THE AFTERMARKET PERFORMANCE OF INITIAL PUBLIC OFFERINGS IN LATIN-AMERICA

This study extends the international evidence on initial public offerings (IPOs) and is the first comprehensive analysis examining new issues in the Latin American countries of Brazil, Chile, arid Mexico. These countries have been among the best performing markets in the early 1990s and are undergoing major modernization programs and opening their economies. Since Chile uses an auction process to go public, while issues are offered at a fixed price in Brazil and Mexico, interesting comparisons based on the method of going public emerge. Further, both Chile and Mexico have been involved in massive privatization programs, and Brazil has embarked on one as well. A large proportion of the new issues in Chile were privatizations. This allows an examination of IPOs involved in privatization versus non-privatization programs. Findings similar to the U.S. and UK pattern of positive initial returns followed by long-run underperformance are found in the three Latin American countries studied. The Brazilian sample includes 64 IPOs between 1980 and 1990. All IPOs begin trading at one of the major exchanges. IPOs issued to trade on the OTC market were not considered because the trading in this market is very thin. There was one hot-issues year (1986) with almost 50% of the IPOs in the sample occurring during that year. The first day market-adjusted returns relative to the offer price averaged 78.5%. Investors who bought the issue at the closing price of the fir.st trading day and held the shares for three years ended with 67% of their initial investment (adjusted for the market performance in the same period). The Brazilian sample does not include privatizations, since most of the privatized firms are already public companies. The pattern is similar in Chile. There were 36 Chilean IPOs in the sample, including 21 privatizations. for the 1982-1990 period. The first day mark-et-adjusted return from the offer price was 16.3%. Investors who could not buy at the offer price and purchased the new stock at the first trading day's closing price ended with 83% of their initial investment value after three years. The pattern was similar when considering only the privatizations. There was a 7.6% first day market-adjusted return from the offer price, but investors who bought the issue at the first trading day's closing price ended with 91% of the initial investment after three years. In Chile, IPOs are placed through an auction procedure similar to a block trade. There are no underwriters. The issue is brought to the market through brokers. Despite the different procedure and characteristics of its sample, the Chilean IPOs behaved similar to the Brazilian IPOs and the IPOs in other major international markets. The Mexican results are less dramatic but convey the same pattern. For the 44 IPOs in the Mexican sample issued between 1987 and 1990, a 2.8% first day market-adjusted return was found. After one year, the investors that bought the IPO at the first day closing price ended up with 81% of their initial investment. The three countries use different issuing procedures but show behavior similar to other major international markets like the U.S. and UK. In the case of Chile. the privatization issues behaved in the same way as other issues. In all three countries, IPOs are usually oversubscribed and concentrated in some ''hot issues'' years. This suggests that the investors that buy IPOs in the secondary market may be overoptimistic. Based on the international evidence, it appears that these patterns are not country-specific and not particular of a specific issuing procedure. Investors and financial managers operating and raising funds in these Latin American countries should be advised about this high initial returns and poor long-term performance pattern. While buying the IPOs in the primary market and selling them soon in the secondary market seems. on average. to be a good strategy, buying during the first few trading weeks and holding for one year or more generally does not bring good results. Finally, as in other world markets, firms seem to time their IPOs to periods in which the market is performing well.