The aftermarket performance of small firm initial public offerings

The dream of many entrepreneurs is to some day take his or her growing small firm public and, to thereby become the CEO of a publicly-traded corporation. Currently, entrepreneurs are continuing to utilize initial public offerings (IPOs), as a viable source of venture financing. IPOs also represent a viable mechanism for harvesting venture capital and entrepreneurial investments. The touted entrepreneurial benefits of taking a company public include the abilities to borrow additional funds; return to the public equity market; negotiate mergers without depleting cash; the potential for enhanced personal wealth and so forth. Investors in small firm public equity issues are often motivated by the potential for discovering another Apple Computer, or perhaps an IBM at the “ground floor.”This study empirically examines the aftermarket returns of small publicly-held firms that have issued initial public offerings. Aftermarket returns refers to stock returns immediately after a stock begins trading. The study specifically examines two questions. First, “Is there a positive risk-return relationship for small firm aftermarket returns, where higher firm risk will generate higher aftermarket return?” Second, “Will aftermarket returns show on industry effect, where certain industries will automatically generate higher returns?” Answers to these questions will affect the strategic financial alternatives available to entrepreneurs both before and after going public and, will also affect the decisions of investors interested in financing small public corporations.The research findings indicate that entrepreneurs planning to take younger firms public will probably not have available to them numerous subsequent financial alternatives, utilizing corporate stock, if the true aftermarket performance of their stock is taken into consideration. Likewise, investors in small firm public issues may also be disappointed in the aftermarket performance of younger firms. A positive risk-return relationship, where age was a proxy measure of risk, did not exist. This was true even though the initially quoted returns of these same younger firms may have been substantial. On the other hand, the aftermarket performance of older firms is typically favorable.Finally, the study suggests that neither entrepreneurs nor investors should bet solely on a particular industry categorization to “carry” their aftermarket stock performance. While certain industries indicated significant positive initial returns, aftermarket returns based on industry classification were generally not statistically significant. Investors should therefore always exercise firmspecific due diligence and research before investing in small firm public equity issues, since the variance of their aftermarket market returns tends to be large.     

Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

I use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.     

The role of internationalization on the IPO performance of service firms: Examination of initial returns,long-run returns,and survivability

This study examines the effect of internationalization on the initial and long-run IPO performance of service firms. The study discusses that pre-IPO internationalization of service firms contributes to the explanation of long-discussed IPO underpricing phenomenon, and underperformance of IPOs in the long-run. Sample of the study includes 1822 IPO issues conducted by US service firms between 1980 and 2009. Findings of the study suggest that international service firms leave less money on table in their IPOs compared to domestic service firms by providing significantly lower first day returns to their investors on their first day of public trading. Moreover, our findings provide evidence that 3-year cumulative abnormal returns and 3-year buy-and-hold returns of international service firms are significantly higher than domestic service firms, and international service firms outperform domestic service firms in both operating return on assets and operating cash flows in the post-IPO period. Lastly, the study documents that survival rate of service firms subsequent to an IPO issue increases with pre-IPO internationalization.     

Venture capitalist participation and the performance of Chinese IPOs

We examine the effects of venture capitalist participation in IPOs in China and find that VC-backed firms are more underpriced than non-VC firms. Both VC-backed and non-VC-backed IPOs experience long-run underperformance; however, VC-backed IPOs perform significantly better. The higher level of underpricing and cost of going public for the VC-backed firms are consistent with the monitoring role of the VC. Finally, the fact that VC reputation is associated with lower underpricing is consistent with the reputational capital theory, which asserts that reputable VCs use their expertise and experience to minimize underpricing in order to preserve their reputational capital.     

Does corporate hedging affect firm valuation? Evidence from the IPO market

Focusing on the IPO market, we examine the influence of corporate hedging on firm valuation. Consistent with the argument that hedging reduces information asymmetry, we find that hedging IPO firms are associated with lower price revisions and underwriting fees. More important, hedging reduces IPO underpricing, especially for informationally opaque firms. This provides strong evidence that corporate hedging increases firm valuation. We also show that corporate hedging lowers aftermarket idiosyncratic volatility, enhances aftermarket liquidity, and improves the long-term performance of IPO firms. We use both an instrumental variable approach and a regulation change on derivatives supply to address endogeneity concerns.     

Venture Capitalists, Syndication and Governance in Initial Public Offerings

This paper examines the development of effective boards in venture capital (VC)-backed initial public offerings. It argues that VC-backed IPOs suffer from two sets of agency costs which are related to principal–agent and principal–principal relationships between the founders and members of the VC syndicate. Using a unique sample of 293 entrepreneurial IPOs in the UK it shows that VC syndicates invest in relatively more risky firms. VC-backed IPOs have more independent boards than IPOs with no VC involvement, with board independence being higher in syndicated VC-backed firms. These results are consistent with assumption that these governance factors are used to mitigate agency costs associated with VC involvement in IPO firms. We also find that in syndicated IPOs there is a higher equity presence of passive private equity firms investing alongside VC firms.     

Underpricing in new equity listings: A conceptual re-appraisal

This paper appraises the existing approaches used to measure the underpricing of Initial Public Offerings (IPOs). The conceptual problems surrounding the measurement of IPO underpricing are noted to be significant and suggest that underpricing costs and returns may need to be evaluated with reference to the particular characteristics of individual offerings. For example, details of the number of primary shares on offer, the effect on corporate control of listing, the information effects resulting from listing, the liquidity of shares pre-offer, the impact of speculative activity on post-listing firm value and, finally, the actual dating of an IPO may all need to be considered. In short, the existing measures suggested for IPO underpricing do not allow managers/owners in IPO firms or investors in IPO stocks to assess, unequivocally, the respective costs and returns from underpricing in such issues.The authors would like to acknowledge the helpful comments of an anonymous reviewer.     

Do Private Equity Investors Create Value for Italian Initial Public Offerings?

This study analyses the role of private equity (PE) backing in initial public offerings (IPOs) using a dataset of 227 companies that went public on the Milan Stock Exchange between January 1995 and December 2007. The evidence rejects the certification and monitoring hypotheses and provides considerable support for the market power hypothesis. In accordance with Chemmanur and Loutskina (2006) , we suggest that PE investors exploit their relationships with the key IPO market players to attract attention to the IPOs of firms backed by PE, thus obtaining a higher equity valuation (both in the IPO and in the secondary market).     

The Effects of Industrial Policy Support on IPO Performance: Evidence from Listed Enterprises of the Chinese SMEs Board

This study examines the effects of industrial policy support on the initial public offering performance of listed enterprises on the Chinese small and medium‐sized enterprises board. We observe that industrial policy support has a positive effect on IPO performance. In addition, we provide evidence that after the financial crisis, the decrease of IPO underpricing resulting from policy support implemented three months before firms going public is less than that deriving from the policy support issued six months prior to listing, whereas the effect of industrial policy support on post‐IPO operating performance has increased after the financial crisis.     

The survival and success of Canadian penny stock IPOs

We analyze the survival and success of a large sample of Canadian penny stock initial public offerings (IPOs), launched mostly by small and unprofitable firms from 1986 to 2003. The failure rate of these IPOs is lower than in the US for larger IPOs, probably because of lax delisting rules and the market’s capacity to refinance non-profitable firms. The survival of new issuers is significantly associated with their characteristics at the IPO and with the level of initial listing requirement they meet. The involvement of reputable intermediaries in the IPO process mitigates this effect. Success, estimated by the graduation to a senior exchange, is not linked to the financial conditions at the IPO. Overall, Canada seems to have developed a particular strategy to finance the growth of small firms even if the propensity to fail of firms listed at a pre-revenue stage is very high.     

媒体关注对IPO抑价影响路径探究——基于创业板的经验证据

文章重点探讨媒体关注对我国IPO抑价影响的具体路径。基于上市公司IPO及之前的媒体信息,选取创业板IPO公司作为研究样本,从行为金融学视角对抑价理论进行实证检验。经路径研究发现,高媒体关注通过配置投资者“有限注意力”导致高发行抑价,在个人投资者比例较高的创业板市场上,媒体关注对IPO抑价的影响路径是基于情绪效应而不是认知效应。     

Multinational Corporate Power,Influence and Responsibility in Global Supply Chains

This study examines the influence of underwriter–auditor relationship (UAR) on pre-initial public offering (IPO) earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market.     

Government Public Policy, Regulatory Intervention, and Their Impact on IPO Underpricing: The Case of Malaysian IPOs

This study examines the impact of government initial public offering (IPO) regulation intending on promoting public policy. The study examines the results of the implementation of a Malaysian government policy in 1976, which mandated that at least 30 percent of any new shares on an IPO offer be sold to the indigenous Bumiputera population or to mutual funds owned by them. The study examined the short-run and long-run underpricing of Malaysian IPOs and found that Malaysian IPOs are highly underpriced compared to IPOs in developing countries, creating a market microstructure effect. It also confirmed that the Malaysian government's regulatory intervention in spite of noble public policy intentions appeared to be the significant factor for the emergence of an average first-day underpricing increase of Malaysian IPOs by 61 percent during the period after the regulatory economic policy was instituted. Furthermore, the study found that this high underpricing persists even for the long run, in contrast to the long-run performance of IPOs in the United States.     

Do Venture Capitalists Add Value to Small Manufacturing Firms? An Empirical Analysis of Venture and Nonventure Capital‐Backed Initial Public Offerings

We examine a set of small, venture capital (VC)-backed manufacturing firms and compare it to a control sample of nonVC-backed manufacturing firms going public between 1990 and 1996. We use the degree of underpricing, three-year sales growth, three-year cumulative stock return, and three-year survivability as measures of success. First, we test if the presence of VC backing results in significant differences in success between the two samples. Next, we test if certain VC and deal characteristics are discriminators within the VC-backed sample of firms. Despite previous literature, which argues for either inferior or superior VC post-initial public offering (IPO) performance, these tests indicate no significant differences between VC- and nonVC-backed firms. Additionally, it is found that VC and deal characteristics are not discriminating factors within the VC sample.     

Does Choosing a Section of the Stock Exchange Matter in the IPO of SMEs? The French Case

The empirical study presented in this article is localized in between two major fields of research in finance: underpricing of Initial Public Offerings (IPOs) and financial markets integration or segmentation.This empirical work proves that the institutional and political intention, translated in a segmentation of financial markets dedicated to Small and Medium-sized Enterprises has an impact on the financial environment of SMEs and consequently on the level with which IPOs are underpriced. The differences between companies listed on both parts devoted to SMEs correspond to the ambition of the French Stock Exchange. And these differences result in surprising pricing: a lower profile in risk does not mean a better valuation. At least, our study on IPOs of SMEs could help managers to choose the appropriate section for their firm.     

On the Demand Elasticity of Initial Public Offerings: An Analysis of Discriminatory Auctions

We analyze 52 Taiwanese IPOs that were introduced through discriminatory auctions (you pay what you bid) between December 1995 and October 1998. The evidence suggests that the elasticity of demand for IPOs in Taiwan through discriminatory auctions is relatively flat. The elasticity is significantly negatively correlated with bidders’heterogeneity, which is consistent with the investor heterogeneity hypothesis. We also find that the average winning bidders earn a significant average abnormal return of 7.83% in the post–IPO market. The post–IPO market abnormal return is positively correlated with the demand elasticity, the idiosyncratic risk of stock returns and the institutional participation rate, and is negatively correlated with the auction clearing price, which is consistent with theory. Finally, there is evidence that informed investors have an incentive to shade their demand for IPOs to avoid the winner’scurse. The most aggressive bidders (the top 5% of the winning bidders) on average incur a small loss of 1.64% (not significant) in the market–adjusted initial returns.     

The Aftermarket Performance of Initial Public Offerings: The Brazilian Experience

ABSTRACT

This article analyzes the behavior of share prices in the first aftermarket year at the moment the company goes public for the first time, specifically in the case of Brazil. First, we present evidence drawn from the international capital markets and how returns may be characterized. Next, we analyze current Brazilian capital markets and returns on shares for 30 companies that went public in the country between January 2004 and July 2006. We found that Brazilian initial public offerings averaged large positive returns both in the short-term and for a one-year period.

RESUMEN. Este trabajo busca evidenciar cómo el precio de las acciones en IPOs tiende a comportarse en el mercado secundario durante el primero año de negociaciones, específicamente en el caso brasileño. En primer lugar, se presentan las evidencias en el mercado internacional de capitales y mostramos que tipo de retornos se suele obtener. Luego, se lleva a cabo un análisis del mercado de capitales brasileño y de la rentabilidad en 30 IPOs, ocurridos entre enero de 2004 y julio de 2006 en el país. Se nota que el desempeño de IPOs en Brasil tiene fuertes tendencias positivas, tanto para el corto plazo como para un año.

RESUMEO. Este estudo analisa o comportamento dos preços de ações no primeiro ano após a abertura de capital de uma empresa, especificamente no caso do Brasil. Primeiramente, apresentamos dados do mercado de capitais internacionais e como os retornos tendem a ser. Depois disto, analisamos o mercado de capitais brasileiro e os retornos das ações de 30 empresas que abriram o capital no país entre janeiro de 2004 e julho de 2006. Constatamos que os lançamentos de ações (IPOs) brasileiros proporcionaram, em média, retornos positivos grandes a curto prazo e também por um período de um ano.     

The Distribution of IPO Holdings Across Institutional Mutual Funds

We examine initial public offering (IPO) holdings in the mutual funds of four large investment banks and five large non-investment banks during the period 1997 through 2002. Investment banks hold IPOs with different characteristics than IPOs held by non-investment banks, and they also tend to hold IPOs in different types of funds than non-investment banks. We classify holdings as to whether the IPO lies outside or inside the fund’s objective. Investment banks hold IPOs outside the fund objective in 27% of the fund/IPO pairs while non-investment banks hold outside their objective in just 5.4% of fund/IPO pairs. We see significant differences in IPO underpricing for both groups as well. For example, when non-investment banks hold IPOs outside a large capitalization fund objective, they select IPOs with 52% higher underpricing as measured by first-day returns.     

中国A股市场发行抑价问题分析

首次公开发行(IPOs)抑价是世界各国股票市场普遍存在的一种现象,而这种现象在中国A股市场又显得十分突出。从理论和实证的角度对可能与我国A股市场发行抑价率相关的一些因素及造成高发行抑价率的根本原因作一简要的分析。主要对IPOs抑价现象作了一些研究;以2000年在沪深两市发行并上市的122只A股为样本,实证地分析可能影响发行抑价率的一些因素;从理论上探讨了造成我国A股市场高发行抑价率的原因。