Do Excess Funds Make Financially Constrained Firms Better Off? Evidence from IPOs in China

Firms in transition economies often suffer financial constraints. In initial public offerings (IPOs), however, many newly listed Chinese firms raise funds in excess of what is originally planned. This paper examines whether these excess IPO funds are wasted on value-destroying spending or enable firms to take growth opportunities. After controlling for the endogeneity issue, we find that Chinese firms with excess IPO funds have better post-IPO operating performance, especially those with limited financing channels. In revealing the mechanism, we find that excess IPO fundraising alleviates financial constraints and reduces the cost of debt.     

SHORT‐TERM EFFECTS OF PRIVATIZATION ON OPERATING PERFORMANCE IN THE CZECH REPUBLIC

In this article I use a sample of 178 Czech firms that were in the first wave of voucher privatization to test changes in efficiency and profitability. Based on a previous study's methodology, nonparametric tests reveal that efficiency and profitability decreased immediately following privatization. This is in contrast to earlier studies that find privatization increases these measures. Changes in firms' operations do not vary significantly by size or ownership but do vary by industry type, with nonmanufacturing firms having more positive (or less negative) changes after privatization. Evidence indicates that in spite of the disappointing findings, positive operating performance changes are taking place, such as a decrease in employment. JEL classification: G32, L33, 052     

The Impact of Strategic Investment Choices on Post-Issue Operating Performance and Survival of US IPO Firms

Abstract:  We examine the impact of strategic investment choices at the time of the IPO on: (i) the post-issue operating performance and (ii) the likelihood of failure and time-to-failure of newly public US firms. Our post-issue operating performance analysis uses various performance metrics, benchmarks, and expectation models. Overall, our evidence indicates that the extent of diversification and industry-adjusted capital expenditures intensity are generally positively related to changes in operating performance. We do not, however, document a consistent relation between industry-adjusted R&D expenditures and changes in operating performance. The results from our survival analysis suggest that pre-issue managerial commitment to R&D spending and developing diversified product lines enhance the ability of IPO issuing firms to remain viable for longer periods of time. Our study highlights the impact of various managerial investment decisions on the subsequent performance of newly public firms.     

Do Privatization IPOs Outperform in the Long Run?

This paper investigates the long-run stock returns of privatization initial public offering (IPO) firms using a sample of 241 privatization IPOs from 42 countries during the period 1981-2003. We compare one-, three-, and five-year holding period returns of privatization IPOs to those of the domestic stock market indices and to size and size- and book-to-market equity ratio (BM)-matched firms from the same countries. Consistent with previous studies, we find that privatization IPOs significantly outperform their domestic stock markets in the long run. However, they show less consistent abnormal long-term stock performance relative to their size or size- and BM-matched benchmark firms.     

Abnormal operating performance in IPOs: Does public float matter?

Using a unique dataset of privately held firms and companies that went public on the European and Asian stock exchanges between 2007 and 2011, we find that on average, newly listed firms experience negative abnormal operating performance in the years after the IPO. Furthermore, we document a nonlinear relation (inverted Ushaped) between public float and post-IPO abnormal operating performance. We interpret this quadratic relation as evidence that for each level of public float, factors that facilitate the convergence of interest between insiders and outsiders (namely, monitoring effects) and entrenchment factors (namely, agency problems) are both at work. Specifically, we suggest that at low levels of public float, increasing the float intensifies agency problems less than it increases monitoring effects. However, at a high level of public float, the situation is inverted, and increasing public float intensifies agency problems much more than it facilitates the convergence of interest between insiders and outsiders.     

Earnings management by classification shifting and IPO survival

The study examines the effect of earnings management by classification shifting on firm success, focusing on the survival of newly listed firms. We argue that shifting income-decreasing expenses from core to special items should negatively associate with future operating performance because of improper signaling of actual repeatable core profitability. We find that classification shifting strongly and negatively affects future Initial Public Offering (IPO) success and survival. We further identify the economic mechanisms that drive this finding and observe that our results are mitigated when the quality of external corporate governance alleviating agency concerns is stronger, also for IPO firms operating within stronger business contexts. Therefore, in an environment that facilitates firm survivability, the existence of weaker than reported sustainable performance may not end up materializing in the form of lower firm survivability as these factors aid firms' continuing operations from a business perspective. Our findings provide evidence of the longer-term implications of a method of earnings management that has long been considered “soft” and without any longer-term reversing consequences.     

Should Firms Going Public Enjoy Tax Benefits? An Analysis of the Italian Experience in the 1990s

In Italy tax benefits are granted to firms going public. However, does such tax relief really reduce the corporate tax burden? In this study we tackle the issue by considering 21 industrial firms that were listed on the Italian Exchange from 1995 to 1997 and enjoyed a temporary tax rate cut‐off. We find that the increase in the taxable income reported by these firms largely counterbalances the effect of the tax relief. We conclude that a tax rate cut‐off may not necessarily provoke a reduction in the tax burden for newly listed firms, since in the short term they report larger earnings compared with privately‐owned companies. We claim that this ‘induced’ effect is mainly due to: the significant improvement of operating performance in the year of the listing; the reduction of the debt tax shield; an increase in investment and more accounting transparency. Our findings suggest that tax relief for IPO firms does not necessarily mean a loss of revenue for the government.     

Do anti-corruption campaigns affect IPO underpricing? Evidence from a central discipline inspection of the CSRC in China

The system of central discipline inspections has become a key anti-corruption governance tool in China since 2013. This paper investigates the impact of a central discipline inspection of the China Securities Regulatory Commission (CSRC) on initial public offering (IPO) underpricing. We find that IPO firms listed during the inspection period exhibit greater IPO underpricing than those listed outside the inspection period. The reason is the increased focus of the CSRC on maintaining capital market stability, which makes it more inclined to approve IPO firms with lower issue prices during the inspection period compared with other periods. We also find that IPO firms listed during the inspection period have better short-term market performance but poorer long-term returns than those listed outside the inspection period. Moreover, the effect of the anti-corruption inspection on IPO underpricing is more pronounced for non-state-owned enterprises, firms with low-quality auditors and firms located in regions with high corruption. Overall, our paper enriches the literature on IPO underpricing and the economic consequences of the central discipline inspection system.     

Performance of Cross Listed Dual-Class Firms: Evidence from Chinese Firms Cross Listed on US Exchanges

We compare operating and market performance of Chinese single- and dual-class firms cross listed on US exchanges. We find evidence in line with researchers who argue that a dual-class structure allows insiders to invest in long-term value-enhancing projects. We find that dual-class firms underperform prior to their initial public offering (IPO) and then improve and have better operating performance than single-class firms in the second year after IPO. We find that dual-class firms also have better market performance than single-class firms beginning in the initial year, which is contrary to the finding in most other studies. The reason for this might be that firms that list on US exchanges show a credible commitment to shareholder rights.     

Ownership and operating performance of Chinese IPOs

We examine changes in operating performance of Chinese listed companies around their initial public offerings, and focus on the effect of ownership and ownership concentration on IPO performance changes. We document a sharp decline in post-issue operating performance of IPO firms. We also find that neither state ownership nor concentration of ownership is associated with performance changes, but there is a curvilinear relation between legal-entity ownership and performance changes and between concentration of non-state ownership and performance changes. Our results are robust to different performance measures and industry adjustments. These findings suggest that agency conflicts, management entrenchment, and large shareholders’ expropriation co-exist to influence Chinese IPO performance, and the beneficial and detrimental effects of state shareholdings tend to offset each other.     

The Impact of Fundamentals on IPO Valuation

We examine how initial public offering (IPO) valuation has changed over time by focusing on three time periods: 1986-1990, January 1997 to March 2000 (designated as the boom period), and April 2000 to December 2001 (designated as the crash period). Using a sample of 1,655 IPOs, we find that firms with more negative earnings have higher valuations than do firms with less negative earnings and firms with more positive earnings have higher valuations than firms with less positive earnings. Our results suggest that negative earnings are a proxy for growth opportunities for Internet firms and that such growth options are a significant component of IPO firm value.     

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.     

The New Game in Town: Competitive Effects of IPOs

We analyze the effect of initial public offerings (IPOs) on industry competitors and provide evidence that companies experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to their withdrawal. Following a successful IPO in their industry, they show significant deterioration in their operating performance. These results are consistent with the existence of IPO‐related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross‐section of underperformance as well as survival probabilities for competing firms.     

The pricing and performance of IPOs in China’s poor counties

In the context of China’s drive to alleviate poverty, we focus on the initial public offering (IPO) firms located in China’s poor counties and investigate their IPO pricing and post-IPO performance. Contrary to the findings reported for the U.S., we find that the problem of information asymmetry between Chinese firms located in rural areas and their investors is so severe that these IPO firms are associated with significantly higher underpricing. This effect is more pronounced for firms located in rural areas with poor traffic systems. We do not find significant market performance differences between rural and urban firms after their IPOs, but the operating performance of rural firms improves in the short term. Our additional analyses indicate that rural IPO firms have significantly lower investor attention and higher agency costs than urban firms. Overall, we enrich the literature on IPO pricing and the economic effects of geographic location.     

INVESTORS ADJUST EXPECTATIONS AROUND SELL-SIDE ANALYST REVISIONS IN IPO RECOMMENDATIONS

In this article I compare investor response to sell-side analyst recommendation revisions of initial public offering (IPO) firms in the first three years after issue with that of a benchmark control sample of firms that have been public longer. I test whether investors in IPO firms adjust their initially optimistic expectations as information about new issues is released and uncertainty is resolved. In support of my hypothesis that investors adjust expectations downward, I find abnormally negative returns around analyst revisions of IPO firm recommendations. Additionally, I find the effect of analyst revisions on long-run performance of IPO firms is economically significant.     

Secret Recipe of IPO survival: ESG disclosure and performance

While ESG initiation and disclosure may help newly listed companies maintain a social license to operate, mitigate information asymmetry, and attract investor attention, it may impose significant costs on initial public offering (IPO) firms and magnify agency problems. Using a sample of 1102 IPOs issued in the U.S and the ESG data from MSCI between 1999 and 2016, the paper empirically tests the competing hypotheses and examines the influence of ESG disclosure and performance on the survivability of IPOs. We document that (1) voluntary ESG disclosure reduces IPO failure risks and improves long-run performance of IPO; (2) the sooner ESG information is disclosed after the IPO, the greater the likelihood of survival and better long-run performance; and (3) IPOs with better ESG score are less likely to fail, with the impact largely attributable to the company's social and governance performance. Our findings identify new failure risks for IPOs, supply evidence of value-relevance of ESG, and provide practical guidance for managers.     

Buyback behavior of initial public offering firms

We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3 years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.     

The impact of shareholders and creditors rights on IPO performance: An international study

This paper examines the impact of cross-country variation in shareholders' and debt holders' rights on post-IPO performance and survival of newly listed stocks across the globe. Using a sample of 10,490 initial public offerings (IPOs) in 40 countries between 2000 and 2013, we find that post-IPO performance and survival is better in countries with stronger shareholder protection, but the impact of creditor protection is negative i.e. stronger creditor protection leads to poor post-IPO performance and survival. This effect is driven by rules requiring creditors’ consent for company reorganization and the mandatory replacement of incumbent managers. Reputable IPO advisors exacerbate the positive impact of shareholder rights and the negative impact of creditor rights.     

私募股权投资特征、IPO抑价与经营绩效——基于我国创业板的实证研究

论文从私募股权投资的特征出发,研究私募的特征对企业IPO抑价和经营绩效影响的差异。研究发现：在我国创业板市场上,私募的参与显著提高了企业的IPO抑价,私募未起到认证作用。成立时间长的私募、高声誉私募、民营私募和私募投资持续时间长、联合投资以及阶段性投资能降低企业的IPO抑价,但作用不显著。在企业经营绩效方面,私募参与的企业没有更好的经营绩效,私募未起到提供增值服务的作用。私募投资持续时间、持股比例以及阶段性投资与经营绩效显著负相关;成立时间长的私募、高声誉私募、民营私募参与以及私募联合投资的企业也没有更好的经营绩效。私募的特征对企业经营绩效影响的差异与基于国外市场的研究发现显著不同。     

The effects of venture capital syndicate diversity on earnings management and performance of IPOs in the US and UK: An institutional perspective

This study examines the extent to which principal–principal agency conflicts within venture capital (VC) syndicates lead to additional principal–agent conflicts in IPO firms in two institutional contexts. Using a matched sample of 274 VC-backed IPOs in the US and the UK, it shows that the diversity of a VC syndicate increases pre-IPO discretionary current accruals, used as a proxy for earnings management, but the impact of such diversity is higher in the US. There is also evidence of higher underpricing and lower aftermarket performance in firms with higher earnings management and VC diversity, and these negative performance effects are also higher in the US. Our findings indicate that local and informal institutions have a significant effect on multiple agency conflicts in IPO firms and performance outcomes.