Impact of initial public offering coalition on deal completion

Abstract

Measures of underwriter and top management team prestige have been shown to signal the underlying quality of a company in an initial public offering (IPO). We extend these measures to include the entire coalition (i.e., managers, board, venture capitalists (VCs), underwriters, auditors, and both sets of lawyers) and surprisingly find VCs to have the highest explanatory power in predicting IPO outcomes (completion or withdrawal). Companies with deep management and a separation of the CEO/chair role are more likely to hire prestigious underwriters and successfully complete IPOs. Although companies with prestigious VCs are more likely to have prestigious underwriters, companies with VC-backing are more likely to withdraw the offering, likely to take advantage of better market opportunities. Companies with prestigious underwriters are more likely to have successful IPOs, although we show that the capabilities of underwriters and other intermediaries are more likely driven by activity level (i.e., market share), rather than prestige in affecting IPO outcome. Using an agency framework, we test how signals of monitoring, information asymmetry, bonding, and incentive alignment affect IPO outcomes and show that signals of lower agency costs are associated with a greater likelihood of IPO completion. Finally, because many of these measures are shown to endogenously affect IPO completion, a selection bias may exist in previous IPO studies as up to 70% of IPOs filed annually are not completed.