UNDERPRICING OF IPOS THAT FOLLOW PRIVATE PLACEMENT

In this study we examine the underpricing of initial public offerings (IPOs) by firms that have private placements of equity before their IPOs (PP IPO firms). We find that PP IPOs are associated with significantly less underpricing than their peers. Furthermore, PP IPOs are associated with lower underwriting spreads, more reputable underwriting syndicates, and greater postissue analyst coverage as compared to IPOs that are issued by their industry peers under similar market conditions. Consistent with the implications of the information asymmetry explanation for IPO underpricing, our findings suggest that companies could benefit by conveying their quality via successful pre‐IPO private placements that help reduce the cost of going public.     

SEO Cycles

Public equity offerings by seasoned firms (SEOs) exhibit similar but less volatile cycles than initial public offerings (IPOs) of newly public firms. Our paper provides a comprehensive examination of the factors that cause variation in the number of firms issuing SEOs. Specifically, we use four factors from studies of IPOs as potential determinants of SEO cycles. We find that whether tested separately or collectively, only the demand for capital and market timing hypotheses receive strong empirical support in explaining SEO volume. Investor sentiment is not an important factor in explaining SEO volume, nor is information asymmetry.     

Underpricing in the Corporate Bond Market

This article examines underpricing of initial public offerings(IPOs) and seasoned offerings in the corporate bond market.We investigate whether underpricing represents a solution toan information problem or a liquidity problem. We find thatunderpricing occurs with both IPOs and seasoned offerings andis highest among riskier, unknown firms. Our evidence suggeststhat information problems drive underpricing, with support forboth the bookbuilding view of underpricing and the asymmetricinformation theory. We do not find evidence in favor of theRock model of underpricing or any evidence that illiquiditycauses underpricing.     

Do institutional investors reinforce or reduce agency problems? Earnings management and the post-IPO performance

This study investigates the dual roles of institutional investors in earnings management during initial public offerings (IPOs). Research suggests that institutional investors play a monitoring role in the corporate governance of firms by mitigating earnings management to reduce agency problems. However, institutional investors have incentives to opportunistically maximize their wealth by manipulating earnings when firms engage in IPOs. Results suggest that institutional investors facilitate accrual-based earnings management before IPOs but restrain earnings management after their issuance. We also find that firms with high institutional ownership experience superior post-IPO stock returns and operating performance, thereby suggesting that the capital market positively prices the monitoring function of institutional investors after IPOs, and the performance of these firms is improved. Our results are robust to controlling the endogeneity problem of institutional investors and further identifying active institutional investors.     

Merger-Motivated IPOs

In this paper, we find support for initial public offerings (IPOs) motivated by subsequent acquisition activity. Over a third of newly public firms enter the market for corporate control as acquirers within three years of the IPO. We find that IPOs facilitate acquisitions in a number of ways. Newly public firms benefit from the cash raised in the IPO, from subsequent access to public financing, and from ability to pay with publicly traded stock for acquisitions. IPO firms also benefit by obtaining market feedback and by taking advantage of high post-IPO stock values in making stock-based acquisitions at favorable terms.     

Are publicly held firms less efficient? Evidence from the US property-liability insurance industry

This paper studies the performance of publicly held firms in the US property-liability insurance industry by analyzing companies that issued initial public offerings (IPOs) from 1994 to 2005, using private firms as the benchmark. I investigate ex ante determinants and ex post effects of IPOs on firm efficiency, operating performance, and other financials. I also analyze stock returns and follow-on SEO and acquisition activities to provide further information on IPO motivation. The paper finds that the likelihood of an IPO significantly increases with firm size and premium growth. IPO firms experience no post-issue underperformance in efficiency, operations, or stock returns; register improvement in allocative and cost efficiency; and reduce financial leverage and reinsurance usage. Moreover, IPO firms are active in follow-on SEO issues and acquisition activities. The findings are mostly consistent with the theory that firms go public for easier access to capital and to ease capital constraints.     

Europe's Second Markets for Small Companies

European stock exchanges have repeatedly opened second markets to list small companies. We explain the motivation for the creation of these second markets, and the reasons why many of them have failed. We find that the average long‐run performance of initial public offerings (IPOs) on second markets is dramatically worse than for main market IPOs. However, the second markets have provided firms with the opportunity to raise funds at the IPO and in follow‐on offerings. The relative success of London's AIM, which is an exchange‐regulated market with minimal regulations, has led other European stock exchanges to establish similar non‐EU regulated second markets. Most of the IPOs on these exchange‐regulated markets are offered exclusively to institutional investors, and are equivalent to private placements. These IPOs, which frequently raise only a few million euros, rarely develop liquid trading.     

The under-pricing of IPOs in the Gulf cooperation council countries

We document the phenomenon of under-pricing initial public offerings (IPOs) for 47 Gulf firms that went public between 2001 and 2006. The IPOs had, on average, initial abnormal returns of 290 percent, far exceeding those documented for both developed and emerging markets. In aftermarket performance, we find that these IPOs provide investors with negative abnormal returns over a one-year period, which seems to be consistent with findings in other industrial and emerging markets. The empirical models fail, however, to provide us with a satisfactory explanation using the common independent variables employed in the literature. Nevertheless, it appears that country- and industry-specific characteristics, in addition to the timing of the offers, play a key role in explaining IPO behavior in the region. This paper's empirical findings support the hypothesis that investors are initially over-optimistic about an IPO's performance, but grow more pessimistic over time.     

Underwriter Compensation Structure: Can It Really Bond Underwriters?

Underwriter compensation can be structured as all cash or a combination of cash and warrants. Using a sample of small initial public offerings (IPOs), we find that underwriter compensation contracts that include warrants in exchange for cash can serve as certification for IPO firms by substituting for reputation capital. When underwriters accept warrants when they could have received more cash compensation, the IPOs avoid the well documented long‐run underperformance. However, when underwriters receive warrants after maximizing cash compensation, the IPO experiences higher underpricing and poorer long‐run performance. The findings are consistent with a motivation by the underwriters to circumvent regulatory constraints.     

Short‐Term Performance of U.S.‐Bound Chinese IPOs

Firms from emerging markets, including China, increasingly seek to raise capital outside of their home markets. We examine the short‐term performance of U.S.‐bound Chinese initial public offerings (IPOs) and find that these IPOs have significantly lower underpricing than a matched sample of U.S. counterparts. We also find that the magnitude of IPO underpricing for U.S.‐bound Chinese firms is positively related to revisions in offer price.     

Private equity exits after IPOs

We examine post-IPO exits of private equity sponsors of portfolio firms via follow-on secondary equity offerings and third party takeovers. Sponsors retain considerable ownership in listed portfolio firms for lengthy periods after IPOs, well beyond lockup expiration. After private equity post-IPO secondary offerings, corporate profitability is strongly superior to benchmark firms, indicating portfolio firms are successfully prepared for private equity's subsequent exit. Nevertheless, share prices fall at offering announcements, reflecting the failure of private equity sponsors to exit stakes in listed entities at the high premiums paid in third party takeovers, premiums that are invariably shared equally with public shareholders.     

An empirical investigation of Yankee stock offerings

This paper examines the operating and investment performance of 100 foreign firms that conduct their initial public offerings (IPOs) in the U.S. (Yankee stock offerings). The uniqueness of these firms is that the U.S. IPOs are their first public equity issue in any market, including the home market. We find significant improvement in the operating performance subsequent to these U.S. IPO events and firms from countries with poor investor protection benefit more. Compared to various benchmarks, unlike the significant underperformance of IPOs documented in many countries, these firms show no significant abnormal long-run stock market performance after 1, 3, or 5 years of seasoning. The findings are consistent with signaling and selective entry hypotheses.     

Warrants in IPOs: Evidence from Hong Kong

We examine whether the Hong Kong Stock Exchange listed firms include warrants in their initial public offerings (IPOs) to signal their quality. We show that IPOs with warrants have higher profitability and better asset utilization rates compared to IPOs without warrants. We also report evidence that after controlling for the level of retained ownership, the proportion of the firm value sold as warrants increases in firm's riskiness. The results from the self-selection model reveal that firms include warrants in their offerings to reduce underpricing relative to what it would have been in the absence of warrants. We conclude that warrants are more likely to be used for signaling purposes rather than as mechanisms to reduce the agency costs of free cash flow.     

The Underpricing of Insurance IPOs

The previous literature documents that insurance initial public offerings (IPOs) are less underpriced than those of noninsurance firms. This difference is usually attributed to lower information asymmetry for regulated firms. However, we find that once one controls for the file price adjustment insurance IPOs, both stock and mutual, are no less underpriced than other noninsurance offerings suggesting the book-building process resolves any such information asymmetries. We also find that mutual IPOs appear more underpriced than stock insurance IPOs, but this difference is related to the differences in pre-issue managerial ownership.     

Initial Public Offerings: CFO Perceptions

We examine four issues pertaining to initial public offerings (IPOs) using a survey of 438 chief financial officers (CFOs). First, why do firms go public? Second, is CFO sentiment stationary across bear and bull markets? Third, what concerns CFOs about going public? Fourth, do CFO perceptions correlate with returns? Results support funding for growth and liquidity as the primary reasons for IPOs. CFO sentiment is generally stationary in pre‐ and post‐bubble years. Managers are concerned with the direct costs of going public, such as underwriting fees, as well as indirect costs. We find a negative relation between a focus on immediate growth and long‐term abnormal returns.     

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use hand-collected data on the management quality of firms making seasoned equity offerings (SEOs) or initial public offerings (IPOs) to analyze the relationship between management quality and equity issue characteristics, and to compare the effect of management quality on SEOs versus IPOs. We hypothesize that higher quality managers are more credible to equity market investors, thereby reducing the information asymmetry they face in the market and outsiders’ information production costs. Therefore, the equity issues of higher management quality firms will have more reputable underwriters, smaller underwriting spreads, and other expenses, and smaller SEO discounts. Further, since better managers will be able to select better projects, higher management quality firms will have larger offer sizes. Finally, since SEO firms are likely to suffer from less information asymmetry compared to IPO firms, these effects will be smaller for SEOs than for IPOs. Our findings support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs provide further support for these hypotheses.     

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.     

Going public to acquire? The acquisition motive in IPOs

Newly public firms make acquisitions at a torrid pace. Their large acquisition appetites reflect the concentration of initial public offerings (IPOs) in mergers and acquisitions-(M&A-) intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms’ acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency used to raise capital for both cash- and stock-financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets, and acquisitions are as important to their growth as research and development (R&D) and capital expenditures (CAPEX). The pattern of acquisitions following an IPO shapes the evolution of ownership structure of newly public firms.     

The impact of venture capital backing on the corporate governance of Australian initial public offerings

This study explores the role of venture capitalists on investee boards at the time of listing for 552 initial public offerings. Australian board structures and mechanisms are more similar to those in the US and the United Kingdom, but market activity characteristics are more similar to Japanese and German systems. Further, the Australian private equity market is relatively young compared to US and European markets. IPOs backed by venture capital have more independent boards, similar to US IPOs. Venture capitalists improve governance by using their networks to recruit specialist independent directors with industry experience.     

UNDERWRITER REPUTATION AND REPETITIVE PUBLIC OFFERINGS

A recent examination of underwriter reputation and initial public offerings (IPOs) suggests that one of the reasons prestigious underwriters market low-risk IPOs is to increase the expected present value of subsequent offerings. There is a greater likelihood that a firm issuing low-risk IPOs will be a viable future operation with the potential for subsequent offerings than a firm issuing high-risk IPOs. I examine the hypothesis that the likelihood of subsequent offerings is negatively related to IPO risk. In addition to finding support for this hypothesis, I show that the likelihood of subsequent offerings is positively related to the IPO underwriter's reputation and negatively related to the IPO gross spread. Finally, I find that the likelihood of firms switching IPO underwriters for subsequent offerings decreases with increasing IPO underwriter reputation.