Supercharged IPOs: Rent Extraction or Signal of Future Firm Performance?

Abstract

This study examines a new form of initial public offerings colloquially referred to as “Supercharged IPOs.” In a supercharged IPO, a series of transactions are performed as part of the IPO process that eventually generate new tax assets (i.e., greater future tax deductions) for the corporation. Unlike traditional IPOs, the creation of new tax assets also creates a tax liability for the pre-IPO owners. The benefits (i.e., future tax deductions) from the new tax assets are then split between the pre-IPO owners and the new IPO investors, who enter into a tax receivable agreement based on those assets. The net result of the transaction to the pre-IPO owners is the assumption of a certain tax liability in exchange for a contingent future benefit. As a result, we hypothesize, and find evidence consistent with, the decision to “supercharge” an IPO providing a signal regarding the future prospects of the firm. We document higher final offer prices and greater future financial performance for supercharged IPO firms compared to traditional IPO firms. We also examine future stock returns and do not find significant differences between traditional and supercharged IPO firms, consistent with the higher offer price for supercharged IPO firms not reversing. Our results contrast critics’ claims that tax receivable agreements allow pre-IPO owners and advisors to extract rents from new IPO investors.