Legal Determinants of IPO Activity: Insights from European Stock Markets

Financial Globalization and the Rise of IPOs Outside the U.S.

The number of initial public offerings (IPOs) in the United States has been much lower since 2000 than in the preceding two decades, although there was a surge in IPO activity in 2021. The Securities and Exchange Commission (SEC) has attempted to reduce the regulatory and cost burdens of going public. Important new developments in the U.S. IPO market include confidential filings, testing the waters, direct listings, and special purpose acquisition companies (SPACs). Related research sheds light on whether the new developments can help capital formation and lower the costs of going public. Also relevant are the motives for going public, new insights into IPO pricing, institutional investors’ pre-IPO investments, and the consequences of firms’ IPO decisions. In the U.S., the majority of IPOs have used the bookbuilding mechanism, which involves generating and recording investors’ buying interests. Different companies prefer different mechanisms for going public. Bookbuilding is valuable for companies that face uncertainty regarding investor demand. A private firm may prefer selling itself to a publicly traded acquiring firm over an IPO in order to expand more quickly by utilizing the acquirer’s capital and established platform. A high-growth firm may prefer a merger with a SPAC over a traditional bookbuilt IPO due to the ability to use solid forecasts to increase the stock’s valuation. And companies with strong brand recognition or easy-to-understand business models, but no immediate cash needs, may find a direct listing more attractive, especially when their insiders have large diversification or liquidity needs. The SEC and other regulatory agencies should embrace and enhance these alternative mechanisms. Economies-of-scope considerations, globalization, regulatory and disclosure requirements, and the relative costs of public versus private capital all play a part in firms’ decisions to go public. Careful examinations of the benefits and costs are still needed. Possible widespread use of confidential filings and testing-the-waters communications after the regulatory changes initiated by the 2012 JOBS Act can substantially influence information production, IPO decisions, and IPO pricing. Private companies have increasingly used direct listings and SPAC mergers to go public, and emerging evidence suggests these methods will continue to evolve. Several recent papers have examined IPO underpricing across countries, and their findings are consistent with both information-asymmetry-based explanations and those based on issuer–underwriter conflicts. Information asymmetry helps explain the 7% average IPO underpricing in the U.S. during the 1980s. However, explanations based on agency problems, underwriter power, and issuer complacency are instructive for understanding the average underpricing of over 18% for all IPOs since then or over 50% for large subsets that can be identified ex ante. Future research would be useful to shed light on the predictability and magnitude of IPO underpricing, as well as on the effects of regulations and issuer–underwriter conflicts on underpricing. Recent research shows that IPOs have far-reaching effects. They not only influence the financing and investment policies of the issuing companies, but also have spillover effects to other companies, local communities, and labor markets.

Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China

Economies of Scope and IPO Activity in Europe

PurposeThe purpose of this paper is to hypothesize two channels in which market volatility affects initial public offering (IPO) activity.Design/methodology/approachFirst, CEOs time the market for IPOs and volatility makes this decision process harder. Second, risk-averse IPO investors become more reluctant toward IPOs during periods of higher volatility for their after-IPO returns.FindingsThe authors provide evidence that higher market volatility leads to lower IPO activity, supporting these hypotheses. More importantly, the authors show that it is not the realized volatility, but rather the implied (expected) volatility, that causes lower IPO activity.Research limitations/implicationsWhile there may be many companies that are ready to have IPOs, they may be simply waiting for a more opportune time which may not necessarily be a period of high prices but of low volatility.Practical implicationsThe public policy prescription is clear: if IPOs are to be encouraged, then regulatory policies should be constructed with the aim of reducing volatility.Originality/valueThis study is the first (to the authors’ knowledge) to argue that it is not the realized volatility which most affects the IPO decisions of executives, entrepreneurs and investors.

Initial public offering (IPO) activity in Europe has recently come to a near-halt and, similarly to the US, this decline has been more pronounced among small firm IPOs. Three alternative explanations have been proposed: the economies of scope hypothesis states that getting big fast has become more important, resulting in small firms being acquired; the regulatory overreach hypothesis, which states that small firms are remaining private due to an increase in the regulatory costs borne by publicly traded firms; and the market conditions hypothesis, which states that poor stock market levels have resulted in low IPO volume. Although Europe is characterized by more fragmented regulation and by the existence of second markets with lower compliance costs, we argue that the decline in the number of IPOs is partly attributable to the economies of scope explanation. The Panic of 2008 and the Eurozone crisis of 2011 have also temporarily depressed IPO volume, consistent with the market conditions hypothesis. We present evidence of an increased difficulty for small firms to remain profitable, their underperformance, and their higher propensity to be acquired soon after the IPO, relative to large firms. We document that these patterns persist even among second market IPOs, where the regulatory overreach hypothesis does not apply. Controlling for the impact of market valuations, we investigate IPO activity in a time-series setting and unveil a downward trend in European IPOs over time.

Influence of national culture on IPO activity

We analyze initial public offering (IPO) activity under political uncertainty surrounding gubernatorial elections in the United States. There are fewer IPOs originating from a state when it is scheduled to have an election. To establish identification, we develop a neighboring-states method that uses bordering states without elections as a control group. The dampening effect of elections on IPO activity is stronger for firms with more concentrated businesses in their home states, firms that are more dependent on government contracts (particularly state contracts), and harder-to-value firms. This dampening effect is related to lower IPO offer prices (hence, higher costs of capital) during election years.

Going Entrepreneurial? IPOs and New Firm Creation

Using matched employee-employer US Census data, we examine the effect of a successful initial public offering (IPO) on employee departures to startups. Accounting for the endogeneity of a firm’s choice to go public, we find strong evidence that going public induces employees to leave for start-ups. Moreover, we document that the increase in turnover following an IPO is driven by employees departing to start-ups; we find no change in the rate of employee departures for established firms. We present evidence that, following an IPO, many employees who received stock grants experience a positive shock to their wealth which allows them to better tolerate the risks associated with joining a startup or to obtain funding. Our results suggest that the recent declines in IPO activity and new firm creation in the US may be causally linked. The recent decline in IPOs means fewer workers may move to startups, decreasing overall new firm creation in the economy.

This article examines the effect of size of new issues on their survival profile in the aftermarket. The relationship between the probability of delisting and the time duration of initial public offerings (IPOs) on Bombay Stock Exchange (BSE) is tested using logistic regression and parametric survival analysis models. The models take a range of information concerning offering, market and corporate specific characteristics as well to explore the outcome of IPOs on the trading exchange. The analysis of Kaplan–Meier curves provides insight about how size matters in determining the survival and hazard trend of IPO in the aftermarket. Overall, the study reveals that issues with large size exhibits more market confidence as well as ability to withstand the rough market situations in the aftermarket, and hence, they survive longer in the market. The analysis of other variables shows a positive influence of age, lead manager’s reputation and IPO demand, whereas negative influence of risk, list delay, underpricing, market level and IPO activity on the survival probability as well as duration of IPOs in the aftermarket. Further, the survival prospects are analysed across several industrial sectors as well. The present study provides useful insight to several parties associated with IPOs, such as investors, issuers, creditors and regulators, who can utilize this information for taking rational decisions.

Macroeconomic uncertainty, the option to wait and IPO issue cycles

There are three behavioral phenomena associated with initial public offerings (IPOs). These have been termed (1) initial underpricing; (2) long‐term underperformance; and (3) “hot issue” market. Initial underpricing occurs when the offer price is too low. In this case, the issue will be underpriced and its price will soar on the first trading day. But price may overshoot fundamental value. In this case, it will fall back over time, giving rise to long‐term underperformance. IPO activity also appears to move in cycles, hot and cold. A “hot issue” market is a period when investor demand for IPOs is especially high. Are the three IPO phenomena consistent with market efficiency? They are not. In a “hot issue” market, excessive optimism on the part of investors leads IPO prices to rise above fundamental value on the first trading day, and remain so for long periods. This optimism is a manifestation of heuristic‐driven bias. Investors may also be affected by other heuristics. The chapter discusses instances of similarity, betting on trends, representativeness, and regret. Two cases are used to illustrate IPO phenomena, Boston Chicken and Netscape.

Going Entrepreneurial? IPOs and New Firm Creation

The Role of the Underlying Real Asset Market in REIT IPOs