Underpricing of Brazilian Initial Public Offerings : An empirical analysis of the first-day trading performance of the Initial Public Offerings in the Brazilian market between January 2004 and April 2007

Sammanfattning: IPO underpricing is a phenomenon found in all markets worldwide. Investors are always looking for a good opportunity of short-term abnormal positive returns, and the IPOs first-day trading returns have been a good investment strategy for both institutional and private investors in all markets of the world. This study consists at an investor’s perspective analysis of the first-day returns of 59 IPOs listed on the Brazilian Stock Exchange Market from January 2004 to April 2007, where I have found a significantly mean positive underpricing of 6,60%. I have found also some evidences of a sprouting “hot-market” period in Brazil, since the number of the IPOs in Brazil has been growing almost in an exponential speed, taking advantage of the constant growing cash inflow and liquidity of the Brazilian market, followed by the high evaluation of the Ibovespa Index, with return of 140% on the study time frame. When categorizing the study by year, by underwriter (investment bank) and by market segment, I always have found positive adjusted initial returns, which corroborates the fact that underpricing is a constant phenomenon in the Brazilian market. Other important facts that were identified in this study is that the average returns of the IPOs are decreasing along the years and that companies that depend to a large extent on their human capital and are in the business areas that are staff intensive have a high level of underpricing while companies that have a high level of fixed assets have a low level of underpricing. Finally, after performing a multivariate linear regression analysis with the chosen independent variables on the full sample and some categorized samples, the results did not have enough statistical significance and consistence that could make them useful to create a statistical model to explain the underpricing level of Brazilian IPOs between January 2004 and April 2007.