financial performance of saudi arabian ipo firms

8/12/2019 Financial Performance of Saudi Arabian IPO Firms

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Financial Performance of Saudi Arabian IPO Firms

Ahmed Alanazia*, Benjamin Liua, John Forstera

a Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Queensland 4111, Australia

Abstract

We examine changes in the Saudi listed firms' performance around their initial public

offerings. It is found that Saudi IPOs exhibit a sharp decline in the post-IPO

performance compared to the pre-IPO period as measured by the ROA and ROS. We

also find that the performance deterioration is significantly associated with the IPO

event. Surprisingly, the performance decline comes with a significant increase in sales

and capital expenditures, which do not support the lack of opportunities theory.

Instead Saudi firms performance decline can be attributed to the owners' desire to

cash out as the windows of opportunity theory suggests.

Keywords:Initial public offerings; Firms performance; Ownership; Saudi Arabian IPOs Clustering

JEL Classification: G32; G34; M41

* Corresponding author, address to: Department of Accounting, Finance and Economics, GriffithBusiness School, Griffith University, Queensland 4111, Australia, E-mail: [email protected];Mobile: +61 410 963 145; Fax: +61 7 373 57760

Acknowledgments:We would like to thank Christine Smith, Eduardo Roca and Jen Je Su at Griffith University for theirrecommendations, help and support, and Laura Hopper and Sharron Vercoe (the secretary team) fortheir assistance.

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mailto:[email protected]:[email protected]


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1. Introduction

The main objective of the paper is to measure and compare the Saudi Arabian IPO

firms' performance before and after going public. Initial public offering (IPO) is "a

first-time offering of shares by a specific company to the public" (Al-Barrak, 2005,

p.1). In this paper, we examine the change in Saudi firms' performance for the period

between 2003 and 2008. This period was characterized with a substantial increase in

the number of listed firms (IPO clustering) in Saudi stock exchange market

"Tadawul". Therefore, it is time to investigate the impact that IPO brings on the Saudi

firms performance.

The decision for private firms to go public is one of the most fundamental decisions

that the company faces in its life. It is the decision that is going to change the whole

structure of the company, and in many cases it ends up with the ownership power

being transferred and taken away from the company's original owner. It is not

surprising then that the IPO topic has attracted the attention of scholars, investors, and

decision makers. Consequently, a vast number of studies have been conducted on the

IPO topic, and it has been growing at faster pace in recent years (Shen & Wei, 2007;

Pagano, Panetta & Zingales, 1998).

Saudi Stock Market classified as an emerging market belongs to the Middle East and

North Africa region (MENA region) (Al-Barrak, 2005). In July 2003, the Capital

Market Authority (CMA) became the regulatory body for supervising the Saudi stock

market. CMA is an independent government organization that reports directly to the

Saudi Prime Minister. It enjoys authority for regulating and developing the capital

market, protecting investors and general public from unfair practices, achieving

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Analyzing a sample of 16 Saudi IPOs, we document several important findings. First,

we find that Saudi firms' performance decline after going public as measured by the

ROA and ROS. The median average for the ROA after the IPO is found to be 30 per

cent lower than the average three years before. This a larger drop than that

documented in U.S by Jain & Kini (1994) of 9 per cent, but less severe than that

found in Thailand by Kenneth et al.,(2004) of 70 per cent. Also, we found a similar

pattern of performance decline of about 12 per cent for the average median change in

ROS. We next investigate the association between performance decline in Saudi ROA

and the IPO occurrence. Using a regression analysis for 94 observations by including

the IPO event as a dummy variable, we found that the performance deterioration is

significantly linked to the IPO. Examining causes for the performance decline, we

found neither the lack of opportunities, nor the agency cost theories provide the

answer. Saudi firms maintained a reasonable level of sales and capital expenditures

growth after the IPO, which do not give support for the lack of opportunities theory.

This result is in line with Jain & Kini (1994) and with Kenneth et al.,(2004). Also, we

have documented a strong support for the alignment of interest hypothesis that the

more the owners retain after the IPO, the better the performance will be. Finally, we

found that the age of the firm is significantly linked with the firm's performance,

while the size of the firm is not. Older Saudi firms show better performance after the

IPO. This result is consistent with Mikkelson et al., (1997) and Kenneth et al.,(2004).

The remaining of the paper proceeds as follows. Section 2 reviews the relevant

literature. Data and methodology discussed next in section 3. Section 4 provides our

empirical findings on Saudi firms' performance and analysis. Finally, we conclude our

paper in Section 5.

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2. Literature Review

In this section we discuss the relevant literature and issues surrounding IPOs. First, we

review the empirical findings on the impact of IPO on firms performance. Second,

we survey the literature on theories explaining the after-IPO performance

deterioration.

2.1IPO and firm performance

There are numerous scholarly articles have been published to measure the firms

performance after going public. The negative impact of the IPO is evident in most

studies. Jain and Kini (1994) have examined 682 U.S IPO companies between 1976

and 1988. They found a significant decline in the performance as measured by the

operating return on assets and the operating cash flows. This performance

deterioration started from the year prior to the IPO to the subsequent five years after

the conversion. Also, Mikkelson et al. (1997) documented a significant decline in the

post-IPO performance compared to the pre-period on a sample of 283 American

firms.

The same outcome of performance deterioration is documented in other developed

countries. For example, a study on 180 Japanese firms by Cai and Wei (1997) found

that these IPOs are unable to sustain the same level of pre-IPO performance. A result

that is consistent with the above mentioned authors on American IPOs. In European

markets in line with other results, a paper on 411 IPOs that took place in London

stock exchange market from 1995 to 1999 have shown a performance decline after the

IPO in the U.K (Khurshed, Palerai & Vismara, 2005). Another study by Pagano,

Panetta and Zingales (1998) on the Italian IPOs has used a performance comparison in

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order to conclude the motivations behind going public. They came up with the same

findings of performance decline.

Moving into the developing world, we found the same pattern of performance decline,

but rather more dramatic deterioration is documented. A study on the Chinese IPOs

(China as being transitional economy) conducted by Changyun in 2005. The author

has included a big sample size of 747 Chinese IPOs. He found a sharp decline in the

operating performance as measured by the return on assets and the return on sales

(Changyun, 2005). Kenneth, Pattanaporn and John (2004) studied Thai IPOs and

concluded that the performance decline after the issue is ten times larger than that of

the U.S IPOs. For example, the performance decline in Thailand is found to be 75 per

cent less than the year before the IPO, which can be compared to 9 per cent

deterioration in the U.S.A. Also, Al-Barrak (2005) in a case study on one Saudi IPO

found that this IPO firm suffered a performance decline in terms of return on assets,

return on sales, return on equity and many other profitability measures.

2.2The performance decline explanations

Reasons that explain the performance decline after the IPO are varied and

controversial. The first possible explanation is the agency conflict that arises after the

issue between the original owners and the new shareholders. There are two major

hypotheses link the post-IPO performance and the change in the ownership structure.

The alignment of interest hypothesis predicts a positive relationship between the post-

ownership structure and the post-IPO performance. The more the owners retain after

the firm goes public, the more they will engage in value maximizing behaviour

(Jensen & Meckling, 1976). On the other hand, the entrenchment hypothesis suggests

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a negative association, the more the owners keep after the IPO, the more entrenched

they will be and try to expropriate wealth from the outside shareholders (moral

hazard) (Fama & Jensen, 1983). Jain and Kini (1994) found that American IPOs show

better performance when the owners retain the majority of shares. This result however

contradicting the findings of Mikkelson et al,. (1997) who failed to find any

association between firms performance and ownership structure change.

The second potential explanation for the performance decline after the IPO is related

to the windows of opportunity theory for the new issue puzzle (Loughran & Ritter,

1995). This theory links the performance fall to the firms owners desire for

exploiting a bullish stock market, which may bring a favourable price for the firms

shares. The surveyed 336 chief financial officers in Brau & Fawcett (2006) study have

strongly supported that firms owners are opportunists. These officers have described

the IPO event as a tool allowing firms principals to cash out.

The other potential explanations for the performance deterioration after the issue

include the window-dressing accounting data, which suggests that owners and

underwriters may attempt to manipulate the firms accounting numbers prior to the

issue to attract investors (Jain & Kini, 1994; Cai & Wei, 1997). Also, the lack of

opportunities explanation suggests a possible drop in the performance due to firms

inability to sustain the same pre-IPO level of sales and capital expenditures growth

(Jain and Kini, 1994). Finally, there is the impact of the age and the size of the firm on

the performance. Mikkelson et al. (1997) found that large and well established firms

tend to show better performance after the IPO than small start-ups. In contrast,

Kenneth et al. (2004) found a link only between the age and the firms performance.

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2.3 Summary

The gap in the IPO topic in the emerging economies is obvious, and hence further

research on the developing countries is vital. This paper on the IPO impact on the

Saudi Arabian firms performance is an attempt to fill some of this gap. The impact of

the IPO on the firms performance is negative and this effect has been documented in

many papers from both developed and developing economies. Reasons for the

performance deterioration associated with the IPO movement are still controversial.

The reasons for the performance decline include the agency conflict theory, the lack

of opportunities, the windows of opportunity, the window-dressing accounting data

behaviour, the age and the size of the firms impact.

3. Data and Methodology

The main thrust of this paper is to investigate Saudi Arabian firms' performance after

going public. Performance is a relative concept. For example, the performance of one

Saudi firm in 2008 can be measured relative to its past performance in 2007, or it

could be measured relative to another firm in 2008 (Coelli et al., 1998). The paper

also aims to identify reasons that could have affected the performance based on the

IPO literature theories and explanations. The methodology section is essential in

understanding the methods which have been used in similar studies and the data

collection process and techniques. It also discusses the sample selection, data

collection, and approaches adopted in this study.

3.1 Data and Sampling

We have relied on the secondary type of data in measuring Saudi IPOs. Neuman

(2006) defines the secondary data as data prepared by other researchers or

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institutions. Two sources of data have been used in this paper. Companies

performance data before the IPO have been collected from the Saudi Capital Market

Authority (CMA). As a regulatory procedure, all firms must provide three years

minimum accounting audited information (prospectuses) prior to going public to

Saudi investors. CMA maintains these prospectuses in its database where we were

able to access and collect. Data on firms performance for the post-IPO period were

collected from the Saudi Stock Exchange Market Tadawul. Tadawul produces

quarter and annual financial statements for the stock market performance in general

and each listed firm individually. It maintains these reports in its database where we

were able to access and collect for all IPO firms.

We restrict our sample to the period between 2003 and 2008 because it is the period

when most Saudi IPOs took place, 57 companies. Firms that went public as a new

establishment or start-ups were excluded because they do not add any value to the

scope of the study. Also, to avoid data incompatibility, IPOs under mergers and

acquisition activities and privatization policy were also excluded. These filters have

reduced the sample size to 16 firms.

3.2Descriptive statistics

Table 1 Panel A shows all IPOs that took place in Saudi Arabia between 2003 and

2009. Note that the number of IPOs has increased in 2006 and peaked in 2007. This

two years period particularly represents the clustering period in Saudi Arabia, which

characterized with an increase in the number of firms shifting from private ownership

into public. In Panel B we list all IPOs under consideration in this study, their

industry, the year when they conduct the IPO, and the shares percentage of the firm

being offered to Saudi investors.

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Following previous studies, the time horizon window between 2003 and 2008 will be

divided into three segments for each targeted firm separately. The first period is the pre-

IPO period (this period is labelled as the years). The second time frame segment is the

year of the event or the year of the IPO, which is the year when the IPO took place

(labelled as year 0). The third segment is the after IPO period, which is the post-IPO time

and this includes the years after the event (labelled as + years). As a result, a performance

"time line" will be developed, which reflects the financial results from the before the IPO

to the years followed the IPO (Megginson, Nash and Randenborgh, 1994; Kenneth et

al.,(2004); Changyun, 2005).

The last step in the analysis is to use statistical tests for significance change test. Similar

to previous studies, theWilcoxon signed rank testfor the median difference and the t-test

for the mean difference will be used. The idea is to find if the difference between the two

periods is statistically different from zero.

3.3.2 Regression Analysis

Anyone surveys the IPO literature will observe that regression analysis is one of the

most adopted methods. For instance, Pagano et al. (1998) have used regression

analysis to determine the firms' going public probability. Also, Jain & Kini (1994)

have used regression analysis.

The first model to be used in this study was developed by the authors to measure the

association between the performance change and the IPO event. It is in a linear-log

form as follow:

ROA = 1 + IPO + 2 ln (1/Total assets) + 3 ln (Net Income) + 1 [ln (1/Total

assets)*IPO] + 2 [ln (Net Income)*IPO] +(1)

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The dependent variable in equation (1) is the return on assets ROA. The first

independent variable is the IPO, which is an intercept dummy variable that takes 1 for

firms after the IPO and 0 before the IPO. Including this intercept dummy variable will

enable to capture the direct effect of the IPO on the ROA without interference from

other variables. Also, two dummy interaction parameters 1 and 2 have been

included in the model to capture the effect of the net income and total assets with the

IPO event. The benefit of this step is to compare the interaction between the IPO

event and other variables between the two periods, pre and post-IPO. When the IPO

takes place all dummy variables will be included, but before the IPO the model in

equation (1) will retain only the total assets and the net income variables. The best

way in seeing the effect of the inclusion of these dummies is to consider the

regression function E (ROA) in the two periods, pre and post-IPO:

E (ROA) = (1+ ) + (2 + 1) ln (1/total assets) + (3 + 2) ln (net income), when

IPO = 1 for the after the initial public offerings period ..(2)

E (ROA) = 1 + 2 ln (1/total assets) + 3 ln (net income), when IPO = 0 for the

before the initial public offerings period.(3)

The second model to be used in this paper was used many times in the literature such

as the study of Kenneth et al. (2004) and Changyun (2005). The model with slight

changes and adjustment to be used in this paper is:

Change in performance (ROA -1 to +1) = 1 + 2 Ownership + 3 Age + 4 Size + 5

Capital expenditures +6 Sales growth +7 Total debt ratio + ..(4)

The dependent variable in equation (4) is the change in the return on assets between the

year -1 and year +1. Ownership independent variable represents the ownership stake (in

percentage) held by the original owner at the IPO time. Age is the difference between the

firm's establishment year and the year of the IPO. Size is the logarithm of the total assets

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in the IPO year. The age and the size as discussed before can have impact on the

performance variation. Mikkelson et al. (1997) found that the size and the age of the firm

have an impact on the performance; therefore we include them in the model to find out

their effect on the Saudi firms. Kenneth et al. (2004) said that leverage could have an

impact on the firms' performance, thus total debt ratio is included to control for possible

leverage effect.

4. Empirical analysis

4.1 Saudi Firms' Performance change between pre and post-IPO

Panels A and B of Table 2 show the change in the median and mean values of return

on assets (ROA) and return on sales (ROS). The median change in ROA for sixteen

Saudi IPOs has dropped by 16.5 per cent during the IPO year compared to the year

before the event. We also found that the performance decline has intensified in

magnitude and became significant at 22.34 per cent in the first year after the IPO.

Comparing the average years before the IPO (three years before the IPO) to the years

followed the IPO while excluding the IPO year; we found a sharper decline of 29.2

per cent. The change in the mean values reveals the same outcome of performance

ROA decline. Mean values have fallen by 12.46, 22.86 and 24.57 from Year -1 to Y

0, Year -1 to Year +1 and the average years to the average + years respectively.

Comparing Saudi IPOs performance in terms of return on sales we document the same

pattern of performance deterioration, but less severe. The median change for ROS has

declined by 6.08, 14.81, and 11.75 per cent respectively (all statistically significant at

0.01 and 0.10 levels). Also the mean value for ROS change has dropped by 7.44,

16.21, and11.5 per cent after the IPO compared to the pre-IPO period.

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Table 2 Change in firms' performance of Saudi IPO firms

Panel A: ROA (16 firms) Y-1 to Y0 Y-1 to Y+1 Y- AVG to Y+ AVG

Before (Ltd 16 firms) 0.1521 0.1521 0.1461

After (Ltd 16 firms) 0.127 0.1162 0.1142

Change in Median -16.5 -22.34 -29.2P-value 0.1148 0.0021*** 0.009***

Change in Mean -12.46 -22.86 -24.57

t-stat -1.3781 -2.8211 -3.46P-value 0.1883 0.0129** 0.0035***

Panel B: ROS (16 firms)

Before (Ltd 16 firms) 0.2016 0.2016 16.72

After (Ltd 16 firms) 0.1892 0.1693 17.61

Change in Median -6.08 -14.81 -11.75

P-value 0.0744* 0.0018*** 0.0319**

Change in Mean -7.44 -16.21 -11.5t-stat -1.4939 -4.9832 -2.41

P-value 0.1559 0.0002*** 0.0295**

Median and Mean changes between two periods expressed as percentages for 16 Saudi Initial PublicOfferings' firms. They are calculated as the median and the mean of the change between the two

periods for all firms. Wilcoxon signed rank test is used for the median change significance test, whilethe t-test is used for the mean change test.* indicates the 10 % level of significance** indicates the 5 % level of significance*** indicates the 1 % level of significance

The bar charts below in Figures 1 and 2 are demonstrating the average change in ROA

and ROS for the sixteen Saudi IPOs between pre and post-IPO periods. It can be

clearly seen that most Saudi IPOs have experienced performance deterioration in

terms of ROA and ROS.

Figure 1 The Difference in the Saudi IPOs ROA Average before & after the IPO

-.16

-.12

-.08

-.04

.00

.04

2 4 6 8 10 12 14 16

CHANGE

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Figure 2 The Difference in the Saudi IPOs ROS Average before & after the IPO

-.08

-.06

-.04

-.02

.00

.02

.04

2 4 6 8 10 12 14 16

CHANGE

4.2 Saudi Firms' performance decline explanations

The decline in the Saudi firms' performance can be expected if the firms' cannot

generate the same level of positive NPV projects or if the owners are unable to

maintain the same level of capital expenditures (the lack of opportunities theory).

Table 3 Panel A shows that Saudi firms' sales have significantly increased from year -

1 to year 0 and from year -1 to year +1. Also, in Table 3 Panel B, Saudi firms' owners

seem to have maintained a reasonable level of capital expenditures in the post-IPO

period unlike the decline found in Thailand by Kenneth et al.,(2004). Overall, our

evidence suggests that changes in sales and capital expenditures levels cannot explain

the performance deterioration among Saudi IPOs.

Table 3 Change in Sales and capital expenditures of Saudi IPOs

Panel A: Sales From Year -1to Year 0

From Year -1to Year +1

Median Percentage Change 17*** 23***

P-Value 0.0009 0.0005

Panel B: Capital Expenditure

Median Percentage Change 41** 41**

P-Value 0.0214 0.0186Median changes between two periods expressed as percentages for Saudi IPOs sales and capitalexpenditures. Wilcoxon signed rank test is used for the median change significance test.* indicates significance at 10 per cent level** indicates significance at 5 per cent level

*** indicates significance at 1 per cent level

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4.3 The performance decline and the IPO event association

To test for an association between Saudi firms' performance decline and the IPO

event, a regression methodology has been used. Table 4 illustrates the regression

model results. The goodness-of-fit is the adjusted R-squared = 85.1 per cent,

indicating that the model fits the data well.

Table 4 ROA Regression Equation Estimates

Variable Coefficient Std. Error t-Statistic Prob.

Intercept 3.993010*** 0.249586 15.99854 0.0000

IPO -1.359305*** 0.362713 -3.747603 0.0003

LOG (1/Assets) 2.904865*** 0.167070 17.38708 0.0000

LOG (Income) 0.135187*** 0.007356 18.37782 0.0000

LOG (1/Assets)*IPO -1.000123*** 0.235385 -4.248883 0.0001

LOG (Income)*IPO -0.044768*** 0.010079 -4.441552 0.0000

Adjusted R-squared = 0.851No. Observation = 94

This table reports Ordinary Least Squares regression coefficient estimates. The dependent variable isthe return on assets. The sample is 94 observations, a pooled data for 17 Saudi firms that went IPOduring the period 2003-2008. IPO represents an intercept dummy variable takes 1 after the IPO and 0before. The second explanatory variable is the logarithm of the inverse total assets. The third

explanatory variable is the logarithm of the net income. Log (1/Assets)*IPO and Log (income)* IPOare interaction dummy variables that will be present after the IPO and disappear because the zero

multiplication before the IPO.*, **, *** are statistically significant at the 10%, 5%, and 1% levels respectively.

The estimated regression function for Saudi firms after the IPO is

E (ROA) = 3.993010 + (-1.359305) + (2.904865-1.000123) + (0.135187-0.044768)

E (ROA) = 2.633705 + 1.904742 LOG (1/Assets) + 0.090419 LOG (Income)

For the pre-IPO period, the regression function is

E (ROA) = 3.993010 + 2.904865 LOG (1/Assets) + 0.135187 LOG (Income)

1. The IPO premium for firms after they go public is (-1.359305). The intercept is

significant and it says that when all independent variables are equal to zero, the

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expected return on assets would be 2.633705 per cent for the after-IPO period

and 3.993010 per cent for the pre-IPO period. As we do not have any ROA

value equal to zero within our data set, the intercept interpretation is

meaningless, but it is important to include it because omitting it leads to other

coefficients being badly affected.

2. The coefficients for the total assets and its interacted slope dummy variable are

all significant indicating that the IPO has significant impact on the return on

assets. A 1% increase in assets leads to a 0.01904742% increase in the return on

assets for the post-IPO period, while a 1% increase in assets used to lead to

more increase 0.02904865% in the return on assets for the pre-IPO period. This

result indicates that the usage of assets efficiently in generating higher ROA

was better in the pre-IPO period than in the post-IPO period, which is consistent

with our findings on Saudi firms' performance decline.

3. The coefficients for the net income and the interacted dummy variable are

significant indicating that the IPO has big impact on the firms' performance. A

1% increase in net income leads to a 0.00090419% increase in the return on

assets for the post-IPO period, while a 1% increase in the net income used to

lead to bigger increase 0.00135187% in the return on assets in the pre-IPO

period. This result also shows that hiring the net income effectively was better

in the pre-IPO period than in the post-IPO, which confirmed the performance

deterioration after going public for Saudi IPOs.

Using this model is showing that the IPO has significant negative impact on Saudi

firms' performance as measured by the ROA and the performance decline is related to

the IPO event.

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4.4 The performance decline reasons using regression methodology

Table 5 below shows the results for the second regression model investigating factors that

might affect the change in the performance.

Table 5 The Change in ROA Regression Equation Estimates

Variable Coefficient Std. Error t-Statistic Prob.

Intercept -4.138380** 1.366575 -3.028286 0.0143

Ownership 2.025879** 0.656125 3.087641 0.0130

Age 0.008246*** 0.002435 3.385930 0.0081

Size 0.265870 0.145627 1.825693 0.1012

CAPEX -0.010537 0.024234 -0.434814 0.6739

Sales -0.202294 0.212112 -0.953714 0.3651

TDR -0.197397** 0.072418 -2.725796 0.0234

Adjusted R-Squared = 0.565, No. Observation = 16

This table reports Ordinary Least Squares regression coefficient estimates. The dependent variable is

the change in return on assets from year -1 to year +1, where year 0, the year when company goespublic is excluded. The sample is 16 Saudi firms that go IPO during the period 2003-2008. Ownership

represents the percentage stake held by the original owners after the IPO. Firm age is the differencebetween the establishment year and the IPO year. Firm size is the natural logarithm of total assets at theIPO year. CAPEX is the change in capital expenditure from the prior year. Sales rate is the growth insales from the prior year and is calculated as the percentage increase in annual sales. TDR is the totaldebt ratio calculated as the percentage change between year -1 and year +1. *, **, *** are statisticallysignificant at the 10% level, 5% and 1% respectively.

We consider here a linear relationship between firms' performance and ownership.

The model has adjusted R-Squared value of 56.5 per cent, which indicates the model

fits the data well. The ownership variable (Ownership) is found to be significant at 5

per cent. Therefore, it seems that there is a positive linear relationship between the

change in firms' performance and the ownership change after the IPO. This result is

consistent with Jain & Kini (1994), but contradicts the findings of Mikkelson et al.

(1997). Jain and Kini (1994) found that firms with high level of ownership after going

public outperform firms with low level of ownership. In this study, most firms retain

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the majority of the shares (70 % retention), and thus we have had an excellent

opportunity in assessing this level of ownership. The coefficient ownership has

significant positive value indicating that for each increase in the ownership, there will

be a positive increase in the change in ROA. A result that supports the theory of the

alignment of interest hypothesis that institutes at the high level of ownership.

Therefore, it is difficult to attribute the performance decline to the agency cost in

Saudi Arabia. It seems that selling only 30 per cent of the firms to the public in Saudi

Arabia guarantee a control by the original owners on the firms after the issue.

Also, in Table 5 it is found that there is a strong impact of the firms' age on the

performance. The age coefficient is positively significant indicating that with each

increase in the age there will be an increase in the change in the ROA. The size of the

firm seems to have also a positive impact on the performance, but it is not significant.

This result is consistent with Mikkelson et al. (1997) who linked the performance

change to the age and the size of the firm. While our result is in line with this author

in regard to the age of the firm, the size of the firm in Saudi Arabia cannot be linked

to the firms' performance. Moreover, the total debt ratio coefficient has a significant

negative impact on the ROA change. This means that firms using more debt have

experienced a worse performance after they go public as measured by the change in

ROA. This result is consistent with Kenneth et al. (2004) on Thai IPOs.

Finally, in Table 5 we find that the capital expenditures and the sales growth are both

insignificant, and that firms with more sales and capital expenditures growth seem to

suffer worse change in the ROA. This is an expected result in regard to the capital

expenditures since this increase may have enlarged the denominator in the ROA

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equation and hence lowering the change in the ROA. On the contrary, the increase in

sales was expected to be a positive impact on the change in the ROA as it contributes

to the numerator. These two estimates however are insignificant.

5. Conclusion

We examine the Saudi post-IPO financial performance of 16 firms that went public

between 2003 and 2009. The firms' performance as measured by the ROA and the

ROS is showing deterioration after the IPO indeed. Both measures of performance,

the ROA and ROS have fallen significantly after the issue. Also, this paper has

documented that the performance decline for the sixteen firms had started from the

year of the IPO and intensified in magnitude in subsequent years following the shares

issue. We also documented that the performance decline among the sixteen Saudi

IPOs is associated with the IPO occurrence as the regression analysis indicated.

The decline among Saudi IPO firms' performance cannot be attributed to the lack of

opportunities explanation. Despite the severe decline after the IPO, Saudi firms are

showing steady growth in terms of sales and capital expenditures. This result is

consistent with Jain & Kini (1994) and Kenneth et al. (2004). In terms of the agency

cost and conflict impact on the performance, it is found that, the performance

deterioration is not due to the conflict between the original owners and the new

shareholders as indicated by the regression analysis. Issuing 30 per cent to the market

and retaining the majority of the shares is found to be positively linked to the change

in the ROA. This result is consistent with Kenneth et al. (2004) and with the

alignment of interest hypothesis. It seems that Saudi firms' owners by issuing just 30

per cent are achieving two goals at the same time. First, they are keeping the

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controlling power to themselves after the issue. This is particularly true knowing that

the issued 30 per cent is going to be divided equally between the vast numbers of

Saudi investors. The second goal is that the original owners are trying to not miss out

on the surge in the Saudi capital market, which is more likely going to give their

shares higher value than that they really deserve. Therefore, the owners are taking

advantage by selling some shares and meanwhile keeping the power in their hand.

This is a supporting result for the windows of opportunity and timing the issue

explanations, which suggest owners are opportunists who attempt to maximize their

wealth from the issue.

Furthermore, this paper has documented that the age of the firm in Saudi Arabia has a

significant positive impact on the performance as older firms have shown a better

performance. This is consistent with Mikkelson et al. (1997), however there is no or

weak evidence to confirm an association between the size of the firm and the

performance as Mikkelson et al. (1997) did. The result on the age and the size of the

Saudi firms is in line with Kenneth et al. (2004) who found a link between the age and

the performance, but no link between performance and the size among Thai's IPOs

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