Determinants of IPO Activity: Does IPO Activity Fluctuate in Accordance with the Business Cycle? Evidence from European Firms

Abstract

The literature on corporate financing is quite extensive. However, researchers have so far not shed light on the IPO determining factors in Europe as a whole. This paper addresses three main questions observing more than 9000 IPOs performed during a period from 1991 to 2014. First, the macroeconomic and country-specific factors leading to IPO fluctuation in Europe are identified. Second, the question whether firm characteristics change prior to the IPO, indicating window dressing of the financial statements, is addressed. Finally, various firm characteristics are considered to identify differences between firms in successful and withdrawn IPOs, as well as IPOs during a boom cycle and a recession. I am able to reject the hypothesis that IPO fluctuation follows the business cycle. IPO activity rather follows the path of stock market returns, suggesting that firms act opportunistically, taking advantage of relatively low equity costs. There is strong evidence that the number and volume of IPOs follow a mean reverting tendency. Successful firms, in addition, disclose lower interest burden relative to EBITDA, indicating that investors value high funding costs negatively, penalising firms that follow the pecking order theory. More precisely, firms that want to raise equity due to high interest burden, are more likely to fail with their IPO.