Accounting Professors set a new Standard

Associate Professors Carlos Correia and Glen Holman of the Department of Accounting in the Faculty of Commerce at UCT have won the Standard Bank prize for best paper of the year in the SA Journal of Accounting Research for 2008.

Their paper, An analysis of underpricing and aftermarket performance of initial public offerings on the Alternative Exchange (AltX), garnered the Standard Bank prize which carries a purse of R10 000 and will be presented at an awards function to be held shortly.

The original research also attracted high praise when it was first presented – the pair won the PricewaterhouseCoopers Best Paper Award when they presented their findings at the Biennial South African Accounting Association (SAAA) Conference in Johannesburg last year.

The paper analysed aftermarket performance of Initial Public Offerings on the AltX from inception in 2003 until October 2007. The study found that investors would have earned a non-risk adjusted cumulative return of 44% higher than the market benchmark based on the opening issue price. However, once the first-day return is excluded, (which was mostly only available to financial institutions and hedge funds), then investors would have earned a non-risk adjusted cumulative return of only 6% higher than the ALSI market benchmark.

At the time, this result questioned the general consensus that investing in the AltX offered significantly greater returns than the ALSI market benchmark. The paper questioned the wisdom of investing in the AltX due to the higher risks which were not matched with a commensurate return once the first-day return was omitted from the analysis. The paper also analysed IPO underpricing and aftermarket performance relative to previous South African and international studies. The findings of this study indicate that underpricing was evident on the AltX during the period under review with the average first-day return recorded at 29%.

Further, the study matched average quarterly returns of AltX companies to the ALSI and Small Caps Index benchmarks. Positive returns were concentrated in five companies of the 60 companies listed to date on the AltX. The recent significant fall in the value of small caps on the AltX has added weight to the results of the study as the significantly higher risks of investing in the AltX small cap companies were not matched by significantly higher returns.

Posted 11/09/2009 by Carolyn McGibbon