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ACKNOWLEDGEMENTS
All praise and thanks be to Allah, Lord of the Worlds, for His Providence and
Divine Direction throughout my life and especially during the course of researching
for this thesis. To My supervisor Professor Ronnie MacDonald, for his supervision,
recommendations, guidance, suggestions, and encouragement, go my sincere thanks.
I owe a great debt of gratitude to my parents for the inexhaustible encouragement
and support received over the years. The encouragement of my colleagues DR
Salaheldin Ismail and his family, and DR Mohammed Salimullah is acknowledged. I
am indebted to my home country, Egypt, for financing my education in the United
Kingdom, and to my teachers and officials at both the University of Helwan and the
Ministry of Higher Education in Cairo, Egypt, for their support. Finally, the thesis
would never have been completed without the assistance, understanding,
encouragement, sacrifices and patience of my wife, Umm Heba, and my children,
Heba, Reham and Hadeer, to all of them I am very much indebted.
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ABSTRACT
The core of this thesis has involved an examination of the efficiency of the
Egyptian stock market (ESM) with a specific focus on the price performance of the
privatised initial public offerings (PIPOs). Recent structural changes in the Egyptian
economy during the 1990s permit testing hypotheses about how these changes have
affected the behaviour of ESM, in general, and PIPOs in particular. An analytical
review of prior studies is provided in Chapter Two. Two documented anomalies of
IPOs price performance, i.e. short-run underpricing and long-run overpricing, are
revealed. Some researchers attribute these findings to the trading system of the
developed capital markets. Our study refutes this explanation because we also find
these anomalies in the ESM, although it is a market without an investment-banker
(specialist) system.
Accordingly, five empirical chapters are constructed to investigate the ESM.
Before examining the price performance of PIPOs in the ESM, two chapters are
assigned to examine the whole market at the domestic and international levels, as a
preliminary exploration. From the domestic point of view, Chapter Four deals with
questions of normality, volatility, randomness, and the efficiency of the ESM.
Several basic tests were employed for testing normality. All indicated that none of
the indices has a normally distributed return. Then, the Autoregressive Conditional
Heteroscedastic model (ARCH) proposed by Robert Engle (1982) and the
Generalized ARCH model (GARCH) of Bollerslev (1986) are employed to describe
the process of stock returns. The findings show that the variance of returns is time-
varying in the GARCH context. Also, the integratedness of the volatility of asset
returns is analyzed using the IGARCH model. The results indicate that the volatility
of stock returns is integrated.
To test the stationarity of the ESM returns, unit root tests of Dickey and
Fuller (1979) and the variance-ratio test of Lo and MacKinlay (1988) were
implemented. The results support the notion that there is a relatively significant
stationary component in past returns that can be used to predict future returns;
therefore, returns do not follow pure random walks. Since the random walk
hypothesis is not equivalent to market efficiency, we conduct the test of efficiency by
using unit root and cointegration techniques, which are recently developed
techniques in the time series literature. It is found that disaggregate stock price
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indices of the ESM are cointegrated which is interpreted as a violation of the concept
of static efficiency introduced by MacDonald and Power (1993).
Then, Chapter Five is assigned to test the internationalization of the ESM
among eighteen emerging international stock markets. The Engle-Granger two-step
methodology and the Johansen’s multivariate cointegration tests were performed on
these prices. The findings show that the eighteen emerging markets are cointegrated,
indicating Granger-Causality in levels and these are suggesting of inefficiency.
However, for the Middle Eastern and Mediterranean Rim markets groups, the results
reveal an absence of any clear evidence of cointegration among them.
Then, to measure the price performance of PIPOs, we use both the market-
adjusted and risk-adjusted models. In the risk-adjusted model, both the general
CAPM and the Returns Across Time and Securities (RATS) model were employed.
Chapter Six illustrates that the Egyptian PIPOs are underpriced with average initial
returns of 15.03 % and the observed distribution is heavily skewed and has a median
of 13 %.
Chapter Seven shows that insignificant positive excess market returns exist,
on average, between the close in the first day of listing and the close in the fourth
week of trading. It is suggested that these early positive excess market returns in the
aftermarket may result from speculative bubbles which burst in subsequent trading in
the aftermarket period giving rise to negative excess market returns. Also, the results
indicate that the mean beta declines after-listing and varies around the market beta of
unity. The mean beta in the Egyptian PIPOs market thus appear to behave nearly in a
similar manner to the risk behaviour in other markets. Finally, Chapter Eight
investigates the efficiency of the Egyptian PIPOs in the aftermarket. The results
supported both the weak-form and semistrong-form of the Efficient Market
Hypothesis of the PIPOs in the ESM.
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CONTENTS
Page
Acknowledgements i
Abstract iii
Contents iv
Chapter One Introduction 1
1.0 Introduction 1
1.1 Objectives and Importance of the Study 1
1.2 Research Philosophy and Plan 6
1.3 Research Strategy 14
1.4 Organization of the Thesis 17
Chapter Two A Review of the Literature on the Price Performance of IPOs 20
2.0 Introduction 20
2.1 A Survey of Initial Returns 21
2.2 A Survey of the Aftermarket Returns 65
2.3 Summary 90
Chapter Three The Structure of the Egyptian Securities Market 92
3.0 Introduction 92
3.1 Brief History of the Egyptian Stock Market 93
3.2 Microstructure of the Egyptian Stock Market 102
3.3 Summary 120
Chapter Four Efficiency and Stochastic Properties of Stock Daily Returns in 122
Egypt (1994-1996)
4.0 Introduction 122
4.1 Examining the Assumption of Normality 123
4.2 Examining the Volatility of Egyptian Stock Returns: GARCH Models 130
4.3 Stationarity and Random Walk Tests 141
4.4 Cointegration and Egyptian Stock Market Efficiency 157
4.5 Conclusion 168
Chapter Five The Internationalization of the Egyptian Stock Market 170
5.0 Introduction 170
5.1 Egypt within the Context of Middle Eastern Emerging Markets 174
5.2 Data and Summary Statistics 179
Chapter Five (continued)
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5.3 Methodology 182
5.4 Empirical results 183
5.5 Conclusion 191
Chapter Six The Initial Performance of the Egyptian PIPOs 192
6.0 Introduction 192
6.1 Examining the Initial Performance of the Egyptian PIPOs 193
6.3 Explanations of the Reported Underpricing 202
6.4 Summary and Conclusions 210
Chapter Seven The Aftermarket Performance of the Egyptian PIPOs 212
7.0 Introduction 212
7.1 Returns in the Aftermarket 213
7.2 Systematic Risk in the Aftermarket 227
7.3 Analysis of Results 232
7.4 Conclusion 235
Chapter Eight The Aftermarket Efficiency of the Egyptian PIPOs 237
8.0 Introduction 237
8.1 Price Performance and Market Efficiency 237
8.2 Data and Methodology 242
8.3 Empirical Results 252
8.4 Conclusion 263
Chapter Nine Conclusions 265
9.1 Summary of Findings 265
9.2 Recommendations and Suggestions for Further Research 273
Bibliography 279
Appendices 298
Appendix A: Capital Market Law no. 95 of the Year 1992 298
Appendix B: The Dickey-Fuller Procedure for Unit Root Testing 312
Appendix C: Daily Price Index for the Egyptian Capital Market 316
Appendix D: Collected and Analysed Data of the Selected Sample of the 352
Egyptian PIPOs
