Evidence of abnormal returns in Bovespa IPOs from 2004 to 2007: an event study

Abstract

The goal of this study was to detect anomalies in the pricing of stocks in the IPOs (Initial Public Offerings) of the Brazilian capital market. The issue is becoming increasingly important, because the number of individuals investing and the Bovespa IPO market have both been growing. The event study was the methodology used to measure abnormal returns in portfolios comprised of samples with 23 to 98 stocks out of a total of 106 IPOs conducted from 2004 and 2007, encompassing the market pricing of the stocks from January 2004 to June 2008. The empirical results evidenced overpricing of the stocks during the first day of trading, with abnormal returns ranging from 4.80% to 9.26%, followed by substantial price drops. The accrued mean abnormal returns, excluding first day returns, amounted to -11.52% at the end of the sixth month, -16.60% at the end of the twelfth month and -41.79% at the end of the twenty-fourth month, indicating a relevant loss of value of the portfolios analyzed during the period, both in economic and statistical significance terms, and characterizing underperformance, widely documented by academia, in particular in the US capital market.