Initial Public Offerings by Commitments Test Entities on the ASX

Recent changes to the Australian Securities Exchange (ASX) listing rules allow unprofitable entities, termed Commitments Test Entities (CTEs), to become quoted on the ASX based on commitments to spend the funds raised under an Initial Public Offerings (IPO). Using a comprehensive sample of 351 companies we examine subsequent IPO returns of these CTEs and compare their characteristics and returns to 321 non-CTE IPOs. We find that initial returns to CTEs of 24 percent on average were achieved by subscribing investors. These returns are cyclical and vary widely between industries, but are comparable to initial returns achieved by non-CTE IPOs. Initial returns are higher for those CTEs that forecast positive earnings in the post-offer year and have high growth prospects. Initial returns are lower when there is a greater delay in the time to listing and where oversubscription of the offer is allowed. The returns for the first three years after the listing of CTEs are negative and are significantly less compared to the market and respective industry returns, as well as compared to concurrent non-CTE IPOs listed on the ASX. The long-run returns for CTEs are superior, however, higher the initial after market return on listing. Two and three year long-run returns are higher for those CTEs that forecast positive cash flows in the offer document for the post-offer year. CTEs are not significantly more likely to delist due to negative reasons (financial distress or bankruptcy) than the concurrent non-CTE IPOs.