IPO Firms Research Articles

The cost of going public and financial constraints

AbstractWe provide empirical evidence on the bargaining power model proposed in Hu and Ritter (2007) by examining the financial constraints channel on the direct and indirect cost of going public. We find that financially constrained firms possess lower bargaining power and thereby incur higher direct costs (gross spreads) and higher indirect costs (underpricing) in an IPO. Consistent with the bargaining power model, we find that IPOs of financially constrained firms are usually managed by sole bookrunners and underwritten by smaller syndicates. Finally, we find that these financially constrained IPO firms underperform their non-financially constrained IPO peers in the long term. These results are robust to multiple endogeneity tests.

The impact of investment banks going public on underwriting behavior: Evidence from IPO clients’ earnings management

This study examines the economic incentive theory, positing that listed investment banks facing significant economic pressure are likely to compromise their underwriting quality to meet client demands. Analyzing Chinese IPO firms from 2006 to 2020, we observe that those underwritten by listed investment banks demonstrate more substantial earnings management compared to those underwritten by privately held banks. This tendency is more evident in scenarios where investment banks have stronger economic incentives, weaker corporate governance, and increased performance pressure. We also find that IPO firms underwritten by listed investment banks are likelier to pass the IPO screening by the China Securities Regulatory Commission and secure higher IPO prices through pronounced earnings management. Additionally, these firms show poorer post-IPO accounting performance and stock returns. Our findings suggest that the public listing of investment banks can compromise the impartiality and quality of their services as gatekeepers in the capital market, particularly in emerging markets with limited shareholder rights protection. These results underscore the need for investors, stakeholders and regulators to be vigilant about the potential compromise to the independence of investment banks following their public listings.

The impact of the JOBS act on the costs of going public: evidence from long-term audit costs

The Jumpstart Our Business Startups (JOBS) Act (2012) allows reduced compliance costs for IPOs with less than $1 billion in revenues. While prior research has focused on the Act’s ability to reduce short-term IPO compliance costs, we investigate how the Act affected key observable compliance costs – audit fees – over the five years the issuing firm is eligible for this reduced level of disclosure/compliance. In contrast to prior findings of increased short-term audit costs, we find that long-term audit costs decreased by 16.6 percent, or $172,000 for IPO firms following JOBS, relative to the change fees for in control firms unaffected by the regulation. After investigating other consequences of the Act, we find greater information uncertainty for affected firms following JOBS. However, we find lower accrual-based earnings management as responses to these information frictions. We find the reductions in earnings management is driven by firms with the greatest information uncertainty with investors, suggesting that affected firms take additional steps to mitigate the information risks in light of their inherently riskier IPOs. Overall, we present a fuller picture of the costs/benefits and risk mitigation in post-JOBS IPOs.

The effect of gambling culture on initial public offering underpricing

We examine the effect of gambling culture where an IPO firm is located on its IPO underpricing. Our findings suggest that an IPO firm in a strong gambling culture region, on average, operates more aggressively than one in a weak gambling culture region. Then, we show that such IPOs exhibit lower underpricing than their counterparts. The findings remain qualitatively the same after an array of robustness checks. We interpret the results as indicating that IPO investors consider aggressively operated IPO firms to have good upside potential and are willing to pay higher subscription prices for these IPOs.

Who Performs Better? The Roles of Acquisition and Scaling on Performance of High Growth IPO Firms

Who Performs Better? The Roles of Acquisition and Scaling on Performance of High Growth IPO Firms

Preopening auctions and price discovery in initial public offerings

Using a proprietary dataset for 97 IPO firms, we examine investors’ trading activities in newly listed firms during the one-hour preopening auction on the Bombay Stock Exchange on the listing day. We document significant price discovery during the preopen. We find that the offer-to-first quote returns largely explain IPO initial returns. The probability of informed trading is much higher during the preopen than during the trading day, and trades by institutional investors are more informative than those by other investors. We also find that illiquidity decreased after the introduction of the preopening auction.

Delaware Reincorporation and the Double-Exit Puzzle: Evidence from Post-Initial Public Offering Acquisitions

Initial public offerings and mergers and acquisitions represent important opportunities for investors to exit and harvest their entrepreneurial success. Some firms are acquired shortly after their initial public offerings. This exit strategy is known as a double exit. In addition, issuing firms may choose to reincorporate in Delaware during their IPOs. In this study, we use hand-collected data from 1993 to 2020 to investigate whether and to what extent Delaware reincorporation may affect the M&As in the post-IPO stage. We use a Cox proportional hazard model to test the relation between Delaware reincorporation and the likelihood of being acquired for our sample IPOs. Recognizing that Delaware reincorporation is not a random decision, we adopt a Heckman switching regression method to estimate the relation between Delaware reincorporation and takeover premiums and announcement returns. We report that IPO firms choosing to reincorporate in Delaware experience a higher likelihood of being acquired compared to those IPO firms choosing to remain incorporated in their home states. We further document that IPO firms choosing to reincorporate in Delaware receive lower premiums in acquisitions, and experience lower abnormal returns on announcements.

A comparison of direct listings and IPOs

AbstractIPOs and direct listings (DLs) offer two different mechanisms for firms to go public. In contrast to IPOs, DLs do not employ an underwriter or raise new capital. Using a sample of IPOs and DLs on major stock markets in the European Union, we document that firms that choose to go public via DLs are larger, more profitable, and less levered, on average, than IPO firms. These pre‐listing differences suggest that DL firms should be less risky than IPO firms; however, controlling for this selection effect, we find that DLs have higher aftermarket price volatility than IPOs. This is consistent with some policy‐makers' concerns that, because they lack an underwriter, DLs expose investors to higher risk than IPOs in the immediate post‐listing period. We show that this heightened price volatility persists, on average, for the first 20 trading days after listings, and is larger in industries where listed peer firms provide relatively low‐quality disclosures. Our results provide new evidence regarding the types of firms that choose to list via DLs versus IPOs and the riskiness of IPOs versus DLs in the immediate post‐listing period; additionally, our results are consistent with underwriters improving the quality of information available to investors for IPO firms in the pre‐listing period.

Community social capital, managerial opportunistic behavior, and information uncertainty in IPO firms

AbstractWe examine whether and how community social capital influences the information uncertainty of a private firm's going‐public process. We find that high social capital of the US counties in which IPO firms are headquartered significantly reduces underpricing and post‐IPO stock volatility. This relation is stronger under lessened disclosure requirements and less reputable underwriting. Further findings suggest that high social capital constrains IPO issuers from practicing opportunistic financial reporting. We document that high social capital is associated with a more readable prospectus, less financial misconduct, more readable annual reports, and better long‐run stock return performance in the years following the IPOs.

Do innovator CEOs matter in IPOs?

AbstractThis paper examines the impact of innovator CEOs on their firms' IPO underpricing, long‐run performance and post‐IPO innovation. Firstly, we find that IPO firms led by innovator CEOs experience lower first‐day returns (indicating lower IPO underpricing). This phenomenon can be attributed to a CEO's innovative ability, as it plays a pivotal role in mitigating information asymmetry within the IPO market. Secondly, we observe that IPO firms with innovator CEOs have greater IPO long‐run performance. Lastly, our analysis reveals that IPO firms led by innovator CEOs demonstrate greater firm‐wide innovation up to 4 years after the IPO. Overall, our study highlights the effect of CEO characteristics on firm performance in the IPO market.

Gender diversity at entrepreneurial firm IPOs: responding to changing societal norms

Recently, the lack of diversity in startup leadership has been criticized by public figures and institutional investors as a signal of inadequate governance. And yet, little is known about the historical changes in gender diversity in entrepreneurial firms. Using a unique database of the gender composition in all entrepreneurial firm IPOs from 1990 to 2020 in the USA, we examine these changes. The IPO is a particularly interesting moment in an entrepreneurial firm’s evolution, as governance evolves from a private firm directed by venture capitalists, with their beliefs about what a good management team is, into a public firm with owners who are institutional investors with potentially different goals and beliefs. Grounded in signaling theory, our expectation is that the changes in public investors’ view of proper governance will result in changes in the gender in personnel added immediately prior to the IPO and that IPO teams will be more diverse than Early Teams when the firm was younger and controlled by its private investors. We suggest that the private investors such as venture capitalists have different mental models of what “good” members or top management and the board of directors are. We expect these models are particularly influential in the digital technologies where a “tech bros” model is dominant, and thus there is little “space” for women leaders, particularly in contrast to the university research-based biotechnology industry, which has not experienced such direct criticism. We find support for our propositions, and also document an increase in women directors and top management team members over time.

Response of anchor investors to pre-IPO earnings management: evidence from an emerging market

PurposeThis study aims to examine the reaction of anchor investors (AIs) to pre-IPO earnings management (EM). The authors use the unique detailed bid data from the Indian anchor experiment. The authors also study the reputed AIs’ EM detection ability and pricing behavior in response to pre-IPO EM.Design/methodology/approachThe authors use unique AI bid data for 169 Indian IPO firms. Utilizing the logistic regression and Tobit regression models with industry and year-fixed effects, the authors examine the relationship between various measures of AI participation and proxies of short-term and long-term discretionary accruals.FindingsThe authors document that pre-IPO EM is positively associated with the likelihood of anchor backing but negatively related to the likelihood of reputed anchor backing. The findings indicate that AIs are misled by pre-IPO EM, but reputed AIs are not. The authors also observe that reputed AIs, compared to the non-reputed, pay less than the upper band with increasing EM. The findings are robust to using various AI measures and EM proxies.Practical implicationsThe findings have significant implications for regulators in the implementation of AI concept in non-anchor markets and better implementation of policies in existing anchor settings. Findings can also be relevant for non-institutional investors in the IPO domain.Originality/valueThis is one of the few studies on institutional investors' IPO bidding behavior in response to pre-IPO EM. However, this is the first study to analyze AIs' IPO bidding behavior in response to pre-IPO EM.

THE COMPETING-RISK ANALYSIS OF POST-IPO DELISTINGS

This paper is working on one IPO panel data to estimate the predicting power of some covariates on future status of IPO firms after going public. These new firms could be delisted due to two major reasons, either acquisition or liquidation. Specifically, our study aims to examine how the possibility of each type of delisting could be determined. There are two main findings in this paper. First, we find that the inclusion of the aftermarket performance in a competing-risk model helps distinguish the impact of those covariates on the two types of delistings. For example, profitability increases the chance of being delisted due to mergers but decreases the chance of being delisted due to bad performance. Second, our evidence indicates that time-varying covariates may impact the delistings in different ways. For instance, profitability appears to affect the voluntary delistings only until last year before delisting. In sum, our paper contributes to the prior literature by shedding light on how voluntary/forced post-IPO delistings are determined.

A global review of the literature on and proxies of busy boards and audit committees

PurposeThis study comprehensively reviews the global literature on busy boards and audit committees.Design/methodology/approachSix eight articles on busy boards and audit committees from prominent accounting journals are reviewed and analyzed under the “reputation” and “busyness” premise.FindingsMost studies advocating the “reputation” hypothesis have the consensus that busy directors have their benefits (knowledge spillovers), particularly regarding sharing their in-depth knowledge, experiences and expertise. This phenomenon is pronounced for younger and IPO firms, which have high advising and financing needs. From the “busyness” perspective, busy directors are too overboard in carrying out their duty effectively and responsibly.Practical implicationsThis study identifies future research avenues on busy boards/audit committees and suggests that policymakers and regulators should limit the number of board appointments.Originality/valueThis is the first study to extensively amalgamate research on busy directors and audit committees. It reveals the various proxies used to measure the busyness of board and audit committee members and the consequences of busyness.

Do retail and institutional investors react differently to earnings management? Evidence from Indian IPOs

PurposeThis study investigates the impact of pre-IPO earnings management on investor demand in the Indian IPO market. It also examines whether earnings management by issuer firms affects IPO valuation, a topic that is underexplored in accounting research.Design/methodology/approachThe study uses the data of 310 IPOs from India during the period 2000–2021. The association between pre-IPO earnings management with investor demand and valuation is tested using cross-sectional ordinary least squares regression models with heteroscedasticity-robust standard errors.FindingsThe study finds that the degree of pre-IPO earnings management impacts retail investor demand, measured as their over-subscription multiple. Pre-IPO earnings management is unrelated to institutional investor bidding. Further, this paper suggests no relation between pre-IPO earnings management and IPO valuation.Research limitations/implicationsFuture studies could explore various other forms of earnings management and their impact on investor demand and valuation.Practical implicationsThe findings of this study will help the investors and regulators to understand the practice of earnings management among IPO firms and how it is related to IPO demand and valuation.Originality/valueThis study contributes to the existing literature on IPO-earnings management and investor demand by documenting that issuer firms engage in earnings management to influence investor demand, particularly retail investor demand. Analysis of IPO valuation reveals that earnings management is mostly unrelated to IPO valuation, contrary to the general perception in the literature.

The Relationship between Managerial Ownership and Firm Performance Mediated by Real Earnings Management of Thai IPO Firms

This study aims to examine the effect of managerial ownership on firm performance, both directly and through real earnings management as a mediating variable, during the pre- and post-initial public offering (IPO) years. Thai quoted companies on the Market for Alternative Investment (MAI) between 2012 and 2017 are analyzed. The findings reveal that before the IPO year, higher managerial ownership exhibits a positive association with firm performance, and this relationship is fully mediated by real earnings management. However, after the IPO, managerial ownership no longer significantly affects firm performance, and real earnings management acts as a mediating variable. These findings highlight the changes in ownership structure during the transition from private to public companies. The decline in managerial ownership post-IPO strongly suggests a potential loss of control and influence, which could impact strategic decisions, financial reporting practices, and operational efficiency. This research adds valuable and important insights to the previous studies on managerial ownership, earnings management practices, and firm performance, offering policymakers, investors, and market participants a better understanding of these dynamics. Nonetheless, it is critical to note that the study’s focus on the MAI in Thailand may limit the generalizability of the findings, so further research is strongly advised to be undertaken in diverse markets and contexts.

The effect of lead institutional investors on investment and capital structure of young firms: Evidence from Indian IPOs

We study the consequences of an exogenous event, a regulation that allows IPO firms to seek investment from lead institutional investors in India. We document a significant increase in IPO volume as a result of the regulation. Post-regulation, lead-investor backed firms experience a reduction in issuance cost, an increase in capital investments and a decrease in leverage. The effects on investments and leverage are significant for high growth and financially constrained firms. Financially constrained firms backed by lead investors raise 26.4% more equity than unconstrained firms. Our findings provide evidence that discretionary allocation of shares to lead institutional investors could reduce capital constraints.

The Influence of New IPO Firms on Incumbent Performance: An Empirical Investigation

Market entry of new IPO firms adds to the competition of any industry, however, the impact on competitors may differ depending on several factors. Our study contributes to the literature on IPOs and incumbent performance by providing empirical evidence of the importance of firm specific characteristics in determining performance. Using a sample of 232 firms, we found that the strategic content of an IPO firm's prospectus affects the short-term pricing of incumbents during an IPO. Specifically, our findings suggest that IPO firms that signal high levels of exploitative tendencies in their prospectus have a negative impact on incumbents’ performance. Incumbent firms’ high degree of involvement in the focal business segment of the IPO firm tends to negatively impact their performance. Finally, technologically diversity of incumbents attenuates the negative impact of new IPOs.

감사인지정제도가 KOSDAQ IPO 시장의 효율성에 미치는 효과

Purpose - The purpose of this study is to empirically investigate whether the auditor accreditation system for IPO firms improves the efficiency of the KOSDAQ IPO market. To verify the effectiveness of the auditor designation system, we time series compare four measures of IPO firms (earnings management, long-term stock performance, change in operating performance, and possibility of delisting).
 Design/methodology/approach - We test the hypothesis through event research method and regression analysis. Specifically, the dependent variables of the regression model are discretionary accruals in the year of IPO, 36-month holding period excess return after IPO, change in operating performance for 3 years after IPO, and dummy variable for delisting. And the explanatory variable is a dummy variable that separates the period before and after the implementation of the auditor designation system.
 Findings - We find that earnings management and delisting risks decreased more in the period after the implementation of the auditor accreditation system than in the previous period. In addition, we find that long-term stock performance and operating performance after IPO increase further after the implementation of the auditor accreditation system.
 Research implications or Originality - Overall, the results of this study suggest that the implementation of the auditor accreditation system for IPO firms contributes to improving market efficiency in the KOSDAQ market, where information asymmetry is high. Our study differs from previous studies in that it demonstrates the effectiveness of the auditor designation system using various measures.

Board Diversity Terhadap Underpricing IPO dan Firm Value pada Perusahaan terdaftar di Bursa Efek Indonesia (BEI)

This research aims to determine the effect of Board Diversity on IPO Underpricing and Firm Value in companies listed on the Indonesia Stock Exchange (BEI). This research method uses hypothesis testing method. Hypothesis testing in this research examines the influence of the variables Bsize, outside, AGE_SD, and woman on the underpricing and firm value variables. secondary data is data obtained indirectly. The data sources in this research were obtained from the BEI website (https://www.idx.co.id), investing.com website (https://www.investing.com). There are control variables, namely CAPEX, Age, leverage, ROA, size and new shares. The data used in this research is panel data, namely a combination of cross sectional and time series data on companies that conducted an IPO in 2017 on the IDX with observations for 5 years (2017 - 2021). In conclusion, that Board Size has no effect on IPO Underpricing and Board Size has a significant effect on Firm Value.
 Keywords : Board Diversity, Firm Value, IPO, Underpricing