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.     

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).     

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.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

The relationship between venture capital backing and the top management team quality of firms going public and implications for initial public offerings

We make use of hand-collected data on a large sample of entrepreneurial firms going public to analyze the association between venture capital (VC) backing and the top management team (TMT) quality of firms at the time of their initial public offerings (IPOs), and the effect of both VC-backing and TMT quality on the growth in their post-IPO operating performance and IPO firm valuations. We first show that VC-backing is associated with higher TMT quality. We then show that both higher TMT quality and VC-backing lead to higher growth in post-IPO operating performance and higher IPO valuations. We find that the above two variables affect the growth in post-IPO operating performance through an “ability channel,” whereby the TMTs of such firms choose projects with higher equilibrium scale and implement them more ably. Further, TMT quality and VC-backing affect IPO firm valuations not only through the above ability channel, but also through a “certification channel,” whereby higher TMT quality and VC-backing credibly certify intrinsic firm value to the IPO market, thus reducing the extent of asymmetric information facing such firms in the IPO market and yielding these firms higher IPO valuations. Finally, we show that TMT quality and VC-backing act as complements in their effect on IPO firms' growth in post-IPO operating performance.     

Going public: The impact of insiders' holdings on the price of initial public offerings

Many entrepreneurs dream of seeing their company's securities trading in the public marketplace. Although going public has many benefits for a firm's founders and insiders, the process is often confusing and intimidating. One of the questions that investment bankers are asked frequently by insiders is, “What determines the price of a stock in the initial public offering?” This article presents empirical evidence that the stock price in an initial public offering (IPO) is directly related to the percentage of the firm's equity retained by the insiders. In other words, the offering price is relatively high when it appears that the insiders are not “bailing out” when the firm goes public.This research investigates equity ownership structure as a determinant of the pricing of IPOs. The hypothesis to be tested is: IPOs with higher (lower) insider holdings at the time of the offering are priced higher (lower) as a result of lower (higher) required rates of return. Support for the hypothesis is based on agency theory, which postulates that additional risk is created when there is a perceived separation of ownership and control.There are several implications of this research. First, a greater appreciation of the sophistication of the IPO market with regard to the actions of the insiders should be gained. Second, the reader's knowledge of the activity and relative pricing of IPOs during the 1978–1985 time period should be enhanced. Third, insiders should realize that actions regarding their relative equity holdings at the time of the offering have an impact on the price of the offering. Finally, the reader should recognize that even in “hot markets” the actions of insiders at the time of an initial public offering regarding the sale of equity are monitored by the market.     

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.     

Do political connections matter in accessing capital markets? Evidence from China

We analyze the influence of political connections on firms' access to capital and the ensuing effect on the cost of raising capital. Using a dataset of 413 IPOs from 2009 to 2012, we exploit a research setting where government is still highly involved with the process. We find that firms rely on political connections to reduce IPO rejection risk as a firm's political connections are positively associated with the propensity of obtaining approval for an IPO. We further find that political connections are negatively associated with the cost of IPO and connected firms appear to perform better subsequent to their IPOs.     

Organizational Virtue and Stakeholder Interdependence: An Empirical Examination of Financial Intermediaries and IPO Firms

Organizational virtue orientation (OVO), an organizational-level construct, refers to the integrated set of beliefs and values that support ethical character traits and virtuous behaviors. To advance the study of organizational virtue, we examine OVO in firms making their initial public offerings (IPOs), with respect to key external stakeholders that serve as financial intermediaries (i.e., venture capital firms and underwriting banks). Drawing on stakeholder and resource dependence theories, we argue that mutual interdependencies occur between financial intermediaries and IPO firms such that venture capital firms’ ownership levels and underwriter reputation are positively associated with the selection of more virtuous IPO firms. We also argue for the moderating relationship of IPO firm age on these main relationships; since IPO firms have more history and information availability, less importance will be placed on OVO in the selection process. In support of our hypotheses, the results of this study suggest the organizational virtue of IPO firms influences the selection decisions of financial intermediaries by reflecting positively on these key stakeholders to improve legitimacy and reputation.     

Factors influencing the choice between founder versus non-founder CEOs for IPO firms

Despite the innate advantage founder CEOs have by virtue of their founding vision, organizational influence, positive image, and ownership stakes to lead their firms at their initial public offering (IPO), extant empirical evidence indicates that between a third to half of IPO firms go public with non-founder CEOs at the helm. Relatively little however, is known regarding factors that influence the choice of founder versus non-founder CEO for firms issuing IPOs. This study examines the impact of factors such as founder characteristics, size of founding team, governance structure, ownership structure, top management team independence, venture capitalist influence, and the demand for equity financing on the probability of founder CEO at IPO.     

审计师选择、留存股权和盈余披露——中国IPO公司价值信号传递机制研究

公司通过权衡信号成本与信息收益,选择一种或多种市场信号,包括审计师选择、留存股权和盈余披露等。各信号间的内生性问题是本文的研究重点。我们以2000—2002年中国155家IPO公司为研究样本,通过构建联立方程系统实证,发现：我国IPO市场审计师选择、盈余预测与留存股权并非替代信号,风险越大公司越倾向保留较低股权;盈利预测对股权留存并没有显著影响;审计收费对公司审计师选择具有显著影响,但审计风险对审计收费的影响并不明显。     

组织间模仿能够解释IPO企业的承销商选择行为吗？——基于新制度理论和组织学习理论的分析

不同于以往IPO承销商选择的研究视角,文章基于新制度理论和组织学习理论,研究了组织间模仿对IPO承销商选择行为的影响。以2006-2012年我国中小板IPO事件为研究对象,发现模仿是解释IPO承销商选择的重要因素,并且在IPO企业的承销商选择中同时存在着不同类型的模仿行为。在面临合法性压力时,IPO企业的模仿属于基于频率的模仿,而非模仿领先者;同时,企业的模仿行为也受理性因素的驱动,企业会有选择性的模仿那些已经取得较好成果的行为,并且成果的显著性程度也会对企业的模仿行为产生影响。     

Going Public to Grow? Evidence from a Panel of Italian Firms

This paper investigates the consequences of the decision to go public for the growth of Italian firms using US firms as a benchmark for comparison. We find Italian firms conducting IPOs are larger than US firms, but raise fewer funds from the IPO and grow more slowly afterwards. We also compare Italian IPOs across time. Firms going public in the 1990s display features that are more similar to US IPOs. We describe changes to the Italian economy and financial markets that are potentially responsible for the change. We compare firms of different size and with different governance structures, and we find that they behave differently after going public. Our results suggest that going public does not guarantee faster growth or more jobs. As such, public policies that simply increase access to equity markets may not be effective unless they provide incentives for the firms’ decision-makers to use the new capital to grow.      

Venture capital investors and foreign listing choices of Chinese companies

We investigate the listing choice of Chinese VC-backed companies between a domestic market and foreign stock markets. Using a comprehensive sample of 2249 IPOs of Chinese companies that went public during the 1994–2013 period, we find that companies backed by Chinese domestic VCs are significantly less likely to list abroad while those backed by foreign VCs or co-invested by foreign and domestic VCs are significantly more likely to do so. We further find that the introduction of a domestic stock market for high-tech start-ups (the ChiNext Board) significantly reduces the likelihood to list abroad. However, the effect of VC participation largely disappears after the introduction of the ChiNext Board, in that the companies backed by foreign or co-invested VCs are more likely to list domestically. Moreover, we find that VC-backed IPOs have larger issuance sizes, but we find no impact on IPO underpricing of these Chinese companies. These results on IPO outcome hold for both the full sample and a matched sample using propensity score matching.     

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.     

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.     

证券市场选择是否影响公司业绩与价值?--来自中国房地产行业的经验证据

企业在不同资本市场之间的选择往往是上市过程中一个重要决策。上市地点是否会影响其后续业绩表现以及价值？文章基于中国内地房地产企业数据的研究发现,在中国香港上市的企业比在中国内地上市的企业经营业绩更优,而两者在股市价值上并无显著差别。另外,在(中国)香港上市的房地产企业中,国有企业股市价值低于非国有企业;而在中国内地上市的房地产企业中,国有企业股市价值高于非国有企业。研究结果说明,证券市场完善的监管有利于降低代理人问题,提高企业经营业绩。     

An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO*

An initial public offering (IPO) is one of the most critical events in the life of a firm. As the IPO market continues to attract attention from both entrepreneurs and investors, research examining the relationship between the firm's characteristics and its IPO performance is growing. In this paper, we use the upper echelon perspective to empirically examine the relationship between the firm's chief executive officer (CEO) and the firm's time to IPO, a relationship that has so far received little attention. Using data obtained from 237 IPOs in the U.S. software industry, we found that the CEO's prior executive experience, network, and age are significantly related to the new firm's time to IPO. This study extends the understanding of the important role of the CEO in the IPO and provides investors greater insight into those variables that influence the speed with which firms go public.     

Can Spending Time in the Minors Pay Off? An Examination of the Canadian Junior Public Equity Markets

This paper tests whether the junior public equity markets serve as an effective development market for early‐stage firms compared to private venture capital (VC). Focusing on the Canadian market, we compare the long‐run stock performance of firms that graduate from the Toronto Venture Stock Exchange (TSX‐V) to the Toronto Stock Exchange (TSX) against the performance of VC‐backed firms that have a direct IPO on the TSX. Controlling for various confounders and possible selection biases, we find that TSX‐V graduations significantly outperform VC‐backed IPOs by 28.2 percentage points in the three years following the TSX listing. Our results are consistent with the idea that a TSX‐V listing provides the insiders of early‐stage companies with valuable public‐markets experience.