Motives and consequences of IPOs in cold periods

Abstract

• We model the factors that could motivate firms to go public in a cold. • We compare the long-term performance of hot and cold period IPOS. • We find the firms go public in cold periods when their future earnings are likely to decline. • We find the cold period IPO firms are more likely to have managed their earnings. • We find that cold period IPO firms underperform hot period IPO firms in the long run. We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.