Initial Public Offerings: The Case Of Health Maintenance Organizations (HMOs)

Abstract

Objective: To determine whether the returns of initial public offerings (IPOs) of HMOs in the days following issue are similar to the return behavior of IPOs in previous studies.

Data Source: The Center for Research in Security Prices (CRSP) tapes compiled by the Graduate School of Business at the University of Chicago provides daily stock prices, holding period returns, and other data pertinent to research in traded securities.

Study Design: The hypothesis to be tested is whether the mean excess return surrounding the offer date is equal to zero.  To adjust the initial returns of the IPOs for overall market movements, Standard & Poor’s Composite Index (S&P 500) was selected as the proxy for the market in general.  We compute the long-run performance for the HMOs and compare that return to the S&P 500 and the CRSP AMEX/NYSE equally-weighted and value-weighted indices.

Data Collection/Extraction Method:  We matched for-profit HMOs listed in the National Directory of Managed & Integrated Care Organizations to the commitment offerings reported by Securities Data Corporation to the same firms on the daily CRSP tapes.  This left 49 firms that went public between 1971 through 1997.  The Wharton Research and Data Services External (WRDSX) was used for data extraction and SAS was used for statistical analysis.

Principal Findings: IPOs of HMOs are underpriced and demonstrate abnormal returns.  The average initial return on these IPOs is less than that of the average in the United States.  On a long-run performance basis, they performed better than the broad market indices.

Conclusions:  Returns follow a similar pattern as do IPOs in general except for the long-run performance.  This needs further research as well as a comparison of performance before and after going public in cases where accounting data is available.