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The core of this thesis has involved an examination of the Egyptian stock
market efficiency with a specific focus on the price performance of the privatised
initial public offerings. Recent structural changes of the Egyptian economy in 1991
permit testing hypotheses about how these changes have affected the behaviour of
discussions and empirical analysis presented in the preceding chapters of this thesis
section of this chapter dealt with the underpricing phenomenon connected with the
IPOs. Numerous studies suggest that the initial return premium from underpricing
could be established by the close in the first day of trading. Many hypotheses were
explanations can be criticised on the grounds of either the extreme assumptions that
in the IPOs was scrutinised. A large number of studies surveyed indicated negative
returns between the first closing traded price and the close of trading twelve months
after issue. Whilst some evidence of IPOs prices rising in the aftermarket was also
apparent, this appeared to be less common than the declining performance of returns.
Some clarifications were presented in order to explain these reported positive and/or
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negative returns. However, the poor performance of IPOs in the long-run makes the
Some conclusions were generated from the literature review. First, evidence
of long-run returns for IPOs was noticed to be less extensive than evidence of short-
run underpricing. Second, explanations for poor abnormal aftermarket returns were
relatively less developed than those for initial returns. Third, evidence of
documented in the developed stock markets, however, it is not the case for
developing capital markets. Finally, the majority of the literature focused on the
private IPOs, whereas the privatisation sales in the emerging markets got only a
small consideration.
market is presented in Chapter Three. During the period prior to the 1991 economic
reform, it was noticed that the private sector was in the early stages of development,
and the role of the stock exchange remained minimal. However, in studying the
current situation of the Egyptian stock market, it was observed that this market
achieved a high level of success. This success was reflected in: (1) the flow of
privatization, (2) the increasing volume of traded shares, (3) increasing the
efficiency of securities companies working in the capital market, and (4) increasing
capital markets. This is of interest because some studies tend to use the trading
system per se to explain the price performance of the IPOs in the developed capital
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markets. For example, a greater volatility in the initial period is thought to be caused
by investment bankers who want to underprice the IPOs in such markets. On the
Egyptian stock exchange, trading is performed through the floor-traders whose duty
is essentially clerical. Nowadays, they receive market orders and record them in the
capital markets, where investment bankers buy and sell for their own accounts and
have an obligation to stabilise prices and supply liquidity to the market, the floor-
traders do not take a position in the stock transactions. They do not buy or sell stocks
in order to ensure price stability nor do they have the duty to do so.
Egyptian stock market, we intended to examine the whole market on the domestic
respectively. In Chapter Four, attempts were made to examine some time series
properties and standard assumptions of stock returns and prices using three years of
daily data on the eleven Egyptian stock indices. First, several basic tests were
employed for testing normality. All indicated that none of the indices has a normally
distributed return. This result justifies the fact that daily stock returns are not
normally distributed. In such a case, our results are well in line with what has been
employed a GARCH model in order to describe the process of stock returns in the
Egyptian financial market. The findings show that the variance of Egyptian stock
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of the volatility of asset returns. The empirical results indicate that the volatility of
Then, in order to test the stationarity of the Egyptian stock returns, unit root
tests developed by Dickey and Fuller (1979) were initially applied. Second, we
conducted the variance-ratio test of Lo and MacKinlay (1988). The results provided
suggests the presence of successful smoothing for these series. It is suggested that
smoothing may reduce volatility of financial series but exhibit significant serial
correlation. The latter was found to be negative, suggesting that the stock returns
there are components in past returns that can be used to predict future returns;
conducted the test of efficiency using recently developed techniques from the time
series literature. In particular, unit root and cointegration techniques were used to test
the concept of static efficiency introduced by MacDonald and Power (1993) for
individual share price indices. Amongst the results reported in this Chapter is the
finding that disaggregate stock price indices of the Egyptian Stock Market are
that such cointegration may either reflect the consequences of noise trading or
Since Chapter four was constructed to examine the efficiency of the Egyptian
stock market from the domestic point of view, we assigned Chapter five to look at
the issue of its internationalization among eighteen emerging stock markets during
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thesis, Strathclyde University, U.K.,1998
the period from January 1994 to December 1997. Considering the opening up of the
Egyptian equity market during the 1990s, it is expected that there is increasing
interest in investing in this market. The weekly stock indices of the eighteen
emerging equity markets examined in this Chapter all have a unit root, indicating that
cointegration tests were performed on these prices. The findings show that the
and suggesting of inefficiency. However, the results reveal an absence of any clear
evidence of cointegration among the Middle Eastern markets and also among
Mediterranean Rim markets. This finding implies that: (1) the international
diversification among these markets would be effective because the country risk can
be diversified away, (2) investors who want diversified portfolios may be encouraged
to invest in these markets, and (3) there is an evidence of efficiency due to the
requires an explicit modelling of the trade-offs between risk and returns, we have
assigned the remaining three chapters to investigate the efficiency of the Egyptian
Chapter six examined the initial returns in the primary market of Egyptian
PIPOs. Such initial returns were found to be approximately 15 % across time and
securities. The observed distribution was heavily skewed and had a median of 13 %.
The level of underpricing seemed to be high and privatised companies might have
lost money on the table. As a result, we investigated three hypothesis which were
proved, in the literature, to explain the positive initial returns to private IPOs.
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However, they were unsuccessful in explaining even a small part of the initial returns
that the underpricing is a protection against legal liability. That is, the implications of
legal liability are quite different in Egypt relative to the U.S. For example, the claims
for compensation due to lack of due diligence are much more difficult to carry out.
Explanations other than the risk of legal liabilities might be more appropriate to
Thus, we may suggest that the institutional feature of the Egyptian Capital
Market -the listing requirements of the Egyptian Stock Exchange and Capital Market
market lapse.
Furthermore, it can be suggested that early sales of the privatised IPOs may
be deliberately underpriced in order to convince the market to absorb larger sales and
reduce the risk borne by the government. That is, it can be argued that the
underpricing is consistent with a signalling argument, since the privatised firms are
exposed to greater policy risk, and tend to be large and well known relative to private
government cannot expect higher proceeds from a subsequent sale, and is therefore
describing and analysing the pattern of returns and risks of the Egyptian PIPOs
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during the first year of trading. The increase in PIPOs prices over the first few weeks
of listing in the Egyptian Capital Market may be consistent with some adjustment
processes for the initial underpricing suggesting efficiency in such market. However,
from the results in Tables 7-2 (Panel B) and 7-3 (Panel B) there is some evidence
that insignificant positive excess market returns exist, on average, between the close
in the first day of listing and the close in the 4th week of listing. These insignificant
positive returns may be caused by a number of initial subscribers selling stocks for
profit-taking purposes so that the PIPOs stocks are subjected to downward price
pressure.
speculative factor. That is, the early positive excess market returns in the aftermarket
may result from speculative bubbles which burst in subsequent trading in the post
listing period giving rise to negative excess market returns. Two explanations could
be provided for the existence of speculative ‘bubbles’ or ‘fads’. First, the Egyptian
government may attempt to place shares in strong hands rather than weak hands. The
former group retains the stock for a significant period of time and artificially
decreases the supply of stocks in the aftermarket forcing market prices upwards. The
second explanation might based upon government artificially stimulating demand for
newly listed stocks by selling shares to small, risk-oriented and generally uninformed
Finally, the results in the long-term seem to support the hypotheses regarding
the behaviour of the mean systematic risk after-listing. Thus, the mean beta declines
after-listing and varies around the market beta of 1. Moreover, the mean beta in the
initial period is higher than the mean beta in the after-market as hypothesised. The
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mean beta in the Egyptian PIPOs market thus appear to behave nearly in a similar
bankers to the offerings, it seems that the market for privatisation initial public
indicate that the Egyptian PIPOs market is seriously deficient relative to other
markets. This argument is given because a substantial body of work indicating that
the form of aftermarket returns and risks observed in the Egyptian market also occurs
Chapter eight, which is the final empirical chapter, examined the aftermarket
efficiency of the Egyptian PIPOs. The results in this chapter supported both the
the Egyptian Capital Market. Testing the weak-form of the EMH, first, the results of
regression techniques for both short-term and long-term returns showed that the
correlation coefficients were not statistically significantly different from zero at the 5
Second, the results of the non-parametric test (runs test) showed that prices of
the PIPOs change at random. Our result was based on the standardised normalised
variable (Z), which was calculated to test the statistical significance of the difference
between the actual and the expected number of runs, and which was not significantly
different from zero in both the daily and weekly data. As a result, based on the
parametric and non-parametric tests used in this study, we conclude that the weak-
form efficiency in the Egyptian initial public offerings market could not be rejected.
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Similarly, in testing the semistrong-form of the EMH, the main conclusion of
Although these findings for Egypt are similar to the developed capital market
patterns, these findings must be interpreted cautiously because of the small sample
size and the fact that the most IPOs are concentrated during a fewer years. These
phenomenon exist in nearly all markets except the UK and the U.S.
and the privatised initial public offerings, in particular, has been conducted in this
investors, and academics interested in emerging equity markets. For instance, the
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4. Government is recommended to attract anchor investors to those companies
which are most in need of foreign capital and expertise. There are several
First, they have a greater concern for protecting their interest in the
investors, most anchor investors have little choice but to work towards a
capital.
investment.
For Investors
Egyptian equity market as well as other Middle Eastern markets, because these
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For Academics
9. Since amongst the results reported in this thesis is the finding that disaggregate
stock price indices of the Egyptian stock market are cointegrated which is
equilibrium expected returns. One way to resolve which of the two effects
expectations, in spirit of work done for foreign exchange markets (see, for
10. Since the Egyptian PIPOs market was exceptionally active in the sample period,
that may be turned into disappointment when they learned more about the IPO
firm’s prospects. Additional evidence from other countries is needed before the
11. Investment banker reputation may play a critical role in assuring investors that
aftermarket price support would be provided. This suggests that a fruitful area for
Particularly interesting in this area is the issue of market penalties for investment
may lose market share; there may also be an increase in the underpricing of
confidence.
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12. I have analysed the stock market returns in the first year after going public. My
suspicious, however, is that the underperformance does not extend much beyond
a longer period, based upon Ibbotson (1975) and Rao’s (1991) findings. Ibbotson
finds no underperformance in the fifth yea after going public, the last year that he
13. Only by extending the sample period beyond the 3 years of this thesis can
additional evidence be gained regarding some of the patterns that have been
findings.
14. Another issue that is unresolved in this thesis is the relation of the long-run
why PIPOs are priced in a manner that results in such large positive average
initial returns. If the Egyptian government sets the offering price in a manner that
price changes, instead of the daily or weekly price changes that this study
employed. The advantages of the transaction price changes are the following:
It will take into account the effect of volume on the distribution of stock
price changes.
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Transaction-to-transaction price changes can serve as a direct measure of
underwritten offers.
between private IPO and privatisation sales in the developing capital markets.
PIPOs and the size of new issue of security, the issues with higher risk, legal
liabilities arising from any false or inadequate information in the prospectus (for
misrepresenting the true value of the firm), the size of the firm, the firm's age, the
quality of a firm, the market conditions (such as: the level of presales in the
premarket, the level of interest in the premarket, and the size of minimum-sales
constraints), the uncertainty of the market demand for the issue, the market share
of the research issues analysed in this study and by the importance of the Egyptian
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equity market. It is anticipated that some of the suggestions in this study can be
adapted in further studies of the pricing of initial public offerings in other developing
capital markets. This would encourage to extend existing empirical findings and set
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