Long-run market performance of initial public offerings in Saudi Arabia: Does sharia-compliant status matter?

Abstract

This research presents a comprehensive analysis of initial public offerings (IPOs) in Saudi Arabia, using a sample of 72 IPOs examined during the period between 2004 and September 2010. To compute the market performance of the IPOs, we split the sample into two sub-samples: sharia-compliant and non-sharia-compliant and we use two methods of calculations which are buy and hold abnormal returns (BHAR) and cumulative abnormal returns (CAR). In contrast to the majority of reported outcomes worldwide, our results show that based on one-year after-market performance, on average, underperformance does not exist in the Saudi market. The regression analysis shows that the factors driving long-run market performance include initial return and ownership structure, firm level risk, age and sharia-compliant status. The highlight of this paper, however, underscored using T-test for equality of means that was performed on the two sub-samples aftermarket adjusted returns is that Sharia-compliant status significantly alters the level of one-year market performance. This result supports our hypothesis that sharia-compliant firms will enjoy superior non-negative returns compared to non-sharia compliant firms, and supports the over-reaction hypothesis. Based on this result, we introduce a new factor which we call non-sharia-compliant underperformance.