Australian Initial Public Offerings Research Articles

Australian initial public offerings and US venture capital: different structures for similar early-stage funding?

PurposeAustralian Securities Exchange (ASX) initial public offerings (IPOs) are an important source of early-stage capital and have also driven a substantial increase in main-board listed companies post-millennium. By contrast, Australian venture capital (VC) funding has remained largely dormant. The opposite has occurred in the US: IPOs have fallen by half, and VC funding has surged. The authors examine the reason for this divergence between ASX IPO and US VC systems that, with their supporting ecosystems, have many features in common and function similarly. The authors explore the potential factors that could explain the US VC surge vis-à-vis Australia's VC stagnation.Design/methodology/approachThe authors’ analysis is predominantly qualitative. The authors describe the Australian listing process and its similar features and functions as for the prototypical VC. The authors also describe the developments in US VC driving its recent exceptional surge and highlight that such developments have not yet materialised on the Australian scene, where early-stage IPOs have served as a substitute.FindingsThe ASX's structure and ecosystem have been critical to its success in fostering early-stage main-board listings. While the US has succeeded in alternatively growing VC, there is an increasing concern that the latter has occurred partially because valuations are stretched, tax concessions for carried-interest capital gains are too high and corporate control benefits are becoming increasingly diluted. These developments could have important implications for Australia, where VC structures are currently being reviewed.Originality/valueTo the best of the authors’ knowledge, no prior study has attempted to bridge the broad differences in IPO and VC funding trends for early-stage companies in Australia and the USA.

Underwriting in the Australian IPO markets: Determinants and pricing

We examine the factors that explain the underwriting decision and underwriting fees for Australian initial public offerings (IPOs). Using a sample of Australian IPOs, spanning the period 1999–2019, we document the following results. IPOs that allow oversubscription of the shares, bookbuild offers, and IPOs with a greater delay to listing, are less likely to be underwritten. We also find that more prestigious underwriters are associated with greater IPO underpricing, while charging lower percent underwriting fees. Prestigious underwriters capture side benefits associated with their reputational status by offering their clients or favoured investors with discounted shares. JEL Classification: G12, G19, G38

Underwriting in the Australian IPO Markets: Determinants and Pricing

We examine the factors that explain the underwriting decision and underwriting fees for a sample of Australian Initial Public Offerings (IPOs), spanning the period 1999-2016. This includes young and often unprofitable IPOs that list as Commitments Test Entities (CTEs). We find: (i) CTE IPOs are more likely to be underwritten than non-CTE IPOs; (ii) IPOs that allow oversubscription of the shares and/or are issued by way of a bookbuild are less likely to be underwritten; and, for underwritten offers, we find (iii) greater initial returns and wealth loss to pre-existing shareholders for bookbuild IPOs and lower initial returns (wealth loss) in IPOs that allow oversubscription of the shares.

New evidence of short-run underpricing in Australian IPOs

The short-run market performance of initial public offerings (IPOs) indicates that the prices are often underpriced. This is widely accepted as a universal phenomenon. To find out whether Australian IPOs are underpriced, this paper analyzes the short-run market performance of 254 IPOs by industry, listing year and issue year. To measure the performance, the first-day returns are divided into the opening price primary market and the closing price secondary market, and the post-listing returns are also examined. The study found that, overall, Australian IPOs were underpriced by 25.47% based on abnormal returns and 26.43% on raw returns on the first-day primary market, which was statistically significant at the 1% level. However, analysis of the secondary market indicates that the Australian IPOs were overpriced by 1.55% and 1.54% on abnormal and raw returns, respectively, which was statistically significant at the 5% level. The examination of post-listing returns shows that Australian IPOs were underpriced based on cumulative abnormal returns (CARs) on the 3rd, 6th, and 10thdays by 24.63%, 24.06%, and 23.34%, respectively. The primary and post-listing analysis shows that IPOs in the industrial sector are more attractive to investors, whereas those in the chemical and materials sector are less attractive compared to other sectors. As far as the investors’ wealth is concerned, the study concludes that the short-run market performance analysis should consider both the first-day and post-listing returns

Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

AbstractI use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.

Evaluation of Short-Run Market Performance and Its Determinants using Binary Models: Evidence from Australian IPOs

To determine whether Australian initial public offerings (IPOs) underprice in the short run, and to identify their determinants, this study investigated the short-run market performance of 254 IPOs listed during 2006 to 2011 by industry and year (listing and issue). To measure their short-run performance, the first listing day returns were divided into the primary market, the secondary market, and the total market. The investigation was then extended to a post-day listing analysis that included returns of up to nine trading days. To identify the determinants of short-run market performance, this study estimated binary regression models with offer, firm and market characteristics. Marginal probability analysis was also carried out to estimate the associated probability of each determinant that indicated a directional change in market performance. The study found that, overall, the Australian IPOs underpriced by 25.47% and 23.11% based on the market-adjusted average abnormal return (AAR) in the primary and total market respectively. However, the secondary market analysis indicated that the Australian IPOs overpriced by 1.55% based on the AAR. The examination of post-listing returns showed that the Australian IPOs underpriced based on the average cumulative abnormal return (CAR), and this signals that investors’ wealth can be diluted in the long run. The overall results varied by industry and year. The IPO period, time to listing, LISDs, total net proceeds ratio and market volatility were the main determinants for the observed short-run performance. Marginal probability analysis also indicated that the market volatility and total net proceeds ratio had a significant effect on the directional changes of the short-run performance. The findings support Rock’s hypothesis and the uncertainty hypothesis.

Competitive valuation effects of Australian IPOs

This study examines the valuation effects that Australian initial public offerings (IPOs) have on industry competitors and to what extent this can be explained by the IPO firm's corporate governance profile and the intended use of their offer proceeds. Using a sample of 106 IPOs between 1999 and 2009, the results indicate that companies experience negative stock price reactions to the completion of an IPO in their industry on days leading up to and including the event date. The multivariate results show that in relation to corporate governance factors, both board size and CEO share ownership exhibit negative relationships with rival firm abnormal returns. Moreover, IPOs which disclose either investment, or both debt reduction and investment as the intended use of proceeds result in a greater negative price impact upon rival firms.

New Evidence of Short-Run Underpricing in Australian IPOs

The short-run market performance of the initial public offerings (IPOs) indicates that the prices are often underpriced which is widely accepted as a universal phenomenon. To find out whether the Australian IPOs are underpriced, this paper analyses the short-run market performance of 254 IPOs by industry, listing year and issue year over the period 2006 to 2011.To measure the performance, the first listing day returns are divided into the first day opening price primary market and the closing price secondary market and further examine the post-day listing returns. The study found that overall the Australian IPOs are underpriced by 25.47% based on abnormal returns and 26.43% on raw returns on the first listing day primary market and it is statistically significant at 1% level. However, the secondary market analysis indicates that the Australian IPOs are overpriced by 1.55% and 1.54% on abnormal and raw returns respectively which is statistically significant at 5% level. The examination of post listing returns shows that Australian IPOs are underpriced based on cumulative abnormal returns (CARs) in the 3rd, 6th and 10th days by 24.63%, 24.06% and 23.34% respectively. The primary and post listing analysis shows that the industrial sector IPOs are more attractive to investors whereas the chemical and material sector IPOs are less attractive compared to other sectors .As far as the investors’ wealth is concerned, the study concludes that the short-run market performance analysis should consider both the first day and post-day returns.

What Do Investment Banks Truly Bring to the Table?

This paper investigates the role of intermediaries in the initial public offering (IPO) process. In the U.S. market, investment banks have traditionally been involved in a firm-commitment or best-efforts underwriting capacity. However, in the Australian IPO market, investment banks are increasingly being named in association with new issues in diverse roles such as issue managers, sponsoring brokers and corporate advisers. Using a sample of 468 IPOs over the 1996 to mid-2006 period, we examine the influence of investment banks across these different engagements. In support of the signalling and information production roles of intermediaries, we find that issuers choosing high intermediary involvement are typically older, retain more capital, seek to raise larger amounts of capital and are without independent expert certification. We find mixed support for the certification hypothesis when testing for the effect of intermediary reputation on IPO issuer wealth loss. Further, the impact of intermediary involvement on underpricing is not significantly different for the different levels of intermediary involvement once issue characteristics have been accounted for. This is puzzling since these different roles by definition do not provide the same level of issue quality assurance.

Underwriter reputation and underpricing: evidence from the Australian IPO market

Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267–280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5–37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.

A duration analysis of the time from prospectus to listing for Australian initial public offerings

A finding of the Australian Initial Public Offerings (IPOs) literature is that the time from prospectus registration to listing is related to the level of informed demand. This makes the understanding of time to listing an important matter. This study analyses the time to listing for 834 IPOs in Australia over the period 1994 to 2004. The study finds that a shorter time to listing is associated with higher issue prices, and the use of an underwriter or Big 5 independent accountant. In contrast, IPOs offering share options take longer to list. The significant role of variables associated with the degree of certainty about a listing is consistent with informed demand hypotheses about the time to listing.

The impact of venture capital backing on the corporate governance of Australian initial public offerings

This study explores the role of venture capitalists on investee boards at the time of listing for 552 initial public offerings. Australian board structures and mechanisms are more similar to those in the US and the United Kingdom, but market activity characteristics are more similar to Japanese and German systems. Further, the Australian private equity market is relatively young compared to US and European markets. IPOs backed by venture capital have more independent boards, similar to US IPOs. Venture capitalists improve governance by using their networks to recruit specialist independent directors with industry experience.

Board governance and IPO performance in the short-run and long-run

In light of the best practice recommendations released by the Australian Stock Exchange (ASX) in March 2003, this study tests the relationship between initial public offering (IPO) firm performance and board governance quality, captured by board size, board leadership, board composition, and director’s share ownership. Based on a sample of Australian IPO firms that lodged prospectuses with ASX between 1994 and 1999, we do not find evidence that links underpricing to board structures at the time of IPO. IPO firms’ board structures are insignificant in explaining the level of IPO underpricing, and board size is the only board governance variable significant in explaining long-run after market performance, after controlling for the size of the firm. That is, IPO firms with larger boards at the time of issuance perform better in the long-run, consistent with the resource dependence theory. Thus, we conclude that ASX’s best practice recommendations are likely to distort the market-driven practice salready in place, and our findings lead us to question the role played by the board of directors in signalling firm quality.

Auditor Conservatism and Audit Quality: Evidence from IPO Earnings Forecasts

We investigate the relation between a proxy for differential audit quality and both the (ex post) accuracy and conservatism of audited earnings forecasts provided in Australian initial public offering (IPO) prospectuses. For the period we examine, most Australian IPO prospectuses include an earnings forecast (i.e., disclosure is not ‘voluntary’), and the auditor must be satisfied prior to signing off on the prospectus. After controlling for other factors associated with forecast error, there is some evidence that forecasts audited by Big 6 auditors prove more accurate than those audited by a non‐Big 6 auditor, although this result is not robust across alternative measures of forecast accuracy. In contrast, our finding of significantly less optimistic bias for forecasts associated with Big 6 auditors is robust to alternative measures of forecast bias. We interpret these results as being consistent with the argument that the economic demand for differential audit quality reflects the same factors that underlie the demand for conservative financial reporting.

The representativeness of management financial forecasts vis‐à‐vis naïve forecasts

PurposeThis paper aims to extend the research into company financial forecasts by modelling naïve earnings forecasts derived from normalised historic accounting data disclosed during Australian initial public offerings (IPOs). It seeks to investigate naïve forecast errors and compare them against their management forecast counterparts. It also seeks to investigate determinants of differential error behaviour.Design/methodology/approachIPOs were sampled and their prospectus forecasts, historic financial data and subsequent actual financial performance were analysed. Directional and absolute forecast error behaviour was analysed using univariate and multivariate techniques.FindingsSystematic factors associated with error behaviour were observed across the management forecasts and the naïve forecasts, the most notable being audit quality. In certain circumstances, the naïve forecasts performed at least as well as management forecasts. In particular, forecast interval was an important discriminator for accuracy, with the superiority of management forecasts only observed for shorter forecast intervals.Originality/valueThe results imply a level of “disclosure management” regarding company IPO forecasts and normalised historic accounting data, with forecast overestimation and error size more extreme in the absence of higher quality third‐party monitoring services via the audit process. The results also raise questions regarding the serviceability of normalised historic financial information disclosed in prospectuses, in that many of those data do not appear to enhance the forecasting process, particularly when accompanied by published management forecasts and shorter forecast intervals.

The gender composition of boards after an IPO

PurposeThe purpose of this paper is to empirically analyse the change in the gender composition of the boards of large Australian companies, after listing.Design/methodology/approachThis study investigates the gender composition of the boards of large Australian companies at the time of the initial public offering (IPO) and subsequently as these companies mature into established public companies. It also investigates industry influences and organizational size influences on the board composition at the time of the IPO and subsequently.FindingsNo significant change is found in the proportion of male and female directors holding directorships at the time of the IPO and some five to eight years later when the company is recorded as a top 500 company (by market capitalization) on the Australian lists. This implies that the capital market is generally satisfied by the gender composition of boards from the time of the IPO.Originality/valueThis paper follows extends on previous work which provides evidence of a relatively low proportion of female directors on the boards of Australian initial public offerings.

The Importance of Intangible Assets in Initial Public Offerings

This paper follows Beatty and Ritter (1986), who argue that lower uncertainty about the value of an initial public offering (IPO) reduces the 'need' for the underpricing of an IPo. Australian IPOs often identify the existence of intangible assets such as goodwill, licenses, brand names, trademarks, patents and capitalized research and development costs in the prospectus. This paper analyses if IPOs identifying the existence of such intangible assets in the prospectus might reduce uncertainty about their valuation and hence allow a lower underpricing return. While the reporting of intangible assets such as goodwill and license costs in the prospectus are not significant ingredients in the level of underpricing, the identification and valuation of intangible assets such as brand names, trademarks, patents and capitalized research and development costs is significant in reducing the level of underpricing return. Our findings are also consistent with previous studies concluding that both the size of the new issue and the use of an underwriter are important in the level of underpricing return.

Stakeholder representation on the boards of Australian initial public offerings

This paper analyses the board composition of Australian initial public offerings (IPOs) over the period 1994 to 1997. The recent management literature identifies a wide range of stakeholders beyond the traditional shareholders. Evan and Freeman, and Jones and Goldberg suggest that the importance of stakeholders should be reflected in board representation. Luoma and Goodstein provide evidence of increased stakeholder representation on the boards of American companies. This paper studies Australian IPOs and finds that this is not the case. This suggests that capital raising by new lists in the Australian equity market does not require stakeholder representation on the board.

Corporate governance, insider ownership and operating performance of Australian initial public offerings

AbstractWe examine ownership structures and corporate governance attributes of 313 Australian initial public offerings (IPOs) between 1976 and 1993 and their relation with up to 5 years of post‐listing operating performance, adjusted for similar (non‐IPO) firms. Consistent with prior share price‐based evidence, we find that the operating performance of Australian IPOs typically deteriorates over the first 4 post‐listing years. Any evidence of a positive association between insider ownership and firm performance is confined to the fourth and fifth years after the IPO. Evidence of a positive relation between institutional ownership and performance is restricted to the latter part of our 5‐year post‐listing window. Board composition (i.e. outsider versus insider control) is not associated with operating performance, although there is some evidence that independent board leadership is associated with better operating performance.

Initial Public Offerings in Australia 1994 to 1999, Recent Evidence of Underpricing and Underperformance

This paper analyses whether financial and non financial characteristics of Australian initial public offerings (IPOs) can explain observed underpricing and long term underperformance over the period 1994 to 1999. A number of previous Australian studies have investigated initial day underpricing and longer term underperformance of IPOs and this study updates those papers. We find that initial day underpricing can in part be explained by market sentiment, forecast dividend per share yields, underwriter options and share options. Our longer term analysis supports the finding of previous studies in that IPOs on average, underperform the market in the first year following their listing.