PERFORMANCE OF THE UK INVESTMENT TRUST IPOs

PERFORMANCE OF THE UK INVESTMENT TRUST IPOs December 2000 Kenbata Bangassa The University of Liverpool Department of Economics and Accounting Eleanor Rathbone Building Bedford Street South Liverpool L69 7ZA UK Tel ++441517943062 Fax ++441517943028 E-mail kenbata@liverpool.ac.uk I thank Professor Paul Draper and Professor Norman Strong for their useful comments and suggestions. PERFORMANCE OF THE UK INVESTMENT TRUST IPOs

ABSTRACT In this study we investigate the performance of investment trust new issues during their first 750 days of trading. Research on the initial performance of new issues has documented that abnormal returns are obtained during the first day of trading. We compare the performance of investment trust new issues with the performance of size and style-based matching investment trusts taking the multinational dimension of these investments into account. We also investigate the performance of investment trust new issues conditional on the intensity of institutional and individual investor share holdings to reflect the impact of information differences on price performance. We also analyse the differences between share prices of investment trust new issues and the prices of the underlying assets. Investment trust discounts increase on average during the study period from -0.08% to 14.66%. The differences between the CAR for investment trust new issues and the corresponding matching funds is statistically significant at the 5% level for Europe, Emerging Markets, UK Capital and Growth investment trust fund styles. The test result of the differences in discounts between size and style-based matching investment trusts and the corresponding investment trust new issues are statistically significant at the1% level for all groups of investment trusts except Japan fund style. For all styles of funds studied matching trusts show higher level of discount than discounts on investment trust new issues. Keywords: Initial public offerings; Investment trusts; Performance; Discounts JEL Classification: G14 G15 G24 F21 INTRODUCTION Investment Trust IPOs have become very popular since the late 1980s. Why investors are interested in investment trust new issues at all, given the history of investment trusts with 2

their shares persistently trading at a substantial discount to net asset value is one of the outstanding puzzles in finance literature. In particular, it is not clear why informed investors such as institutional investors have put their funds in such assets. Institutional investors in the UK are known for holding a large proportion of investment trust shares. In contrast, US closed-end funds are predominantly held by individual investors; see Weiss (1989) and Ammer (1990). It is interesting to study whether or not the differences in ownership structure have an impact on the short-run and long-run performance of investment trust IPOs. Studying the pricing of investment trust new issues is important for a number of reasons including the following: Firstly, we are going to analyse the impacts of size and style based adjustments on price performance of investment trust new issues. Most of the literatures use the national market index as a benchmark for adjustment of new issue prices. Secondly, this paper aim at considering investment trust new issue price performance analysis from a point of view that reflects the concentration of institutional and individual investors in the holdings. The importance of this particular aspect of the study emerges from the very fact that, unlike the ownership structure of US closed-end funds, investment trusts in the UK are predominantly held by individual investors. Thirdly, investment trusts are known for a history of trade at fluctuating levels of discounts (premiums) that represent deviation of the share prices of investment trusts from their corresponding value of their underlying assets. Thus, we analyse the deviation between the prices of investment trust new issues from the value of their underlying assets, i.e. net asset value (NAV). The percentage of the deviation of share price from NAV is reported as discount or premium. Furthermore, investment trusts hold assets that are invest in assets that concentrate in different geographical locations. This is particularly linked with diversification benefits that are expected to accrue to investors by holding portfolio of assets that focus their investments in domestic as well as multinational assets. In this regard, it is interesting to analyse the price performance of new issues with reference to 3

the geographical distribution of their assets. The initial market pricing of IPOs is an important informational event because it indicates the extent to which the assessment of the value of the new issues by the market deviates from the offer price set by the firm and its underwriters. If the IPO market is semistrong efficient, that is, the initial market prices fully reflect the publicly available information about the quality of new issues, then the initial underpricing or overpricing will bear little relation to the subsequent performance of IPOs. One of the frequently researched aspects of initial public offerings involves studies of costs of going public. The cost of adverse selection focuses on the fact that investors differ in quality and quantity of information they possess about the true value of firms going public. Those investors that have incurred costs required to acquire information on new issues will have better opportunity to make informed decision regarding the value of the new issues. On the other hand, investors who have not acquired valuable information on the new issues will have to face higher degree of uncertainty in their decision of investing in new issues. Other costs include: initial underpricing, and direct costs such as underwriting and registration fees as well as post issue costs that include auditing, accounting, as well stock exchange fees (see Chemmanur and Paolo1995 for more details). How do investment trust new issues perform in the market, for example during the first three years of trading? In this study we extend the investigation of the performance of investment trust new issues with reference to the performance of other seasoned investment trusts that are matched based on their size and investment style. Research on the initial performance of initial public offerings has documented that abnormal returns are obtained during the first day of trading following new issues. Studies in this area have concentrated on US markets. In the UK, Levis (1993 and 1995) reported a 14.3% average initial return for a sample of 712 initial public offerings listed on the London 4

Stock Exchange and an average first day return of 1.91% for a sample consisting of 105 investment trust IPOs. 1 First day returns reported for all IPOs studied in the US include: 26.48% by Ritter (1987), 21.65% by Chalk and Peavy (1987), 9.87% by Miller and Reilly (1987), and 11.4% by Ibbotson (1975). Weiss (1989) reported a 0.373% average abnormal initial return for 67 US closed-end funds. Attempts to explain underpricing have included the ex ante uncertainty of the issuer's value by Beatty and Ritter (1986) and Rock (1986), the degree of uncertainty involved in the demand for the IPO by Baron (1982), the existence of potential legal liability to the issuer and the underwriter by Tinic (1988), the impact of signalling of rational agents by Allen and Faulhaber (1989), Grinblatt and Hwang (1989) and Welch (1989), and the presence of regulation by Affleck-Graves and Miller (1989). In this study we review the existing theoretical explanations for IPO underpricing in general and particularly those relevant to investment trusts. Determining the value of the underlying assets of investment trust new issues involves less difficulty than for non investment trust new issues and, therefore, the degree of information asymmetry and the level of underpricing of investment trust IPOs should be lower than that of non investment trust IPOs to an extent that information asymmetry affects pricing of new issues. We also take into account the investment styles and offer types of the trusts in studying the performance of investment trust new issues. These factors are likely to affect IPO returns due to differences in geographical location of markets the trusts operate and differences in the amount of issue costs. Section two presents a summary of previous literature and section three presents details of data and method of study. Section four discusses the results and section five concludes the study. 1 Initial returns are defined as (Pt - Poffer)/Poffer, where Poffer is the offering price and Pt is the closing 5

PREVIOUS RESEARCH A substantial part of research concerning IPO performance focuses on asymmetry of information among the parties involved in the issue process. Rock (1986), Beatty and Ritter (1986), and Baron (1982) advance this aspect. A second body of literature refers to the "fads" or "hot issues" hypothesis as an important aspect contributing to the IPO pricing process. Ritter (1984) and Aggarwal and Rivoli (1990) advance studies from this view point. Weiss (1989) and Wang et al. (1992) undertake studies that investigate closed-end fund IPO underpricing from this perspective as well. A third body of research on IPOs has concentrated on the information signalling aspect of the initial pricing. Leland and Pyle (1977), Ritter (1984), Downess and Hanikel (1982), Boehmer (1991), Grinblatt and Hwang (1989), Welch (1989), and Allen and Faulhbar (1989) contribute to the literature that investigate IPOs underpricing by applying information signalling hypothesis. For closed-end funds the level of institutional participation of shares has also been presented important in studying their short-run and long run performance. There are three major parties involved in the IPO issue process: the issuing firm, the underwriter, and investors. Rock (1986) further categorises investors as informed and uninformed participants in the market. Though researchers in this aspect of the subject differ in method of analysis of the problem, their common view is that underpricing in IPO occurs as a result of differences in the level of valuable information that one class of IPO market participants possesses over the others. IPOs are characterised by a great deal of uncertainty about their true value because of the scarcity of public information at the time of the initial offering. In such an environment, determining the true value of a new issue is obviously a bid price on the first day of public trading. 6

difficult task. Consequently, the initial return on an IPO reveals significant information because it provides the first public indication that the market's average assessment of the IPO differs from that of the underwriter and the issuing firm. Rock (1986) considers the underpricing of IPOs as a natural consequence of his model, which assumes asymmetric information and rationing with respect to informed and uninformed investors in the IPO markets. According to his model, the investment decision of informed investors is based on superior information they possess and they will subscribe to IPOs only if they expect that the after market price will exceed the offering price. According to Rock, on the other hand, uninformed investors subscribe to all IPOs indiscriminately. 2 The author suggests that the discounts in IPOs are offered to induce application from uninformed investors who tend to pay more than the informed investors as a result of lack of differentiation between the overpriced and underpriced issues. The reflection of this point of argument is that, informed investors would only subscribe for underpriced new issues since they act using the superior information set they possess. Hanley and Wilhelm (1995) report that the institutional investors are allocated about the same proportion of shares in overpriced and underpriced issues and therefore reject winners curse explanation for IPO underpricing proposed by Rock (1986). Field (1997) also indicates that institutional investors may be better informed about IPO values than individual investors. Field s study however seems limited since it considers the institutional holdings based on the post issuing level rather than the level of holdings at the time of IPO subscription. Carter, Dark and Singh (1998) present that the underperformance of IPO stocks relative to the market over a three-year holding period is less severe for IPOs underwritten by more prestigious underwriters. Baron (1982) assumes that investment bankers possess more information about the 2 This differentiation in offering prices as a result of information asymmetry results in the winners curse whereby uninformed investors would tend to hold more of unfavourable and less or none of favourable issues. 7

demands of the potential investors than that of the issuing firms. Furthermore, Baron considers that, the reputation of the investment banker may contribute towards certifying the quality of the issue to potential investors thereby generating incremental demand that may not be realised otherwise. Thus, it is possible for the issuing firm to approach an investment bank that possesses a better knowledge about the capital market to fix the price for new issues. Baron argues that the discount on IPOs is an increasing function of the degree of the issuing firm's uncertainty about the prevailing demand for its securities. 3 According to this line of argument, the issuing firm compensates the underwriter by providing the securities at a discount from the price that is expected in the after-market. Thus, Baron s model establishes that a principal-agent relationship between the issuer and the investment banker is responsible for the underpricing of new issues. Beatty and Ritter (1986) extend Rock's model and suggest that the expected level of underpricing is positively related to the uncertainty involved in the equilibrium prices of IPOs. They argue that investment bankers are motivated to maintain an equilibrium level of underpricing in order to preserve their reputation and thereby suggest that underwriters who underprice IPOs by more than an equilibrium level would tend to lose potential issuing firms as clients. On the other hand, it is conjectured that those underwriters who tend to underprice IPOs at amounts that are less than equilibrium levels would disappoint uninformed investors. 4 Tinic (1988) reports that he finds no statistical relationship between the changes in the market shares of investment banks and the deviations in the discounts from the underpricing 3 Muscarella and Vetsuypens (1989) investigate self-marketed IPOs, where an investment bank goes public and promotes or distributes its own shares. In this case the principal and agent are the same firm, hence, no information asymmetry should arise. However, they find underpricing in these issues which is inconsistent with Baron s explanation. 4 Beatty and Ritter design rules such that in order to maintain underpricing equilibrium to the interest of investment bankers it is important to consider the following preconditions: (a) the underwriters do not forecast the after-market price perfectly, (b) each underwriter should possess valuable 8

equilibrium in the preceding time period. He formulates and tests a model that suggests that underpricing serves as a form of insurance against legal liability and damages that may occur to the reputations of investment bankers. 5 Peavy (1990) studies 41 closed-end fund IPOs that were issued during 1986 and 1987. He reports that the returns of the funds are not significantly different from zero, in contrast to the overwhelming empirical evidence that non closed-end fund IPOs are significantly underpriced. This finding is also consistent with that of Weiss (1989) supporting the common explanation that the level of information asymmetry between the issuer, underwriter and investor for closed-end funds, which are typically portfolios of securities traded in the stock exchange, is less than that of non closed-end fund IPOs. Shiller (1990) explains the "hot" market periods by proposing an "impression's" theory. This theory argues that if new issues are initially underpriced, there is a high probability that they will create a short-term impression that the issue is a superior investment. It is expected that this impression will result in a subsequent higher demand and prices that may be higher than if the issue had not been initially underpriced. The extension of this illusion is revealed with the over enthusiasm investors show for other subsequent IPOs in the market believing that all other IPOs are favourable investments. The proposition that underpricing originates from attempts by issuing firms or underwriters to disseminate private information they possess regarding the value of shares being issued is developed in theoretical models by Leland and Pyle (1977), Allen and Faulhaber (1989), Grinblatt and Hwang (1989), Welch (1989), and others. Levis and Thomas (1995) study the issuing behaviour and price performance of a sample of 105 investment trust IPOs that were issued during the period January 1984 reputation capital, (c) underwriters who cheat by offering wrong prices lose clients. 5 Through the examination of the levels of underpricing before and after the Securities Act of 1933, which expanded investors opportunities to pursue lawsuits against issuers and their underwriters, 9

through August 1992 and listed on the London Stock Exchange. They report that their study is the first study of its kind that finds a significant first day return for a sample of IPOs of closed-end funds. Confirming the findings of the investor sentiment hypothesis proposed by Lee, Shleifer and Thaler (1991), the new issues of investment trusts are reported to occur when the seasoned investment trusts are trading at a lower level of discount or at a premium. 6 Data and Method of Study This study examines 77 investment trust new issues that are part of the total population of investment trust IPOs for which the required data is available. The trusts included in the sample are those issued between January 1983 and December 1994. Data for issue date, offer price, closing price for first day of trading, issue size and type of offer is collected from Extel Financial Capital Gains Tax Service, KPMG New Issue Statistics and from the individual company s offer prospectus. Daily stock price, net asset value and return index data obtained from Datastream on-line service are used to compute discounts (premiums) and fund returns. Market value of existing investment trusts is obtained from Datastream on-line service. According to offer types the number of funds included in the sample are: placing (41), offer for subscription (28) and offer for sale (8). In order to study the short term and long term performance of investment trust new issues the data used covers daily data for the first three years from the first date trade takes place for new issues included in the study. The event study method used by Weiss (1989) in examining the initial performance of US closed-end fund IPOs is applied. Weiss (1989) studies the post offering performance of closed-end fund new issues and the impact investor clientele could have on this. Tinic finds increased underpricing since the Act. 6 In this study we will further analyse the price performance of investment trust new issues by introducing adjustment based on style and size with respect to seasoned funds. 10

Weiss adopted a standard events study approach. Adjusted returns for each fund are calculated as follows: AR = R I (1) it it t where It represents the percentage change in the value of market index, and Rit represents the return on each fund for day t that is computed from return indices provided by Datastream: R it = RI it RI RI it 1 it 1 (2) where RI it is the return index for investment trust i at time t. Cumulated abnormal returns are computed for each fund as follows: CAR it ( ARit ) T = 1+ t 1 (3) =1 and the mean cross-sectional daily cumulative abnormal return for all the funds in the sample is calculated as follows: CAR T = 1 N N i= 1 CAR it (4) The standard deviation of the daily adjusted returns is calculated using the following formula in order to compute the statistical significance of the results obtained. SAR 1 = N 1 ( AR AR ) N 2 t i= 1 it t 1/ 2 (5) 11

Where: AR t = 1 N N i = 1 AR it (6) It is noted that the standard deviation that is used in computing the test statistic is the mean standard deviation of the adjusted returns over the sample period, which is computed using the following formula: 1 T SAR = SAR t T t= 1 (7) Finally the test statistic for the results obtained is calculated as follows: t statistc = CAR T SAR T N (8) We also compare the performance of investment trust new issues with the performance of a sample of size-based matching investment trusts by using the model similar to that used by Spiess and Affleck-Graves (1995). The adjustment of the returns of new issues by using the returns of matching non-new issue investment trusts provides an alternative test. This approach is advantageous since it estimates the excess returns for the new issues taking into account the impact of the size and investment style of the trusts. For each new issue we find an investment trust that matches it in size and investment objective as of the first date of trading of the new issue and has been traded for at least three years. Daily returns data for new issues as well as matching trusts are collected from Datastream 12

International on-line data service. The tests are then performed by examining the differences between the returns on the IPOs and those for matching trusts. The fund style and sizematched adjusted return for day t is computed as: ARit = Rit Mit (9) Where Rit is the return on the IPO i on day t in the aftermarket, and M it is the return on its size-matched counterpart on the same day. Returns over a holding period (a, b) are computed as: (10) b ( R ) HPRi, a: b = 1 + it 1 t = a where HPR i, a: b is the holding period return on firm i on day t and a and b define the days over which the holding-period return is calculated. Matched-firm-adjusted holding period returns over (a, b)are given by : MHPR HPR HPM i, m, a: b i, a: b i, a: b = (11) where HPM i, a: b is the holding period return for size and style-matching investment trust. HPM i, a: b is computed in the same way as HPR i, a: b is computed. The difference between the holding period returns of IPO i and its size and style-matched counterpart is averaged across the matched pairs for investment trusts with similar investment objectives to obtain crosssectional averages of size and style-adjusted differences in holding period returns. A t-test is conducted on this result by examining whether or not these cross sectional means are significantly different from zero. 13

Discussion of the Results The average cumulative abnormal returns for the trusts in the sample according to their types of issues for the first 750 days of trading are reported on Table 1. The results show that, except for issues effected through placing, positive average returns are observed during the first day of trade, though none of the average results are statistically significant. The results reported on Table 1 are mainly statistically not different from zero. The results are consistent with the lower level of underpricing reported for closed-end funds compared to the level of underpricing reported in the literature for non fund IPOs. This could be attributed to a relatively lower degree of information asymmetry that prevails in the pricing process of investment trust new issues. The value of underlying assets of investment trust shares could be estimated reasonably accurately. Table 2 presents results for new issue discounts during the first 750 trading days. The level of average discounts for all investment trusts monotonically increases from -0.08% (premium) on day one to 14.66% on day 750 out of which most of the observed values are statistically significant at 99% level of confidence. For new issues that are effected through placing, the level of average discounts increase from 0.32% on day one to 14.79% on day 750 out of which most of the results are statistically significant at 99% level of confidence. Investment trust new issues effected through offer for subscription have traded at premiums initially, and at discounts thereafter up to trading day 750. The level of discount here increases at a slightly slower rate compared to the level of increase in discounts for offers through placing. The discount series ranges from 1.59% (premium) to 14.76% for this group of trusts. The average level of discount for investment trust new issues that are effected via offer for sale increases from 5.09% on day one to 13.02% on day 750. Though these values are 14

economically significant from the first day of trading onwards, they become statistically significant only after trading around day 400. The overall reflection of the results show that the discounts in investment trust new issues are increasing function of time over the study period. A summary of test results for the difference between investment trust new issue daily average returns and the daily returns on size and style-based matching trusts are presented on Table 3. The average returns for the new issues and the matching trusts are computed taking the investment objective of the trusts into account. Except for Europe and Venture and Development Capital group of trusts, mean daily returns for investment trust new issues exceed corresponding returns obtained by matching trusts during the three year study period. The difference is statistically significant and positive for Emerging Markets, North America, and UK Capital Growth fund styles at 5% level of significance. On the other hand, for Europe fund style, the difference in daily return compared to size and style-based matching trusts is significantly negative. Table 4 presents test results for the difference between daily average discount for investment trust new issues and the discount for size and style-based matching firms. For all groups of investment trusts except Income Growth group, the mean level of daily discount for size and style-based matching firms is higher than the discount for investment trust new issues during the first 750 days of trading. The test results for the differences are statistically significant at 1% level of significance for all fund styles except for Japan fund style. The results of average daily returns and cumulative abnormal returns during the first 750 days of trading for portfolios of investment trust new issues that are predominantly held by institutional and individual investors are reported on Table 5. I have collected data that describe ownership proportions for individual and institutional investors from the Association of Investment Trust Companies (AITC) publications and computed average percentages during the period 1983 to 1994 to determine the institutional and individual holdings. The initial 15

average return for portfolio of new issues that are predominantly owned by individual investors is positive whereas the initial average return for predominantly institutionally owned portfolio is negative. The test for the difference between these average returns have a statistically insignificant value, i.e. t-value of -1.27, whereas the corresponding test statistic for the difference between cumulative abnormal returns is significant, t-value of -2.49. Similarly, a two-sample test for the average returns and cumulative abnormal returns have t-values of - 1.08 and -2.02 respectively. Therefore, the average cumulative abnormal returns for investment trust new issues that are predominantly owned by individual investors is on average larger than that of predominantly institutionally owned new issues and the difference is statistically significant. Levis and Thomas (1995) report a statistically insignificant difference between cumulative abnormal returns of principally institutional holdings and individual holdings, which is inconsistent with the results reported in this study. The difference in the findings could be due to the determination of individual versus institutional ownership percentages. In this study we have collated data on ownership details from the publications of the Association of Investment Trust Companies, whereas, Levis and Thomas assume that issues with a level of pre-placing in excess of 25 percent are held principally by institutional investors and vice versa. CONCLUSION Initial public offerings play an important role in allocating resources in market economies. By obtaining the required funding through new issues, investment trust managers are expected to obtain a portfolio of underlying assets that are needed in order to attain the investors diversification goals. A number of studies conducted to evaluate the initial price performance of new issues 16

have observed the existence of abnormal initial returns. In spite of the fact that considerable work has been done to explain why new issues are underpriced, it does not appear that there exists a universally acceptable explanation for this anomaly in finance literature. This study reports a positive and statistically insignificant first day return for a sample that consists of 77 investment trusts. The test for the differences between returns on investment trust new issues and returns on size and style-based matching seasoned investment trusts show that except for Europe and Venture and Development Capital fund styles, new issues returns are greater than returns of matching trusts during the study period. The results are statistically significant at 5% or higher for Emerging Markets, North America and UK Capital Growth fund styles. We also examined the history of discounts for investment trust new issues during the first 750 days of trading. The discounts during this period for all new issues included in this study rise from -0.08% (premium) on the first day to 14.66% on trading day 750. The comparison of new issue discounts with the discounts for size and style-based matching funds show that, for all groups of trusts the mean level of average daily discount for seasoned matching firms is higher than the average daily discount for investment trust new issues during the study period. The test result for the differences in discounts are statistically significant at 1% level for all groups of investment trusts except Japan fund style. It is interesting to note that the disparity between the share prices and underlying asset values for investment trusts new issues emerge from the outset of trade of these assets in the market. We have reported a statistically significant difference between the cumulative abnormal returns of predominantly institutionally owned portfolios of investment trust new issues and predominantly individually owned portfolios. Up to around trading day 400 the average cumulative abnormal returns of predominantly individually owned investment trust new issues exceed that of the predominantly institutionally owned investment trust new issues. Opposite 17

results are observed during trading period after day 400. The observed result in this study is different from the statistically insignificant result reported by Levis and Thomas (1995). The difference between these two findings could be due to the determination of predominantly institutional versus individual holdings in investment trusts. In this study, ownership data provided by the Association of investment Trust Companies is used whereas, Levis and Thomas assume that issues that are effected through pre-placing in excess of 25% are predominantly held by institutions. The relationship between the returns and discount structure as well as the clientele of ownership (i.e. institutional versus individual investors) of investment trust new issues requires further investigation. 18

Table 1 Cumulative abnormal returns, investment trust new issues for the first 750 trading days. All trusts (77), issues through offer for sale (5), issues through offer for subscription (28), issues through placing (41) are reported. T-statistics are reported in parentheses. DAYS OFFER FOR SALE OFFER FORPLACING ALL ITS 1 0.00027 (0.200) SUBSCRP. 0.00003 (0.010) -0.00002 (-0.000) 0.00002 (0.010) 50 0.01760 (0.700) -0.00109 (-0.070) -0.00234 (-0.120) -0.00052 (-0.040) 100 0.08402 (2.030) -0.00660 (-0.310) 0.00147 (0.060) 0.00400 (0.250) 150 0.04550 (0.710) 0.03517 (0.980) -0.00751 (-0.240) 0.01222 (0.550) 200 0.14570 (2.120)* 0.06077 (2.030) -0.03858 (-0.990) 0.01146 (0.450) 250 0.18919 (2.090)* 0.04255 (0.890) -0.03536 (-0.960) 0.00929 (0.330) 300 0.23073 (2.110)* 0.06328 (1.100) -0.05009 (-1.250) 0.01178 (0.360) 350 0.21957 (1.530) 0.03090 (0.520) -0.02631 (-0.660) 0.01195 (0.360) 400 0.19798 (1.310) 0.04519 (0.740) -0.02684 (-0.630) 0.01561 (0.450) 450 0.21590 (1.430) 0.02331 (0.360) -0.01282 (-0.280) 0.01630 (0.450) 500 0.34318 (1.880) 0.01705 (0.310) -0.02428 (-0.520) 0.01619 (0.440) 550 0.34008 (1.660) 0.01951 (0.310) -0.00425 (-0.080) 0.02801 (0.680) 600 0.29687 (1.330) -0.00351 (-0.060) 0.01182 (0.210) 0.02528 (0.610) 650 0.31689 (1.340) -0.00903 (-0.140) 0.00685 (0.120) 0.02179 (0.510) 700 0.35455 (1.330) 0.00297 (0.050) 0.01327 (0.200) 0.03243 (0.680) 750 0.41754 (1.280) -0.02823 (-0.480) 0.01724 (0.270) 0.02709 (0.560) Note: * t-value significant at 5% level. 19

Table 2 Mean values for investment trusts new issues discounts during the first 750 trading days. All trusts (77), issues through offer for sale (8), issues through offer for subscription (28), issues through placing (41) are reported. T-statistics are reported in parentheses. DAYS OFFER FOR SALE OFFER FORPLACING SUBSCRP. 1 0.0509-0.0159 0.0032 (0.730) (-0.710) (0.170) 50 0.0617 (0.840) 100 0.0503 (0.730) 150 0.1150 (1.930) 200 0.0931 (1.410) 250 0.0395 (1.570) 300 0.0418 (1.640) 0.0209 (0.830) 0.0421 (1.420) 0.0532 (1.590) 0.0637 (2.120)* 0.0756 (2.390)* 0.0656 (2.080)* 0.0326 (1.500) 0.0488 (2.480)* 0.0677 (3.260)** 0.0923 (4.880)** 0.0919 (6.020)** 0.1019 (6.390)** ALL ITS -0.0008 (-0.060) 0.0301 (1.890) 0.0463 (2.890)** 0.0654 (3.760)** 0.0815 (5.120)** 0.0822 (5.410)** 0.0841 (5.460)** 350 0.0566 (1.730) 0.1030 (3.470)** 0.1092 (7.490)** 0.1033 (7.090)** 400 0.0600 (2.690)** 0.0894 (2.710)** 0.0929 (6.320)** 0.0893 (5.690)** 450 0.0775 (2.950)** 0.1043 (3.170)** 0.0970 (5.03)** 0.0984 (5.780)** 500 0.0727 (2.890)** 0.0950 (2.800)** 0.1229 (7.170)** 0.1090 (6.520)** 550 0.1047 (2.250)* 600 0.1383 (2.690)** 0.1026 (3.420)** 0.1143 (3.220)** 0.1071 (5.000)** 0.1291 (6.000)** 0.1052 (6.160)** 0.1241 (6.710)** 650 0.0919 (2.040)* 700 0.1079 (2.080)* 0.1332 (5.030)** 0.1533 (5.71)** 0.1297 (6.980)** 0.1427 (6.940)** 0.1285 (8.410)** 0.1444 (8.820)** 750 0.1302 (2.510)** 0.1476 (5.530)** 0.1479 (8.530)** 0.1466 (9.920)** Note: t-value significant at 5% level. ** t-value significant at 1%. 20

Table 3 Test results for difference between average holding period returns on investment trust new issues and returns on size and style-based matching investment trusts during the first 750 days of trading. Fund Style Mean Std. Dev Min Max T-value Europe -0.0024 0.020-0.113 0.058-2.72** Smaller Companies 0.0001 0.003-0.013 0.013 0.47 Japan 0.0003 0.009-0.057 0.030 0.71 Venture & Devt. Cap. -0.0009 0.012-0.050 0.063-1.72 High Income 0.0002 0.006-0.019 0.043 0.77 Emerging Markets 0.0005 0.006-0.033 0.022 1.99* North America 0.0009 0.008-0.038 0.045 2.50* Income Growth 0.0003 0.006-0.048 0.027 0.98 UK Capital Growth 0.0004 0.004-0.014 0.013 2.26* All Trusts 0.0004 0.010-0.003 0.219 1.02 Note: * T-value significant at 5% level. ** T-value significant at 1% level. These results are obtained by applying the model developed by Affleck-Graves (1995) as presented in this paper. 21

Table 4 Test results for difference between daily discounts on investment trust new issues and discounts on size and style-based matching investment trusts during the first 750 days of trading. Fund Style Mean Std. Dev Min Max T-value Europe -0.0086 0.0323-0.0900 0.0600-6.08** Smaller Companies -0.0336 0.0309-0.1000 0.0300-24.86** Japan -0.4134 7.3117-0.2500 1.0300-1.29 Venture & Devt. Cap. -0.3286 0.1793-0.6300 0.0900-41.87** High Income -0.1550 0.0494-0.2800-0.0600-71.61** Emerging Markets -0.0499 0.0540-0.1600 0.1400-21.12** North America -0.1981 0.0598-0.3500-0.0600-75.73** Income Growth 0.0418 0.0531-0.0900 0.1300 18.00** UK Capital Growth -0.0889 0.0258-0.1400-0.0300-78.72** All Trusts -0.0713 0.1842-0.2500-0.0200-8.85** Note: ** T-value significant at 1% level. 22

Table 5 Average daily excess log returns and cumulative abnormal returns for investment trust new issues that are predominantly owned by individual and institutional investors during the first 750 days of trade. EXCESS AVE. LOG RETURNS CUMULATIVE ABNORMAL DAY Predominantly Institutional Predominantly Individual Difference RETURNS Predominantly Institutional Predominantly Individual Difference 1-0.0018 0.0013-0.0031-0.0018 0.0013-0.0031 50-0.0032 0.0019-0.0051-0.0141 0.0059-0.0200 100 0.0034 0.0059-0.0025-0.0337 0.0091-0.0428 150-0.0011-0.0015 0.0004-0.0315 0.0020-0.0335 200 0.0007 0.0002 0.0005-0.0412-0.0051-0.0361 250-0.0020-0.0038 0.00018-0.0482-0.0130-0.0352 300-0.0082 0.0016-0.0098-0.0619-0.0102-0.0517 350 0.0019-0.0032 0.0051-0.0724-0.0166-0.0558 400-0.0011 0.0007-0.0018-0.0594-0.0333-0.0261 450 0.0043 0.0038 0.0005-0.0495-0.0606 0.0111 500-0.0017-0.0010-0.0007-0.0478-0.0643 0.0165 550 0.0008 0.0034-0.0026-0.0396-0.0526 0.0130 600 0.0001-0.0008 0.0009-0.0282-0.0510 0.0228 650 0.0003-0.0005 0.0008-0.0246-0.0506 0.0276 700 0.0004-0.0002 0.0006-0.0265-0.0455 0.0190 750 0.0002-0.0034 0.0036-0.0258-0.0562 0.0304 23

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Appendix 1 Investment Trusts Included in the Study 1. European Assets Trust 2. Murray Enterprise 3. Fleming Geared Growth 4. Baillie Shin Nippon 5. Govett High Income 6. Martin Currie Pacific Trust 7. Pacific Asset Trust 8. Kleinwort Development Fund 9. Sumit 10. Glasgow Income Trust 11. Thompson Clive Investment Plc 12. New Zealand IT Plc 13. Fleming High Income 14. Radiotrust Plc 15. Genesis Emerging Markets 16. Singapore Sesdaq Fund Ltd 17. Abtrust New Thai 18. First Philipine IT 19. Beta Global Emerging Markets 20. First Ireland Investment Company 21. Fleming European Fledgling 22. French Property Trust 23. Dartmoor Investment Trust 24. Jupiter European Ordinary 25. Smaller Companies IT Plc 26. Aberforth Smaller 27. Geared Income 28. Aberforth Split Level Capital 27

29. Fleming Emerging Markets 30. Gartmore Scot Capital 31. US Smaller Companies 32. Fidelity European Values 33. Schroder Korea Fund 34. East German IT 35. Henderson Eurotrust Plc 36. Broadgate IT 37. Shires High Yielding Smaller Companies 38. Warrants And Value IT 39. Eaglet IT Plc 40. Govett Emerging Markets 41. Johnson Fry Utilities 42. Perpetual Japanese IT 43. F&C Special Utilities Fund 44. Abtrust Emerging Economies 45. Throgmorton Pref. Inc. Trust 46. Govett High Income 47. Mercury World Mining 48. Herald IT Plc 49. Mercury European Privatization 50. Mithras IT Plc 51. Taiwan IT Plc 52. Fidelity Japanese Value Plc 53. Morgan Grenfell Latin American Cos 54. Schroder UK Growth Fund 55. Edinburgh New Tiger Trust 56. Undervalued Assets Trust Plc 57. Templeton Latin American 58. Edinburgh Inca Trust Plc 28

59. International Biotech Trust 60. Johnson Fry European Utilities 61. Scudder Latin American Plc 62. Schroder Japan Growth Fund 63. 3I Group Plc 64. Old Mutual South Africa 65. Invesco Japan Discovery 66. Hambros Smaller Asian 67. Abtrust Latin American 68. Asset Management investment co 69. Fidelity Special Values Plc 70. First Russian Frontiers 71. Fleming Natural Resources 72. Murray Emerging Economies 73. Prolific Income Plc 74. Baring Emerging Europe Trust 75. City Merchants High Yield 76. Fleming Chinese IT 77. F&C Private Equity 29