Conflicting interests: Going public in deteriorating market conditions

Pengda Fan,Thanh Nguyen Thi Phuong,Lin Wang

doi:10.22495/cocv16i3art12

Abstract

The purpose of this paper is to analyze whether the conflicting interest between issuing firms and CEOs (venture capitalists) affect the going-public decision. Going public in deteriorating market conditions is costly for issuing firms in terms of low offering price and high probability of withdrawal. If agency costs exist, agents pursuing their own interests may bring firms public even in poor market conditions, which has been largely ignored in the previous literature. To examine our hypotheses, we collect 1246 Japanese firms going public from 2001 to 2016 and conduct logit regressions, propensity score matching (PSM) as well as a probit model with sample selection. Consistent with our conjecture, we find a positive relation between the going-public decision and secondary shares offered by CEOs. Additionally, we also find an inverse U-shaped relationship between CEOs’ retained ownership and the going-public decision, indicating that in addition to liquidity needs, private benefits of control is another potential source of conflicting interests. Furthermore, secondary shares offered by VCs are also positively associated with the going-public decision, suggesting that when VCs attempt to exit as rapidly as possible, they are more likely to bring firms public even in deteriorating markets. These findings suggest that conflicting interests among parties affect the timing and costs of IPOs.

Highlights

The conflict of interest among parties with heterogeneous objectives has been at the core of finance, business, and management literature
Another strand of literature based on multiple agency theory argues that conflicting voices among various groups substantially affect the performance of IPO firms (Arthurs et al, 2008; Bruton et al, 2010)
Given that underpricing has been commonly used to define hot IPO markets (Ritter, 1984; Lowry & Schwert, 2002; Helwege & Liang, 2004), we identify firms that decided to go public in deteriorating market conditions based on UNDERPRICING

Summary

Introduction

The conflict of interest among parties with heterogeneous objectives has been at the core of finance, business, and management literature. Insiders pursuing their own benefits may go public regardless of market conditions This could happen since the conflicting interests among parties are salient at the time of IPOs. One strand of literature based on traditional agency theory (Jensen & Meckling, 1976) argues that an IPO is a typical event that increases the agency cost between manager and shareholders due to the diversification of CEOs’ ownership. One strand of literature based on traditional agency theory (Jensen & Meckling, 1976) argues that an IPO is a typical event that increases the agency cost between manager and shareholders due to the diversification of CEOs’ ownership Another strand of literature based on multiple agency theory argues that conflicting voices among various groups substantially affect the performance of IPO firms (Arthurs et al, 2008; Bruton et al, 2010)

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Results

Conclusion