cyprus, a start-up stock exchange with a relatively new but comparably densely populated market for listed companies (150 listed companies), poses an interesting research case. In particular, the institutional characteristics that existed in the Cypriot capital market over the period 1997 to 2002 (a novice stock exchange, inexperienced market participants, lack of investment options available and restrictions in capital flows, a weak legal and institutional framework) combined with a number of socioeconomic and political factors at the time make IPOs in the CSE an interesting subject for empirical research. This ̳cocktail‘ of inexperience, inadequate regulation, and limited equity culture provided the platform for the formation of a large IPO ̳bubble‘ which eventually imploded. Therefore, the motivation for the study develops the following research questions: 1. What is the level of first-day returns for Cypriot IPOs and how does that compare with the available literature? 2. What are the explanations for the level of short-run underpricing recorded? 3. What is the long-run (12-, 24and 36-months) aftermarket performance of these IPOs and how does that compare with the available literature? ii 4. What are the explanations for the documented long-run aftermarket performance? 5. Did CSE IPO firms employ income increasing accruals prior to the IPO? 6. What is the level of understanding of Cypriot Managers of the IPO process in relation to the extant literature? This thesis consists of three inter-related empirical studies on companies that were listed on the Cyprus Stock Exchange during the period 1997 to 2002. In particular, this thesis investigates the shortand long-run IPO performance of these companies (chapter 1). The variables employed are grouped into four categories namely advisor/certifier-, market/institutional-, issuer-, and IPO-specific. It is observed that CSE IPOs over the sample period offered investors the highest returns in a European market and one of the highest in the world. Following the establishment of these ultra-high returns, and the independent variables that are related to this spectacular performance, the thesis investigates whether these CSE IPO companies engaged in income increasing accruals before their IPOs (chapter 2). In Chapter 2, both univariate as well as multivariate tests are employed to test the hypothesis that these firms actually employed earnings management pre-IPO using income increasing accruals which reversed after the 1st year of listing. In order to establish also the relationship between the shortand long-run performance of IPO firms, the latter are regressed with the earnings management variable which takes the form of discretionary accruals, total accruals or the components of accruals which are creditors, debtors, inventory, depreciation and cash flow from operations. The results show that both the shortas well as the long-run performance are also affected by the earnings management variable together with the other variables that are found to affect IPO performance in chapter 1. Having examined the two aspects of CSE IPOs, i.e., short, long performance and earnings management, the thesis presents also the results from a questionnaire survey which aims at revealing managers of CSE listed IPO companies level of understanding of the IPO process and IPO ̳anomalies‘ (chapter 3) and comparing this with the extant academic literature and also with the responses of managers in the US. Great effort, both theoretical and empirical, has been made to understand