Debt financing,venture capital,and the performance of initial public offerings

We examine the roles of two financial intermediaries, lenders and venture capitalists, in a sample of more than 6000 IPO firms during 1980–2012. Venture capitalists and lenders generally fund different types of firms and, on average, are substitutes; however, in some instances we observe interactions and complementary roles between the two funding sources. Firms with high debt have lower valuation uncertainty, and lower initial day returns than those backed by venture capital. However, firms with high debt levels underperform in the long-run, especially those without venture capital. We provide some evidence that firms backed by reputable venture capitalists perform better.     

Investor sentiment and the underperformance of technology firms initial public offerings

This research examines the effect of individual and institutional investor sentiment toward the overall market at the time of Initial Public Offering (IPO) on the aftermarket performance of technology IPO shares. The study which is based on 1346 U.S. technology IPOs completed between 1992 and 2009 shows that the irrational component of individual investor sentiment negatively affects shares’ aftermarket performance: the more optimistic individual investors are at the time of IPO, the lower the shares’ aftermarket return. On the other hand, the rational component of institutional investor sentiment does not affect the shares’ short-run performance, yet positively affects their long-run performance. In contrast with prior theoretical models this paper shows that investor overconfidence positively affects technology IPO shares’ aftermarket performance. The paper extends the behavioral finance literature by providing evidence on the negative role played by noise trading in affecting technology and biotechnology IPO shares performance.     

The long-run performance of initial public offerings and its determinants: the case of China

Existing research finds poor long-run performance of Initial Public Offerings (IPOs), particularly in the US. Using company IPO data from China’s Shanghai Stock Exchange, we find comparable levels of underperformance. In line with US results, initial overoptimism and the size of the offer are important explanatory factors for this underperformance. Additional variables include the earnings per share prior to listing, the decision to switch investment banks at the time of issue and whether the firm issues shares that can be purchased by foreign investors. These factors suggest that firms in China are able to manipulate the issue process. In the context of Chinese economic reforms, of particular note is the positive performance impact of the government shareholding after issue, which supports a signal argument in relation to continuing government support. As a result, we provide an interesting insight into the influence of the regulatory environment and economic transition on the long-run performance of IPOs in China.

Going-concern initial public offerings

We study the relation between audit reports and the capital-raising activities of small business by studying the role of going-concern (GC) audit opinions in IPOs. After controlling for other effects, we find that the presence of a GC opinion is positively related to whether a stock delists (for deleterious reasons) within two years of IPO. We also find that GC IPOs suffer less first-day underpricing. Based on Rock (1986), this implies that firms with GCs have less ex ante uncertainty in the sense that the information conveyed by a GC helps uninformed investors estimate the dispersion of secondary market values.     

Earnings management and initial public offerings: Evidence from the Netherlands

This paper presents one of the first studies of earnings management by initial public offering (IPO) firms in a European country. Using a sample of 64 Dutch IPOs, we investigate the pattern of discretionary current accruals (DCA) over time. We find that managers manage their company's earnings in the first year as a public company but not in the years before the IPO. We also examine the impact of earnings management on the long-run stock price performance of IPOs. We find a negative relation between the size of the DCA in the first year as a public company and long-run stock price performance over the next 3 years. A number of additional tests support these findings.     

The underpricing of initial public offerings: A theoretical and empirical reconsideration of the adverse selection hypothesis

In this paper we generalize Rock's theory regarding the underpricing of IPOs. In Rock's model, informed investors have a firm-specific informational advantage pertaining to a firm's cash flow. We derive the new results that the level of beta and the size of the market risk premium positively affect underpricing. These implications extend the adverse selection theory and further distinguish this theory from the current state of signalling theories of underpricing. The results put the “hot and cold” issue markets phenomenon in a theoretical context. Empirical results are consistent with the theoretical propositions and provide support for Rock's theory of underpricing.     

Litigation risk, strategic disclosure and the underpricing of initial public offerings

Using word content analysis on the time-series of IPO prospectuses, we show that issuers tradeoff underpricing and strategic disclosure as potential hedges against litigation risk. This tradeoff explains a significant fraction of the variation in prospectus revision patterns, IPO underpricing, the partial adjustment phenomenon, and litigation outcomes. We find that strong disclosure is an effective hedge against all types of lawsuits. Underpricing, however, is an effective hedge only against Section 11 lawsuits, those lawsuits which are most damaging to the underwriter. Underwriters who fail to adequately hedge litigation risk experience economically large penalties, including loss of market share.     

Single versus multiple banking: lessons from initial public offerings

A vast research in banking addresses the question of the costs and benefits of multiple bank relationships versus a single bank relationship. Although no clear-cutting conclusion is reached, several contributions suggest that multiple bank relationships might lead to a sub-optimal level of monitoring, compared to a single bank relationship, as a result of free riding and coordination problems. We take a novel approach to tackle this research question, by looking at the role, if any, played by the number of lending relationships in initial public offerings (IPOs). We look at the short-term performances of IPOs as measured by underpricing and find that firms that go public with multiple bank relationships exhibit more underpricing than those that go public with a single bank relationship. This finding is independent of the number of bank relationships and/or whether any of the lending banks also acts as underwriter in the offering. We interpret our results as suggesting that the market attributes a weaker certification role to multiple bank relationships because of their less effective monitoring of IPO firms.     

Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.     

Long-run stock performance of German initial public offerings and seasoned equity issues

We estimate the long-run stock performance after initial public offerings (IPOs) in the German capital market with a larger sample than prior studies and alternative benchmarks (the equally and the value-weighted market portfolio, size portfolios and matching stocks). In addition we present the first results on the long-run performance after seasoned equity issues (SEOs) in Germany. We conclude that size portfolios and matching stocks are better benchmarks than market portfolios. Using buy‐and-hold abnormal returns, we estimate that German stocks involved in an IPO or in a SEO, on average, underperform a portfolio consisting of stocks with a similar market capitalization by 6% in three years. This is considerably less than the underperformance after IPOs and SEOs in the US market reported by Loughran and Ritter (1995) and the underperformance after IPOs in Germany reported by Ljungqvist (1997). We also show that the apparent underperformance of the 1988–1990 IPO cohort discussed by Ljungqvist (1997) disappears when the abnormal performance estimate is based on size instead of market portfolios.     

The waiting period of initial public offerings

The length of time it takes an IPO firm to go public (called ‘waiting period’) reflects multiple layers of scrutiny from underwriters, auditors, venture capitalists, institutional investors, and regulators. Accordingly, we show that the waiting period is a good barometer of ex ante uncertainty about future cash flows and that it has predictive power after the firm goes public. We find that firms marked by short waiting periods experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket. We also report that smaller firms are taking longer to go public after SOX Act, thus providing justification for the 2012 JOBS Act.     

Value versus growth in IPOs: New evidence from Finland

This paper focuses on the underpricing and the short- and long-run performance of Finnish initial public offerings (IPOs). More specifically, we examine whether there are differences between the performance of value and growth stock IPOs in the Finnish stock market. Our results indicate that growth stock IPOs are slightly more underpriced and have marginally higher short-run returns. However, value stock IPOs are better long-run investments and provide higher returns during the first three years in the aftermarket. We also document that the apparent long-run underperformance of Finnish IPOs can be largely explained by size, book-to-market, and momentum effects.     

Earnings management of initial public offering firms: evidence from regulation changes in China

Discretionary current accruals of Chinese initial public offering (IPO) firms decreased after the abolition of fixed‐price offering systems that directly linked offering price to reported earnings. Results suggest IPO firms that decrease managerial ownership manage earnings upward during the fixed‐price offering period, but this relationship disappeared after the introduction of a book‐building system. We also find that bank debt is negatively related to discretionary current accruals during the fixed‐price offering period, but no relation exists for the book‐building period. Leverage has a significant positive relationship with earnings management. However, this finding is potentially attributable to nonoffering price objectives or endogeneity biases.     

Investment trust IPOs: Issuing behaviour and price performance Evidence from the London Stock Exchange

In this paper, we document an average first day return of 1.91 percent for the population of 105 investment trust IPOs during the period from January 1984 through August 1992 on the London Stock Exchange. This is the first study that finds evidence of significant first day returns for a sample of closed-end fund IPOs. The results also suggest that investment trust IPOs are subject to ‘hot’ issue periods. These tend to occur when there is a marked narrowing in the discounts of seasoned investment trusts. Initial gains are, however, short lived; by the end of their first year, investment trust IPOs substantially underperform a number of relevant benchmarks and, on average, trade at discounts to their underlying net asset values.     

Venture capital‐backed and commitments test entity initial public offerings on the ASX

This paper examines initial returns to venture capital (VC) backed and non‐VC‐backed IPO companies on the Australian Securities Exchange (ASX). We find support for the theoretical predictions of Rossetto (2008), by providing empirical evidence that VC‐backed CTE IPOs exhibit greater wealth losses to pre‐IPO investors compared to non‐VC‐backed CTE IPOs during hot issue markets. We also find that greater retained ownership increases IPO underpricing. In the subsample of IPOs with below the median level of retained ownership IPOs, VC‐backed CTE IPOs and VC‐backed, non‐CTE IPOs have significantly higher levels of underpricing and wealth loss compared to non‐VC‐backed, non‐CTE IPOs.     

The effect of ownership and control on market valuation: Evidence from initial public offerings in The Netherlands

This study examines whether ownership and control variables influence market valuation at the time of the initial public offering (IPO). Using a sample of 118 IPOs on Euronext Amsterdam during the period 1984-2001, we find support for this conjecture. Management stock ownership, the proportion of independent supervisory directors, and board monitoring by large nonmanagement hareholders are positively related to IPO firm value. These factors are successful in reducing agency costs. We also find that supermajority management stock ownership and takeover defenses lower IPO firm value. Therefore, these mechanisms increase agency costs, resulting in a lower price that investors are willing to pay for IPO shares.     

Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK

In contrast to the US practice, rights issues is the predominant method of raising additional equity capital in the London market. the UK evidence for the period 1980-1991 provides no support to the hypothesis that IPO firms deliberately underprice to signal their quality and facilitate subsequent seasoned equity offerings. the level of initial returns is related neither to the size of the issue nor to the price response at the announcement of a rights issue. the results demonstrate, however, that firms with higher first day returns are quicker in returning to the market for additional equity capital. There is also strong evidence to suggest that the announcement of a seasoned equity offering follows a period of significant rises in the stock prices of reissuing firms. Such gains are, however, dissipated quickly in the 18 months after the announcement of the seasoned equity offering. the level of underperformance is particularly pronounced for firms that raised relatively small subsequent amounts of capital in relation to funds raised at the initial offering. Thus, the paper documents a pattern of post-issue behaviour which is fundamentally similar for both unseasoned and seasoned equity offerings.     

Return and risk in initial public offerings of both shares and warrants

In the past few years there has been an increasing number of new issues of shares of common stock together with warrants intended to raise interest in initial public offerings of relatively young, growing firms. In this study we examine the pricing efficiency of stocks and warrants offered simultaneously to the public as a single unit. We present a model for evaluating the warrants in such offerings and test it empirically against data from the Tel-Aviv Stock Exchange, where such offerings have become standard. We find that the issued units are usually undervalued, allowing for significant abnormal positive returns. But, while the warrants are usually underpriced, the stocks are overpriced. Largely consistent with the evidence from other financial markets around the world, we also find abnormal negative rates of return in the long run.     

Determinants of intellectual capital disclosure in prospectuses of initial public offerings

Intellectual capital is recognised as the new economic era’s pivotal factor underlying value creation. Deficient and inconsistent intellectual capital reporting is escalating information asymmetry between informed and uninformed investors. This provides fertile ground for informed investors to extract higher abnormal returns and higher wealth transfers from uninformed investors, particularly during a firm’s initial public offering (IPO). This study investigates the association between intellectual capital disclosure levels in prospectuses of 444 IPOs listing on the Singapore Stock Exchange between 1997 and 2006, and three potential explanatory determinants: (1) ownership retention; (2) proprietary costs; and (3) corporate governance structure. Statistical analysis supports our conjecture of a positive association between intellectual capital disclosure and ownership retention. We also find, consistent with expectations, a negative influence of proprietary costs on the positive intellectual capital disclosure – ownership retention association. However, contrary to predictions, we do not find an IPO’s corporate governance structure significantly influences the negative interaction of proprietary costs on the ownership retention – proprietary cost association. Our findings have implications for various parties such as regulators who may impose unnecessary costs on issuers if they introduce mandatory disclosures whilst lacking an understanding of the factors influencing intellectual capital disclosures.     

Uncertainty,prospectus content,and the pricing of initial public offerings

This study reports evidence on the relation between the pre-market due diligence and book-building processes in determining initial public offering (IPO) share prices. The evidence suggests that there is a complementarity between these processes that has not been discussed in the literature. We find that when there is greater uncertainty regarding the value of the shares, more information of the type that investors are likely to have a comparative advantage in evaluating tends to be included in the offering prospectus prior to the roadshow. The increase in these disclosures is, in turn, associated with greater information discovery during book-building.