Financial Performance of Saudi Arabian IPO Firms

Ahmed Alanazi
a
*, Benjamin Liu
a
, John Forster
a
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, Griffith
Business School, Griffith University, Queensland 4111, Australia, E-mail: a.al-anazi@griffith.edu.au;
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 their
recommendations, help and support, and Laura Hopper and Sharron Vercoe (the secretary team) for
their assistance.




1
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
2
efficiency and transparency in securities' transactions, monitoring full disclosure of
information related to shares and their issuers, and monitoring shares trading (CMA,
Tadawul, 2008). At present, Saudi capital market consists of 129 firms divided into 15
industries.

The choice to study Saudi Arabia was mainly motivated by the recent ongoing IPOs
clustering that occurred in the last five years. The number of the listed firms has been
doubled in just few years. The new regulations applied by the regulatory body in
Saudi Arabia (the Capital Market Authority) have created a unique opportunity to
study IPO and firms' performance in Saudi Arabia. Apparently, Saudi firms value
confidentiality to the extent that most people do not know much about them.
According to Al-Barrak (2005) only one firm agreed to co-operate and provide him
with the needed information, and this was under a strong condition that the firm
identity should not be mentioned in the study. One of the new listing requirements,
however, is disclosing firms' information to investors before going public. The second
reason that makes Saudi Arabia a good candidate for the study is that Saudi Arabia is
the largest economy in the Middle-East. The results on Saudi IPOs will be an
important result for both developing countries in general, and middle easterners'
countries particularly. Saudi Arabia is also an important country to the world. It is a
member of many worldwide organizations including the United Nation U.N, the
International Monetary Fund IMF, the World Bank WB, the World Trade
Organization WTO. Economically, it is the largest oil producer and a founder member
of OPEC (Organization of the Petroleum Exporting Countries). Recently, after the
global financial meltdown, Saudi has become a member of the G20 as being one of
the top twenty economies in the world.
3
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.
4
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.

2.1 IPO 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
5
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.

2.2 The 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
6
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.
7
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
8
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.
3.2 Descriptive 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.
9
Table 1 Descriptive statistics
Panel A: Number of issues in Saudi Arabia
Year Number of Issues IPOs (firms)

2003 1
2004 2
2005 5
2006 10
2007 25
2008 14
2009 5
Total 62

Panel B: The sample industry, IPO year and the percentage of offered shares
Company Name Industry IPO Year Percentage of offered share
1 Almaraie Agricultural and Food 4-J ul-05 30%
2 Aldrees Petroleum Retailers 21-J an-06 30%
3 Saudi Paper Manufacturing Manufacturing Investment 24-Apr-06 30%
4 Red Sea for Housing Construction & Building 12-Aug-06 30%
5 Alhokair Retailers 7-Oct-06 30%
6 Alabdulateef Manufacturing Investment 18-Dec-06 30%
7 SVCP Construction & Building 8-May-07 30%
8 UITC Transportation 23-J un-07 30%
9 Saudi Printing & Packaging Co. Media & Publication 30-J un-07 30%
10 MESC Construction & Building 5-Nov-07 30%
11 Alkaleej Retailers 5-Nov-07 30%
12 Dar Al-Arkan Real Estate Developer 1-Dec-07 11.01%
13 Al-Mojil Construction & Building 3-May-08 30%
14 Al-Othaim Retailers 21-J un-08 30%
15 Halwani Bros Agricultural and Food 21-J un-08 30%
16 Chemanol Petrochemical Industry 11-Aug-08 50%

: , Source: (Capital Market Authority, Tadawul, 2009)

3.3 Methods for empirical analysis
3.3.1 Matched pairs approach for performance measurement
We are using the matched pairs method in measuring Saudi IPOs performance. The
matched pairs' method is basically comparing the firms' performance change between two
time periods, before and after the IPO to draw a conclusion about the performance
change. If the performance in the post-IPO period is better, then it is appropriate to
conclude that IPO has improved the performance. In contrast, if the post-IPO happens to
be worse, we can say that the IPO has a negative effect on the firms' performance.

10
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, the Wilcoxon signed rank test for 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)
11
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
12
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.
13
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 -29.2
P-value 0.1148 0.0021*** 0.009***
Change in Mean -12.46 -22.86 -24.57
t-stat -1.3781 -2.8211 -3.46
P-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 -11.5
t-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 Public
Offerings' 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, while
the 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

14
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 -1
to Year 0
From Year -1
to 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 0.0186
Median changes between two periods expressed as percentages for Saudi IPOs sales and capital
expenditures. 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

15
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 =0.851
No. Observation =94
This table reports Ordinary Least Squares regression coefficient estimates. The dependent variable is
the return on assets. The sample is 94 observations, a pooled data for 17 Saudi firms that went IPO
during the period 2003-2008. IPO represents an intercept dummy variable takes 1 after the IPO and 0
before. 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)* IPO
are 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
16
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.
17
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 goes
public 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 difference
between the establishment year and the IPO year. Firm size is the natural logarithm of total assets at the
IPO year. CAPEX is the change in capital expenditure from the prior year. Sales rate is the growth in
sales from the prior year and is calculated as the percentage increase in annual sales. TDR is the total
debt ratio calculated as the percentage change between year -1 and year +1. *, **, *** are statistically
significant 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
18
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
19
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
20
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









21
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