How employee stock options and executive equity ownership affect long-term IPO operating performance

To ascertain whether the form of managerial compensation affects a firm's long-term operating performance, we track IPOs for 5 years after the expiration of the stabilization period. New public companies perform better when managers receive a balanced combination of stock option grants and equity ownership. Firms with unbalanced compensation arrangements, large option grants and little equity ownership or vice versa do not perform as well. This empirical finding is consistent with a theoretical explanation based on managerial risk aversion and the alignment of managerial and owner incentives.     

IPO anomalies and innovation capital

Innovation capital are typically expensed and/or unrecognized as assets under current generally accepted accounting principles. This results in accounting-related information asymmetry. This paper examines the association of innovation capital (as measured here by the proxies of R&D expenditures and granted patents) and initial public offerings (IPO) anomalies. These anomalies include initial IPO underpricing, duration of honeymoon (a distinct feature of the Taiwanese IPO environment), and long-term performance. The theoretical model underlying this research is a signaling model. The results indicate that more innovative firms are more likely to be underpriced, and have longer honeymoon periods than less innovative firms. Further, the more innovative firms have positive and growing long-term market-adjusted returns. This stands in contrast to the declining long-term stock performance of initial public offering firms that is evidenced in the literature. We conclude that pre-IPO research and development expenditures disclosed in the IPO prospectus, official monthly reports of newly developed patents released to the public, and the frequency of patent citations significantly signal both underpricing and future market performance of IPO firms in Taiwan.     

The market-adjusted investment performance of ADR IPOs and SEOs

Initial public and seasoned equity offerings of American depositary receipts (ADRs) yield significantly positive market-adjusted returns both in early trading and over the longer run. This is in sharp contrast with the long-term performance of initial public offerings and seasoned equity offerings of common stocks in general. In addition, ADRs from emerging markets outperform those originating from developed countries, and those listed on the New York Stock Exchange generate higher after-market returns than those trading on the American Stock Exchange or the National Association of Security Dealers Automated Quotation System.     

Ownership Structure and the Life-Cycle of the Firm: A Theory of the Decision to Go Public

This paper presents a theory of initial public offerings based on the ideathat the optimal ownership structure of a company changes over the life cycleof the firm. Insiders take the company public when they have lost thecomparative advantage over outsiders in gathering information to evaluate thefirm's growth prospects. The size of the share sold to the public depends onthe relative abilities of the market and insiders to gather this informationand on the frictions in the going-public process. Intermediaries help toreduce these frictions and lead to a more efficient allocation if IPOs areconducted more frequently. Discrimination between different classes ofinvestors may be beneficial. Learning by the market about projects in a newindustry can lead to a clustering of new issues (hot issue markets).     

Predicting Subsequent Management Forecasting Behavior at the Date of an Initial Public Offering

In this study, we examine the conditions and choices of firms at dates of initial public offerings (IPOs) as a basis for predicting their likelihood of management earnings forecast disclosure in post-IPO periods. Using a sample of 944 IPOs, we demonstrate that firms choosing to reduce IPO information asymmetries or signal issue quality by choosing prestigious underwriters, high quality auditors, and higher percentages of retained ownership tend to issue management forecasts in the post-IPO period. These relationships exist after controlling for IPO date measures of risk/stability, a construct that prior management forecast research has found to be a key determinant of the forecasting act.     

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.     

The Nature and Persistence of Initial Public Offering Aftermarket Returns Predictability

This paper examines the predictability of monthly aftermarket returns of initial public offerings during the first six years of trading. Predictability is tested under the null hypothesis of random walk using a Markov chain analysis. The evidence shows that excess returns of IPOs (adjusted for the return on the equally weighted NASDAQ index) demonstrate non-random walk behavior through the first five years of trading and random walk behavior in the sixth year. This is accompanied by predictability of monthly excess returns conditioned on the two previous months' excess returns. A trading strategy is offered to capitalize on the predictability patterns. Implementing the trading strategy is not possible due to institutional barriers, providing additional explanation for why IPOs do not reach their intrinsic values for extended periods of time.     

Impact of the Corporate Law Economic Reform Program Act 1999 on initial public offering prospectus earnings forecasts

Commencing 13 March 2000, the Corporate Law Economic Reform Program Act 1999 (Cth) introduced changes to the regulation of corporate fundraising in Australia. In particular, it effected a reduction in the litigation risk associated with initial public offering prospectus disclosure. We find that the change is associated with a reduction in forecast frequency and an increase in forecast value relevance, but not with forecast error or bias. These results confirm previous findings that changes in litigation risk affect the level but not the quality of disclosure. They also suggest that the reforms' objectives of reducing fundraising costs while improving investor protection, have been achieved.     

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.     

REIT IPOs and the Cost of Going Public

We examine Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) that went public between 1986 and 2004. Consistent with previous studies, we find that REIT IPOs are associated with lower levels of underpricing relative to traditional issues. We also find that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. In contrast, using an alternative measure of issuance costs that incorporates the share retention decision by preexisting owners, we find no significant difference between REIT and non-REIT issues, suggesting the results of previous studies are not robust to various specifications of issuance cost and that preexisting owners do not necessarily benefit from the lower level of underpricing. Additionally, we find no difference in the issuance costs of equity versus mortgage REITs, particularly once we control for the use of umbrella partnerships.

Do IPOs bear more severe legal consequences of accounting misstatements?

I compare litigation frequency and outcomes associated with restated IPO prospectus financial statements and a matched sample of restated non-IPO financial statements. I find that investors are 8.4% more likely to sue IPO companies than non-IPO companies for misreporting and, more importantly, that the higher litigation rate in IPOs stems from companies with error-type restatements. In addition, I find that IPO suits are more likely to be settled than non-IPO suits. Overall, these results are consistent with plaintiff attorneys’ incentives driving the filing of lawsuits and provide direct evidence that IPO companies face more severe litigation consequences of accounting misstatements than non-IPO companies.Data Availability: Data are available from the public sources cited in the text.     

What Determines IPO Gross Spreads in Europe?

This paper examines the behaviour of underwriting gross spreads in European IPO markets using a data set of 565 IPOs by European issuers in the period 1986–99. Privatisations have lower gross spreads than other IPOs, other things remaining equal. Gross spreads on European listings by European issuers are significantly lower than on US listings by European issuers, except on the technology stock–oriented EASDAQ and Frankfurt Neuer Markt exchanges. IPOs involving a US bulge bracket underwriter (for joint US/Europe listings) or bookbuilding are characterised by relatively higher spreads.     

Are share price levels informative? Evidence from the ownership, pricing, turnover and performance of IPO firms

We ask whether a firm's choice of IPO price is informative in the sense that it relates systematically to the firm's other choices and characteristics. We find that both institutional ownership and underwriter reputation increases monotonically with the chosen IPO price level. We also find that the relationship between IPO price and underpricing is U-shaped. In contrast, post-IPO turnover displays an inverted U-shaped relation to IPO price. Moreover, firms choosing a higher (lower) stock price level experience lower (higher) mortality rates. Our results are robust to controls for market liquidity and firm size, and for partial adjustment of IPO prices based on pre-market information.     

Patents and the performance of technology firms: Evidence from initial public offerings in Germany

The objective of this study is to analyze the relationship between innovation and performance for German firms that went public at the “Neuer Markt” during the period from 1997 to 2002. In the empirical analysis we investigate in particular whether initial public offerings (IPOs) with more or higher quality patents outperformed IPOs with lower quality or no patented technology. For this we measure the impact of patents on underpricing and long-run performance and explain the magnitude of these valuation effects with the Fama–French value and growth factors, with patent-specific variables such as the number of IPC-classes, family size, the number of backward and forward citations, as well as with industry variables. The empirical evidence suggests that patents are a reliable indicator for the success and the short- and long-run performance of start-up technology firms that went public and that the valuation effects are more pronounced for higher quality patents.

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.