The Effect of Company Quality in Explaining IPO Returns: An Empirical Study on Oslo Stock Exchange from 1998 to 2018

Abstract

The purpose of this thesis is to investigate the effect company quality has in explaining IPO returns. To conduct this analysis, we use a data set that consists of annual accounting data and monthly stock price data from publicly listed firms on the Oslo Stock Exchange from 1998 to 2018. By following the methodology of Asness, Frazzini, and Pedersen (2018), we define company quality by ranking all firms after a composite quality measure. We find that stocks with a high quality score on average have higher prices throughout the whole time period we analyze. Moreover, we find that the price of quality was higher prior to the Global Financial Crisis. When we evaluate the short-run performance of IPO companies, our analysis show that the junk companies have the best initial first day returns, while quality IPOs have the best returns for the first month. For the IPO returns over a longer time horizon, our results indicate that investors don't obtain a positive abnormal return by investing in IPO portfolios. In addition, the analysis suggests that quality IPOs explain a majority of the long-run returns of the IPO portfolios we have constructed. Finally, we find that there is a significant difference in factor loadings between quality and junk IPOs.