Earnings Management and the Long-Run Market Performance of Initial Public Offerings

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most "aggressive" quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most "conservative" quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.     

The Really Long-Run Performance of Initial Public Offerings: The Pre-Nasdaq Evidence

Financial economists have intensely debated the performance of IPOs using data after the formation of Nasdaq. This paper sheds light on this controversy by undertaking a large, out‐of‐sample study: We examine the performance for five years after listing of 3,661 U.S. IPOs from 1935 to 1972. The sample displays some underperformance when event‐time buy‐and‐hold abnormal returns are used. The underperformance disappears, however, when cumulative abnormal returns are utilized. A calendar‐time analysis shows that over the entire period, IPOs return as much as the market. The intercepts in CAPM and Fama–French regressions are insignificantly different from zero, suggesting no abnormal performance.     

The Diversification Effects of Initial Public Offerings

Abstract:  A firm's stock becomes publicly tradable through an initial public offering (IPO). This study suggests a portfolio diversification perspective to explore IPOs. We examine whether investors can gain diversification benefits by adding an IPO portfolio to a set of benchmark portfolios sorted by firm size and book-to-market ratio. Using US IPOs from 1980-2002, we find that adding a value-weighted IPO portfolio does lead to a statistically and economically significant enlargement of the investment opportunity set for investors relative to investing solely in a set of benchmark portfolios. Specifically, the Sharpe ratio of the tangency portfolio increases by 5.50% on average after including IPO stocks. Furthermore, IPOs associated with prestigious lead underwriters are the main source of this augmentation of the mean-variance investment opportunity set. Finally, our study implies that issuing IPO exchange traded funds or similar products can provide diversification gains to investors.     

Long-Run Operating Performance of Initial Public Offerings in Japanese Over-the-Counter Market (1991–2001): Evidence and Implications

This paper implements a comprehensive study on the long run post-issue operating performance of more than 700 initially public offerings (IPOs) in the Japanese over-the-counter market (JASDAQ) from 1991 to 2001. Empirical results document dramatic and continuing operating underperformance that are robust to industry or mean reversion adjustment. The diagnostic tests for behavioral explanations further uncover the salient decline of market expectations by various measures over the post issuing years, as well as the upsurge in company expansion around the offering years followed by the striking dwindle soon afterwards. These findings jointly shed light on the systematic over-optimism of market investors and managers at the time of IPO events. The multiple regression analysis also demonstrates robust evidence that is favorable for the hypotheses of “Windows of Opportunity” and market timing. In contrast, we do not find that there are significant associations between changes in alternative insider ownership and the evolution of operating performance. We suggest the explanations based on the agency problem theory are not effective in explaining the long run operating underperformance of JASDAQ IPOs.JEL Classification Code: G30, G31, D80, D84     

Initial Public Offerings and Underwriter Reputation

This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.     

Venture Capitalist Certification in Initial Public Offerings

This paper provides support for the certification role of venture capitalists in initial public offerings. Consistent with the certification hypothesis, a comparison of venture capital backed IPOs with a control sample of nonventure capital backed IPOs from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads. In effect, the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm. In addition, we document that venture capitalists retain a significant portion of their holdings in the firm after the IPO.     

Analyst Following and Equity Offerings Subsequent to Initial Public Offerings

Analyst forecast information is collected for firms following their IPOs and is used in an examination of subsequent seasoned equity offerings (SEOs). Consistent with information asymmetry arguments, the analysis indicates that a larger percentage of firms conducting SEOs within three years of the IPO are covered by financial analysts than those without SEOs, and that analyst coverage is a significant predictor of subsequent SEOs. In addition, the results indicate that long-term earnings growth forecasts are larger for firms with subsequent SEOs, but growth forecasts decline significantly following the SEOs. Further, SEO abnormal returns exhibit a significant negative relationship with earnings growth forecasts. These results are consistent with windows of opportunity arguments since they suggest that SEOs are timed to coincide with the peak of earnings growth expectations, but that market participants compensate by reacting more negatively to offerings by firms with high growth forecasts.     

Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies

We investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972–1992 and 3,407 nonventure-backed IPOs from 1975–1992. We find that venture-backed IPOs outperform non-venture-backed IPOs using equal weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure-backed IPOs. In tests using several comparable benchmarks and the Fama-French (1993) three factor asset pricing model, venture-backed companies do not significantly underperform, while the smallest nonventure-backed firms do. Underperformance, however, is not an IPO effect. Similar size and book-to-market firms that have not issued equity perform as poorly as IPOs.     

The Role of Lockups in Initial Public Offerings

In a sample of 2,794 initial public offerings (IPOs), we testthree potential explanations for the existence of IPO lockups:lockups serve as (i) a signal of firm quality, (ii) a commitmentdevice to alleviate moral hazard problems, or (iii) a mechanismfor underwriters to extract additional compensation from theissuing firm. Our results support the commitment hypothesis.Insiders of firms that are associated with greater potentialfor moral hazard lockup their shares for a longer period oftime. Insiders of firms that have experienced larger excessreturns, are backed by venture capitalists, or go public withhigh-quality underwriters are more likely to be released fromthe lockup restrictions.     

The Initial Public Offerings of Listed Firms

A number of firms in the United Kingdom list without issuing equity and then issue equity shortly thereafter. We argue that this two‐stage offering strategy is less costly than an initial public offering (IPO) because trading reduces the valuation uncertainty of these firms before they issue equity. We find that initial returns are 10% to 30% lower for these firms than for comparable IPOs, and we provide evidence that the market in the firm's shares lowers financing costs. We also show that these firms time the market both when they list and when they issue equity.     

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 .     

Underpricing, Subsequent Equity Offerings, and the Long-Run Performance of Japanese IPOs

Using data on IPOs that are issued in Japan during January 1975–March 1989, we examine the deliberate underpricing and overreaction hypotheses to explain high initial returns at offering dates. Specifically, we analyze the cross-sectional pattern of the short- and long-run performance of IPOs. The obtained results indicate that the deliberate underpricing theories which we examine are unable to explain the high initial returns on the Japanese IPOs. Furthermore, for the average of the IPOs, the empirical results are not consistent with the overreaction hypothesis. However, there is evidence consistent with the hypothesis that for a certain minority group of IPOs, the high initial returns occur due to overreactions by investors. We interpret the overall results as indicating that the high initial returns on the Japanese IPOs can be attributed to a mixture of both underpricing and investor overreaction. We conjecture that the binding regulations in Japan led to underpricing. This revised version was published online in August 2006 with corrections to the Cover Date.     

Institutional Allocation in Initial Public Offerings: Empirical Evidence

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in premarket demand and other public information. Our evidence supports book-building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book-building alone.     

Industrial Diversification and Underpricing of Initial Public Offerings

The initial public offerings (IPOs) of diversified firms, those reporting more than one business segment at the time they go public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and therefore, lowering underpricing costs. Alternatively, high quality focused firms may be signaling their value by underpricing their shares to a greater degree. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors signaling.     

我国新股发行初始收益率实证分析

在各国股票发行价格被低估是一个普遍现象,因此均存在新股发行初始收益率问题。通过对沪市的实证分析,我国新股发行初始收益率过高的主要原因不在一级市场,而是二级市场的过度投机。     

The Long Run Share Price Performance of Malaysian Initial Public Offerings (IPOs)

Abstract:  This paper investigates the long run share price performance of 454 Malaysian IPOs during the period 1990 to 2000. In contrast with developed markets, significant over performance is found for equally-weighted event time CARs and buy-and-hold returns using two market benchmarks, though not for value-weighted returns or using a matched company benchmark. The significant abnormal performance also disappears under the calendar-time approach using the Fama-French (1993) three factor model. While the long run performance of Main and Second Board IPOs does not differ, the year of listing, issue proceeds and initial returns are found to be performance-related.     

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Debt initial public offerings (IPOs) represent a major shift in a firm's financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer's maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response.     

Stabilization Activities by Underwriters after Initial Public Offerings

Prior research has assumed that underwriters post a stabilizing bid in the aftermarket. We find instead that aftermarket activities are less transparent and include stimulating demand through short covering and restricting supply by penalizing the flipping of shares. In more than half of IPOs, a short position of an average 10.75 percent of shares offered is covered in 22 transactions over 16.6 days in the aftermarket, resulting in a loss of 3.61 percent of underwriting fees. Underwriters manage price support activities by using a combination of aftermarket short covering, penalty bids, and the selective use of the overallotment option.     

Signalling and the Long‐run Performance of Spanish Initial Public Offerings (IPOs)

Abstract:   Academic research into firms that have gone public has focused on the study of two anomalies: initial underpricing and long‐run underperformance. We analyse Spanish Initial Public Offerings to provide additional evidence on the long‐run performance of IPOs and its relationship with initial underpricing. Results reveal the existence of negative long‐run abnormal stock returns, in line with the international literature. Long‐run performance presents a positive relationship with underpricing and the volume of funds obtained in seasoned offerings, in consonance with the predictions of Allen and Faulhaber (1989) , Welch (1989) and Grinblatt and Hwang (1989) .