Does aggressiveness help? Evidence from IPO corruption and pricing in China

Using a unique database of Chinese firms bribing initial public offering (IPO) regulators, we examine the impact of bribing on IPO pricing. Our findings suggest that bribing firms are younger, smaller, more volatile in their operating activities, and more generous in compensating underwriters and management. Most important, bribing firms price their IPO shares more aggressively than non-bribing firms and exhibit a higher price-to-earnings ratio, lower first-day return, and poorer post-IPO stock performance. Additional analyses suggest that both bribing and non-bribing firms exhibit negative announcement returns after the arrest of corrupt officials. However, the effect is stronger for bribing firms. Overall, bribing firms are systematically more aggressive than their non-bribing counterparts. They concede less to IPO investors and reward underwriters and management for helping them access the capital market.     

Do media connections help? Evidence from IPO pricing in China

This study examines how social connections between media executives and firms affect initial public offering (IPO) pricing using manually collected Chinese data. We find media-connected firms receive more frequent and more positive coverage than their unconnected peers, resulting in reduced IPO underpricing. However, media-connected firms have worse post-IPO market performance. Although media-connected firms have better pre-IPO accounting performance, they conduct more earnings management under the cover provided by their connected media. Additional results show that the negative effect of media connections on IPO underpricing is more pronounced for media that are not controlled by the central government and are based in the same city as the firm. It is also more pronounced for firms with less institutional ownership and non-state-owned enterprises. Our results remain valid after various robustness tests, such as alternative proxies for IPO underpricing, eliminating alternative hypotheses, matching analysis, instrumental variable analysis, as well as placebo tests. Collectively, our findings suggest that media connections compromise IPO pricing efficiency.     

IPO Underpricing, Firm Quality, and Analyst Forecasts

We find that IPO underpricing is positively related to post-IPO growth in sales and EBITDA, but is not significantly related to growth in earnings. Our evidence suggests that accrual reversals or earnings management may cause this inconsistency. We interpret the growth rates of sales and EBITDA as measures of firm quality, and conclude that our evidence supports the notion that IPO firms with greater underpricing are of better quality. Our tests on analysts' earnings forecast errors show that analysts are less positively biased in their earnings forecasts for IPO firms that have greater underpricing.     

Politically connected CEOs,corporate governance,and Post-IPO performance of China's newly partially privatized firms

Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO's political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds.     

Managerial Actions, Stock Returns, and Earnings: The Case of Business-to-Business Internet Firms

In this study we investigate the valuation implications of managerial actions undertaken by 57 Internet firms engaged in Business-to-Business (B2B) e-commerce. We classify 3,007 managerial actions undertaken by our sample firms between the firm's IPO date and September 30, 2000 into nine action categories: (1) acquisition of major customers, (2) introduction of new products and services, (3) promotional and marketing actions, (4) actions taken to address the concerns of stakeholders such as employees and the community at large, (5) announcements of technology, marketing, and distribution alliances, (6) completion of acquisitions, (7) expansion into international markets, (8) management team building actions, and (9) organizational changes.
In the short window tests, we find a significant increase in stock price volatility over a three-day event window surrounding the announcement of almost all actions suggesting that announcement of managerial actions provides value-relevant information to the stock market. In the long window tests, we use factor analysis to group the counts of managerial actions taken by each firm over its post-IPO life into two broad managerial initiatives—market penetration and organization building. These two initiatives explain a substantial portion of the cross-sectional variation in the firms' post-IPO life stock market returns beyond that explained by both reported earnings and analysts' forecasts of future earnings and revenues. Thus, investors appear to supplement relatively meager accounting information with data about the cross-sectional intensity of managerial actions in setting stock prices of B2B Internet firms.     

Management quality,certification, and initial public offerings

We empirically examine the relationship between the quality and reputation of a firm's management and various aspects of its IPO and post-IPO performance, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thereby reducing the information asymmetry facing their firm in the equity market. Therefore, IPOs of firms with higher management quality will be characterized by lower underpricing, greater institutional interest, more reputable underwriters, and smaller underwriting expenses. Further, if higher management quality is associated with lower heterogeneity in investor valuations, firms with better managers will have greater long-term stock returns. Finally, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with larger IPO offer sizes and stronger post-IPO operating performance. We present evidence consistent with the above hypotheses.     

Let us work together: The impact of customer strategic alliances on IPO underpricing and post-IPO performance

Leveraging the availability of three years of pre-IPO data and related vs unrelated-party customer information for Chinese firms, we examine the impact of customer strategic alliances (CSA) on IPO underpricing from 2007 to 2015. Our core findings suggest that IPO firms with CSAs have less IPO underpricing than those without such a relationship. The decrease in underpricing is more salient for IPO firms that have non-related-party customers. Additional analysis suggests that the core findings are primarily driven by firms with good information environment pre-IPO, including high audit quality, high analyst following, and low earnings management. We interpret the results as indicating that a good pre-IPO information environment enhances the credibility of CSA relationships and signals high IPO quality. Furthermore, we document that a CSA relationship has a positive impact on an IPO firm's post-IPO performance, especially when the firm has non-related-party customers. Overall, CSAs reduce IPO underpricing and enhance IPO returns post-IPO.     

Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance

We find evidence of income-increasing earnings management in Malaysian IPOs, which occurs primarily for IPOs during a period of severe economic stress (the East Asian crisis). Within the high-ownership-concentration Malaysian market, post-IPO control concerns also appear to constrain IPO earnings management: owners seem willing to accept reduced IPO proceeds and signaling opportunities to increase the likelihood of retaining control of the company post-IPO. The requirement to provide a profit guarantee does not seem to greatly affect earnings management. IPO companies engaging in aggressive income-increasing earnings management have significantly worse market-based performance than their more conservative counterparts, but again only for IPOs issued during the economic crisis period. Overall, the results suggest that personal liquidity concerns are an important factor in IPO decisions during the economic crisis.     

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

We examine the relation between lockup length and voluntary earnings forecast disclosures for IPOs in Singapore. Unlike firms in the United States, companies in Singapore are allowed to provide earnings forecasts in their IPO prospectuses. We find that forecasters are more likely to accept longer lockup periods, so that the lockup expires after the first post-IPO earnings announcement. Our study also shows that because the lockup agreement removes personal incentives to issue aggressive forecasts, IPO firms tend to issue conservative forecasts. Overall, our results suggest that the lockup mechanism adds credibility to the earnings forecast given in the IPO prospectus.     

The effect on stock performance of executives' emotions during IPO roadshows

This paper describes the correlation between executives' emotions expressed at IPO online roadshows and post-IPO stock performance in the Chinese stock market. The executives' emotion is quantified by face recognition models used for analyzing facial expressions during the IPO roadshows. Our results show that the more negative emotions are expressed by executives at the roadshow, the lower the short-term stock returns after IPO, and this finding is stronger for firms with limited information disclosure. These results are robust to the implementation of an instrumental variable strategy using Air Quality Index or Comfort Index of Human Body as the instrumental variable, various measures of management emotions, and the subsample analysis in which the financial firms and industries has the limited number of firms are excluded.     

Predicting Subsequent Management Forecasting Behavior at the Date of an Initial Public Offering

In this study, we examine the conditions and choices of firms at dates of initial public offerings (IPOs) as a basis for predicting their likelihood of management earnings forecast disclosure in post-IPO periods. Using a sample of 944 IPOs, we demonstrate that firms choosing to reduce IPO information asymmetries or signal issue quality by choosing prestigious underwriters, high quality auditors, and higher percentages of retained ownership tend to issue management forecasts in the post-IPO period. These relationships exist after controlling for IPO date measures of risk/stability, a construct that prior management forecast research has found to be a key determinant of the forecasting act.     

Managing News Coverage around Initial Public Offerings

We examine opportunistic behavior of initial public offering (IPO) firms in Taiwan where they are required to disclose their own earnings forecasts and are unrestricted in releasing news around the offerings. We find that prior to the offerings, IPO firms tend to report higher earnings, disclose inflated earnings forecasts, and manage more good news. News management, however, emerges as the most predominant factor in aftermarket stock prices. In particular, IPO firms have a strong preference for releasing good news related to strategy/policy that may simply provide a vision of a firm's future. Furthermore, the news releases are often forward-looking when they are positive about the firms but tend to be realized when they are negative. IPO firms also tend to engage in more window dressing activities before a larger sale of IPO shares from existing shareholders or a larger decline in insiders' holdings. Our analysis shows that managerial optimism cannot fully account for their behavior .     

Does the media help or hurt retail investors during the IPO quiet period?

We examine how the media influences retail trade and market returns during the “quiet period” that follows a firm's IPO. We find that more media coverage during this period is associated with more purchases by retail investors and that such purchases are attention-driven, rather than information-based. Further, these retail trades are negatively associated with stock returns at the firm's first earnings announcement post-IPO. Our results suggest that media coverage, combined with market frictions that limit price efficiency in the post-IPO period, leads to worse investing outcomes for retail investors.     

Pension funds and IPO pricing. Evidence from a quasi-experiment

We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors' side, leads to changes in the IPO pricing and the subsequent stock's performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies' power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.     

What do employees know? Quality perception and ‘over-satisfaction’ in firms going public

Should IPO investors pay attention to employees' views on firm quality and work satisfaction (e.g., work-life-balance)? We track employees' opinions (Glassdoor) in private firms that subsequently go public. Employees' pre-IPO views are informative: positive reviews of firm/manager quality predict stronger post-IPO stock performance, while dispersion in opinions correlates with post-IPO return volatility. A striking finding is that employees' satisfaction in excess of that predicted by firm quality opinions (over-satisfaction) is negatively related to post-IPO performance. Finally, positive initial-day stock returns enhance employees' views regarding firm quality, suggesting that IPO underpricing may secure a boost in employees' morale.     

The association between management earnings forecasts, earnings management, and stock market valuation: Evidence from French IPOs

This study investigates managers' motivations to engage in earnings management through purposeful interventions in the setting of discretionary accruals, in the context of initial public offerings (IPOs) in France. Firms issuing forecasts in their prospectuses are expected to differ from nonforecasters in the level of earnings management during the year following the public offering. Within the context of contracting theory, four research questions are addressed. First, are IPO firms issuing forecasts more inclined to manage earnings 1 year after an IPO compared to nonforecasting firms? Second, is a forecasting firm's level of earnings management conditioned by earnings-forecast deviation? Third, is earnings management by IPO forecasting firms affected by contractual and governance environments? Fourth, how do investors see through earnings management following IPO earnings forecasts, i.e., how do stock market participants value earnings components (i.e., nondiscretionary and discretionary accruals)? Our findings document that in the year following an IPO, the magnitude of earnings management is much higher for forecasters than for nonforecasters. Results also show that a firm's accrual behavior is affected by earnings-forecast deviation, but the relationship is moderated by contractual and governance constraints. Finally, it would appear that French investors do not adequately readjust the relationship between reported earnings and a firm's market value for the year in which earnings are subject to manipulations.     

The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms

The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.     

Do institutional investors reinforce or reduce agency problems? Earnings management and the post-IPO performance

This study investigates the dual roles of institutional investors in earnings management during initial public offerings (IPOs). Research suggests that institutional investors play a monitoring role in the corporate governance of firms by mitigating earnings management to reduce agency problems. However, institutional investors have incentives to opportunistically maximize their wealth by manipulating earnings when firms engage in IPOs. Results suggest that institutional investors facilitate accrual-based earnings management before IPOs but restrain earnings management after their issuance. We also find that firms with high institutional ownership experience superior post-IPO stock returns and operating performance, thereby suggesting that the capital market positively prices the monitoring function of institutional investors after IPOs, and the performance of these firms is improved. Our results are robust to controlling the endogeneity problem of institutional investors and further identifying active institutional investors.     

Are Accruals during Initial Public Offerings Opportunistic?

We find evidence that initial public offering (IPO) firms, on average, have high positive issue-year earnings and abnormal accruals, followed by poor long-run earnings and negative abnormal accruals. The IPO-year abnormal, and not expected, accruals explain the cross-sectional variation in post-issue earnings and stock returns. The results are robust with respect to alternative abnormal accruals and earnings performance measures. IPO firms adopt more income-increasing depreciation policies when they deviate from similar prior performance same industry non-issuers, and they provide significantly less for uncollectible accounts receivable than their matched non-issuers. The results taken together suggest opportunistic earnings management partially explains the new issues anomaly.     

D&O insurance and IPO performance: What can we learn from insurers?

We investigate whether a firm’s directors’ and officers’ liability insurance contract at the time of the IPO is related to insured firms’ first year post-IPO performance. We find that insurers charge a higher premium per dollar of coverage to protect the directors and officers of firms that will subsequently have poor first year post-IPO stock performance. A higher price of coverage is also associated with a higher post-IPO volatility and lower Sharpe ratio. Our results are robust to various econometric specifications and suggest that even when the high level of information asymmetry inherent to the IPO context prevails, insurers have information about the firms’ prospects that should be valuable to outside investors.