Explaining the Short‐ and Long‐Term IPO Anomalies in the US by R&D

Abstract:   Financial scholars who research the initial underpricing and long‐term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors' misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980–1995, a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long‐term performance (R&D is positively related to long‐term performance). Given the pervasiveness and constant growth of firms' R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.     

Decomposing and Testing Long‐term Returns: an Application on Danish IPOs

An improved method for measuring and testing long‐run returns is proposed. The method adjusts for the right‐skewed distribution of long‐run buy‐and‐hold by decomposing average cross‐sectional buy‐and‐hold returns into mean components and volatility components. The method is applied to initial public offerings in Denmark. The mean‐component under performance of initial public offering stocks compared to the market is 30% and significant after 5 years. Compared to matching firms the under performance of IPO stocks is 13% after 5 years but insignificant.     

Operating Performance and Stock Returns of Firms Calling Convertible Preferred Stocks

Abstract:   Using methodologies developed by Barber and Lyon (1996 and 1997 ), we examine the long‐run operating performance and stock returns of firms around in‐the‐money calls of convertible preferred stock. Our study intends to be a direct test of the hypothesis that managers call in‐the‐money convertibles when they view a decline in the firms' performance. We find no evidence that calling firms underperform non‐calling benchmark firms. On the contrary, we find mild evidence that the post‐call operating performance of calling firms is better than a carefully selected group of benchmark firms and call firms' post‐call stock returns are no worse than benchmark firms.     

Performance of Private to Public MBOs: The Role of Venture Capital

Abstract:   Using a unique dataset, we examine financial performance, and venture capital involvement in 167 MBOs exiting through IPOs (MBO‐IPOs) on the London Stock Exchange, during the period 1964 –1997. VC backed MBOs seem to be more underpriced than MBOs without venture capital backing, based on average value‐weighted returns. MBOs backed by highly reputable VCs tend to be older companies, and exit earlier than MBOs backed by less reputable VCs. The results contradict 'certification' and 'grandstanding' hypotheses supported by US data ( Megginson and Weiss, 1991 ; and Gompers, 1996 , respectively). We found no evidence of either significant underperformance, or that VC backed MBOs perform better than their non‐VC backed counterparts in the long run. However, MBOs backed by highly reputable venture capital firms seem to be better long‐term investments as compared to those backed by less prestigious venture capitalist firms. The results remain robust after using different methods to measure performance, and after controlling for sample selectivity bias.     

US, UK and European Stock Market Integration

Abstract:   This paper examines long‐run convergence between US, UK and seven European stock markets. We report evidence to suggest that while real short‐run diversification gains may occur, in general they tend to be short‐lived. However we also find that US and UK markets are relatively less bound to a common trend, which would imply that increased stock market merger activity, and any transition to the European common currency by the UK, may lead to relatively large stock market adjustments as markets adapt to these institutional changes.     

Bank Relationship and Firm Performance: Evidence From Thailand Before the Asian Financial Crisis

Abstract:   This study examines the relation between bank relations and market performance in Thailand, an economy in which commercial banks play a crucial role through lending relationship and, for a number of companies, equity ownership. Overall, bank relationships, both equity‐based and debt‐based, positively affect capital investment. However, there is a negative relation between lending relationships, both short‐term and long‐term, and market performance indicating that bank lending may not always be consistent with value maximization. There is also evidence of a positive marginal effect of bank monitoring through equity ownership on market performance. Further, the relation between bank equity ownership and market performance appears to be non‐linear with a concave function. Ownership by corporate insiders is also negatively related to bank equity ownership. Overall, the findings highlight the detrimental effects of excessive short‐term debt usage, one of the factors believed to contribute to the financial crisis in Thailand, and the marginal benefit of the equity‐based relationship on firm value.     

The Opening, Short, Medium and Long Term Performance of Canadian Unit Trust Initial Public Offerings (IPOs)

Abstract:   This paper investigates the initial pricing and performance of Canadian unit trust IPOs over a three‐ to four‐year period and then draws implications for the efficiency of the Canadian market. Overall, the results confirm the following: in the short term, unit trust IPOs are underpriced and outperform the Canadian market; in the medium term, IPOs are fairly priced and neither outperform nor underperform the Canadian market; and in the long term, IPOs are fairly priced but underperform the Canadian market. In addition, our results confirm that the size of underpricing is related to ex‐ante uncertainty about the value of the issue. Ex‐ante uncertainty proxies, namely total risk, exchange listing, relative bid‐ask spread, and relative volume of initial trade, all explain the size of underpricing. When the effects of these factors are controlled, the results confirm that Canadian unit trust IPOs are indeed overpriced in the short term but underpriced in the long term. We conclude that the Canadian unit trust IPO market appears to be inefficient in the short and long term, but over the medium, the market appears to be efficient.     

The Choice of Privatization Method and the Financial Performance of Newly Privatized Firms in Transition Economies

There is a gap between the theoretical literature which almost unanimously advocates the privatization of enterprises, as part of the solution to the commitment problem in economies in transition, and the empirical evidence regarding the best way to design a privatization program in order to secure an efficient use of resources. This paper contributes to this debate by focusing on the determinants of the financial long‐run performance of privatized firms in Poland, Hungary, and the Czech Republic. This long‐run performance is mainly influenced by the extent of retained state ownership, the choice of privatization method, and firm size.     

Characteristics Associated with the Corporate Decision to Adopt Long‐term Performance Plans

This study investigates why firms adopt long‐term performance plans. The results provide evidence that firms that adopt long‐term performance plans have higher risk as measured by Beta, have lower percentages of managerial stockholdings, have higher levels of investment in research and development expenditures two years prior to adoption of a long‐term performance plan, and experience increases in the ratio of debt to total assets in the two year period prior to long‐term performance plan adoption. Also, firms increase their investments in research and development and capital expenditures following adoption of long‐term performance plans.     

A New Application of Sustainable Growth: A Multi‐Dimensional Framework for Evaluating the Long Run Performance of Bank Mergers

Abstract:   We study the mergers of US publicly traded bank holding companies during 1987–2000 and find that the acquiring firm's sustainable growth rate is an important determinant of the cross‐sectional variation in the merged entity's long‐term operating and stock performance. The most economically significant determinants of the merged bank's abnormal stock return performance are the acquiring bank's estimated sustainable growth rate prior to the acquisition, as well as post‐acquisition changes in this growth rate, and the bank's dividend payout ratio. Our findings are robust even after controlling for several potentially confounding factors.     

Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses

Asymmetric information and mechanisms for its resolution in the initial public offering (IPO) process are subjects of extensive research and debate. In this paper, we investigate the impact of one such mechanism, namely voluntary disclosure of management earnings forecasts by issuers of IPOs, as a means of reducing asymmetric information as well as ex ante uncertainty. Our focus is on the relative importance of this voluntary disclosure mechanism on both IPO underpricing and post‐issue return performance. Our results indicate that management earnings forecasts provide important and incremental information compared to other means of reducing asymmetric information, and these disclosures appear to improve the environment of IPO issuance. For example, our underpricing results show that firms that choose to provide forecasts leave 'less money on the table' with a lower degree of underpricing. In terms of post‐issue performance, firms whose forecasts turn out to be optimistic are penalized significantly relative to other forecasters and non‐forecasters.     

Write‐Down Timeliness, Line‐of‐Business Disclosures and Investors' Interpretations of Segment Divestiture Announcements

Abstract:   This paper examines investors' anticipation and subsequent interpretations of asset write‐downs accompanying segment divestitures. Examining long‐window returns cumulated over the two years preceding the year of divestiture, we hypothesize and find that investors anticipate write‐downs of segment operating assets before divestiture and recognition occurs, with anticipation conditional on the timeliness of the write‐down and prior disclosure of the segments' operating results under segment reporting rules. Short‐window returns cumulated over the three days surrounding the announcement of the divestiture confirm that investor interpretations of asset write‐downs are similarly contingent on write‐down timeliness and prior disclosure.     

Board Share‐Ownership and Takeover Performance

Abstract:   We investigate the relation between takeover performance and board share‐ownership in the acquiring company for a sample of 363 UK takeovers completed in the period 1985–96. In investigating this relationship we pay particular attention to the composition of board shareholdings as well as their size. Thus, in addition to the analysis of total board holdings, we analyse the separate impact of CEO shareholdings and of the pattern of non‐executive and executive holdings within the board. In addition to our detailed examination of board holdings we assess the impact of non‐board holdings. Our analysis controls for a number of non‐shareholding constraints on discretionary director behaviour and for a variety of other influences on takeover outcomes including: the means of payment; acquirer size and market to book value; the relative size of the acquirer and the target; the nature of the bid in terms of hostility and industrial direction; and the pre‐takeover performance of the acquiring company. We assess performance in terms of announcement returns, long run share returns and a portfolio of accounting measures. We find evidence that overall board ownership has a strong positive impact on long run share returns and a weak positive impact on operating performance. However, much stronger effects are found when the overall board measure is split into CEO, executive, and non‐executive directors. We find strong evidence of a positive relation between takeover performance and CEO ownership, which holds for both long run returns and operating performance measures. This finding is robust to controlling for other factors that determine takeover performance and holds in a two stage least squares framework that controls for endogeneity effects. Shareholdings of other executive directors, non‐executive directors, and non‐board holdings are found to have no significant effect on takeover performance.     

The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis

Abstract:   Evidence from recent US and UK studies reveals a pattern of poor long run post acquisition performance by acquiring firms. One explanation, due to Jensen (1986) is that acquirers with an excess of free cash flow (FCF) will have a propensity to squander this on wasteful investments, including take‐overs. In this paper, using a dataset of UK take‐overs and proxies for free cash flow similar to those used by Lang, Stulz and Walking (1991) , we find no support for the FCF hypothesis and show that this conclusion is robust to the model of long run returns employed. Contrary to the free cash flow hypothesis there is evidence that acquirers with high free cash flow perform better than acquirers with low free cash flow. Although not consistent with the Jensen hypothesis, this evidence is compatible with the emerging UK evidence that shows cash flow‐to‐price measures are associated with market returns.     

Pursuing Value Through Liquidity in IPOs: Underpricing,Share Retention,Lockup, and Trading Volume Relationships

We argue that in an initial public offering (IPO), pre-IPO owners make decisions regarding underpricing, share retention, and share lockup simultaneously and optimally to maximize aftermarket liquidity. We predict that underpricing fosters higher trading volume in both the short run and the long run. Also, liquidity is negatively related to the proportion of shares retained by pre-IPO owners, ceteris paribus, so IPO underpricing should be positively related to the proportion of shares retained, as an offset. We document evidence consistent with these predictions. In addition, we find that, for IPOs with a lockup restriction, underpricing is more substantial and the positive relation between share retention and underpricing is much stronger. We also find that the relationship between underpricing and trading volume is stronger for IPOs with lockup. IPOs with lockup have higher trading volume, and a significant portion of this difference is associated with the effect of underpricing.JEL Classification: G10, G14, G24     

Determinants of the Capital Structures of European SMEs

The aim of this paper is to examine the degree to which the determinants of SMEs' capital structures differ between European countries. The study is based on data for four thousand SMEs, five hundred from each of eight European countries. Regressions were run using short‐term and long‐term debt as dependent variables and profitability, growth, asset structure, size and age as independent variables. A key feature of this paper is the use of restricted and unrestricted regressions to isolate the country‐effect from the firm‐specific‐effect. The results show that variations are likely to be due to country differences as well as firm‐specific ones.     

A note on transaction costs and the interpretation of dividend drop‐off ratios

In a recent edition of this Journal, Bartholdy and Brown (1999) presented an analysis of the ex‐dividend share price behaviour of shares listed on the New Zealand Stock Exchange. The authors conclude that their results are consistent with the tax clientele effect (driven by long‐term investors) and that there is little or no support for the short‐term trading hypothesis. Our purpose is to highlight the importance of transaction costs in analyses such as Bartholdy and Brown's. We argue that their results have an alternative interpretation because their analysis excludes the impact of transaction costs. We extend their model to include transaction costs and show that their results are not necessarily inconsistent with the short‐term trading hypothesis. A critical point of our analysis is that, in the presence of transaction costs, the equilibrium drop‐off ratio for dividend strip traders will be less than one, and, in some cases, can be less than the equilibrium drop‐off ratio for long‐term investors.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Tests of Weak‐Form Efficiency of the Dhaka Stock Exchange

Abstract:   Conflicting evidence on weak form efficiency of the Dhaka Stock Market appears to stem from the use of monthly versus daily data, structural changes after the 1996 market crash, and the use of tests with or without heteroscedasticity adjustment. Heteroscedasticity‐robust tests indicate short‐term predictability of share prices prior to the crash, but not afterwards. Although a heteroscedasticity‐robust Box‐Pierce test was used by Lo and MacKinlay (1989) in their simulations, our study appears to be the first to apply this test to stock prices. Typical rejection of weak‐form market efficiency by the usual autocorrelation tests may be reversed by a heteroscedasticity‐robust test.