Listing standards as a signal of IPO preparedness and quality

Abstract

This paper compares three aspects of IPOs on the Toronto Stock Exchange's junior (TSX-V) and senior (TSX) markets: (1) share price performance on the first day and first year, (2) volume on the first day and first year, and (3) days between the predicted IPO date, IPO announcement date and actual IPO date. The primary difference between TSX and TSX-V IPO companies is that TSX-V companies are significantly more underpriced than TSX companies, even after controlling for other company-specific factors, which suggests higher listing standards provide a signalling benefit to companies over-and-above what companies themselves are able to signal. Similarly, TSX companies experience a shorter time from IPO announcement date to an accurately predicted actual IPO date, suggesting TSX companies are better prepared to overcome the hurdles of exchange regulators scrutinizing their preliminary prospectuses. Taken together, the evidence is consistent with the view that higher exchange listing standards screen out companies that are less prepared to go public. But the data show exchange listing standards are not directly related to 1-year share price performance and/or trading volume as those performance indicators are more closely connected to observable company-specific factors.