Foreign Initial Public Offerings Research Articles

Underwriting syndicate structure and foreign IPO underpricing: A team production perspective

Grounded in team production and agency theory, we investigate investment bank opportunism in the context of 466 foreign initial public offerings (IPOs) in U.S. equity markets from 2009 to 2023. Findings reveal that IPO underpricing is higher for foreign firms underwritten by larger and more diverse syndicates owing to concerns about free-riding and moral hazard. Our results are robust to a series of sensitivity tests. Moreover, frequent foreign IPOs by home-country firms and strong home-country legal protection for investors attenuate the positive relationship between underwriting syndicate size and diversity and IPO underpricing. By delineating the collaborative nature of IPO underwriting, this study offers new insights into the implications of syndicate structure for foreign IPO performance.

Do Digital Technologies Add Value? The Role of Digital Diffusion in Foreign IPO Firms

In this article, we contribute to international IPO research on technology and institutions by investigating the relationship between digital strategic intents in initial public offering (IPO) prospectuses and the performance of foreign IPO firms going public in the United States (US). Despite the expectation of this foreign listing activity to convey digital quality, our theory and results suggest the digital adoption-use gap on both the firm and institutional level to create an uncertain digital diffusion process, an investment environment conveying low transparency, and a resulting IPO discount. We further explore contingencies of the chief executive officer’s (CEO) and board of directors’ technology expertise, investigating interrelationships among technology, institutions, upper echelon and foreign IPO performance. Considering uncertainties carried by the digital adoption-use gap, we find both contingencies to be negative moderators.

The evolution of corporate governance and agency control: the effectiveness of mechanisms in creating value for companies with IPO on the Brazilian stock exchange

PurposeFrom the agency theory’s point of view, this paper aims to analyze corporate governance mechanisms about the characteristics of the companies quoted in the segments Bovespa Mais and Bovespa Mais 2 and their influence on the creation of value in preparation for the opening of the initial public offering (IPO).Design/methodology/approachA quantitative approach was adopted to achieve the proposed objective using the panel data with fixed effects and secondary data collected on the Comissão de Valores Mobiliários website, using statistical software Stata® 13.0 for statistical tests. The population comprises non-financial companies belonging to the Bovespa Mais and Bovespa Mais Level 2 groups, as the survey sample took into account the period of adhesion of the companies, totaled in 15 companies, which cover the period from 2008 to 2019. The selected variables correspond to the ownership structure’s characteristics, then the board’s composition and the fiscal council as the body responsible for supervising the administrators’ acts.FindingsThe main results indicate that the number of independent members on the board of directors and the supervisory board’s participation positively influence market performance. However, it also reveals that the concentration of ownership brings fundraising for other companies’ acquisitions, risk reduction concerning information asymmetry between investing powers.Research limitations/implicationsThe main results indicate that the number of independent members on the board of directors and the supervisory board’s participation positively influence market performance. Despite this, it also reveals that the concentration of ownership brings fundraising for other companies’ acquisitions, risk reduction concerning information asymmetry between investing powers.Practical implicationsThis paper advances a comparative institutional perspective to explain capital market choice by firms making an IPO in a foreign market. This paper finds that internal governance characteristics (founder-chief executive officer, executive incentives and board independence) and external network characteristics (prestigious underwriters, degree of venture capitalist syndication and board interlocks) are significant predictors of foreign capital market choice by foreign IPO firms.Social implicationsWhile product market choices have been central to strategy formulation for firms in the past, financial markets’ integration makes capital markets an equally crucial strategic decision. This paper advances a comparative institutional perspective to explain capital market choice by firms making an IPO in a foreign market.Originality/valueThis situation generates value to shareholders and is perceived by the market and, ultimately, generates a direct relationship with the market performance of companies. While product market choices have been central to strategy formulation for firms in the past, financial markets’ integration makes capital markets an equally major strategic decision.

The Narrated Global Orientation and the Liabilities of Newness and Foreignness

This research builds upon the liabilities that firms undergo during foreign initial public offerings (IPOs). While many studies have explored global orientation in internationalization, not much research has focused on the IPO context and the effect upon the liabilities of newness and foreignness. Using a sample from 2008 to 2014 of foreign IPO firms in the United States (US), our study finds evidence about the impact of the narrated global orientation. To detect how a firm narratively focuses on which dimensions of global orientation, we use hierarchical topic modeling and propose a global orientation narrative strategy of a firm using the modeling. The results show that the narrated market-driven and technology-driven global orientation in an IPO process have moderating effects on the relationship between the liabilities of newness and foreignness and IPO performance.

The impact of corporate political connections and executive’s international experience on Chinese firms’ initial public offerings in the USA

PurposeIntegrating social network theory with signaling theory, the purpose of this research is to examine the impact of corporate political connections and executive’s international experience on Chinese firms initial public offerings (IPOs) performance in the USA.Design/methodology/approachThis study used Securities Data Company (SDC) New Issues database to identify all Chinese firms that went public in the USA between 2003 and 2014. Consistent with previous research, IPO firms excluded from the sample include merger or acquisitions, spin-offs and initial stage listed firms. The final sample size is of 142 Chinese foreign IPOs in the US markets.FindingsThis study finds that firms with political connections perform significantly poor than firms without political connections. It shows that US stock markets react to the signals of political connections of Chinese foreign IPOs. In response, the Chinese foreign IPOs can signal international work experience of top executives to US investors. The results show that the executives’ international work experience has significant positive relationships on foreign IPO performance of Chinese firms. Moreover, this study finds that the interaction between corporate political connections and international experience pursues positive effects on the performance of foreign IPOs.Originality/valueThis research intends to extend the knowledge of how corporate political connections and international work experience affects the performance of Chinese firms attempting to access US capital markets. To date, scholars have not investigated the influence of corporate political connections on the amount of capital raised by foreign IPOs.

Signaling value of top management team

PurposeThe purpose of this paper is to integrate the upper echelon theory with signaling theory and examine the impact of top management team (TMT) on the initial public offering (IPO) performance of Chinese firms in the USA.Design/methodology/approachThis study used Security Data Corporation (SDC) that is a central database for foreign IPOs in the USA. The authors identified 142 Chinese firms that issued stocks on the US markets between 2003 and 2014. This study used firm’s final prospectuses to collect data manually.FindingsThis study finds that the TMT characteristics such as functional heterogeneity and international exposure convey the positive signal of firm’s legitimacy to the US investors and increase the IPO performance.Originality/valueThis study extends the upper echelon perspective that has previously overlooked the signaling value of TMT characteristics in the foreign IPO studies. The top management plays an important role to the firm’s successful foreign market listing. Since China joined the WTO in 2001, a large number of Chinese firms have started IPOs in the USA, but there is a dearth of research on these firms. This study aims to contribute to the study of international business and management and describes that the TMT functional heterogeneity and international exposure have a significant role in the success of Chinese foreign IPOs.

How do Foreign IPOs Attract Investor Attention? A Study of the Impact of Language (WITHDRAWN)

Language is increasingly recognized as having the ability to shape strategic outcomes. To understand language’s impact in entrepreneurial settings, we study language in the context of foreign initial public offerings (IPOs), a setting where organizations may suffer both from the liability of newness and the liability of foreignness. Our sample consists of the population of foreign IPOs debuting in the United States between 2001 and 2014, which collectively raised over $60 billion in capital. We find that both the new ventures’ and the media’s language impact investors by influencing the level of interest in the IPO. Specifically, an organization’s language can foster positive sentiment, while the media’s use of analogies plays a pivotal role in familiarizing and legitimizing unfamiliar organizations. Overall, our study offers insight into the power of words in managing the challenges of the liability of newness and foreignness.

How do foreign initial public offerings attract investor attention? A study of the impact of language

Language is increasingly recognized as having the ability to shape strategic outcomes. To understand language’s impact in entrepreneurial settings, we study language in the context of foreign initial public offerings, a setting where organizations may suffer from both the liabilities of newness and foreignness. Our sample consists of the population of foreign initial public offerings debuting in the United States between 2001 and 2014, which collectively raised over US$60 billion in capital. We find that both new ventures’ and the media’s language impact investors by influencing the level of interest in the foreign initial public offerings. We also reveal that the media’s use of analogies plays a pivotal role in familiarizing and legitimizing unfamiliar organizations. Overall, our study offers insights into the power of words in managing the challenges associated with the liabilities of newness and foreignness.

The long-run performance of US firms pursuing IPOs in foreign markets

Purpose The purpose of this paper is to investigate the long-run performance of a unique set of US domiciled firms that have bypassed the US capital markets in pursuit of their initial public offering (IPO) overseas. Additionally, this paper then tests the popular underwriter prestige impact and the window of opportunity hypothesis on this unique subset of IPOs. Design/methodology/approach Using a sample of foreign and purely domestic IPOs made by US firms from 2000 to 2011, this study investigates the long-term performance, one-, two- and three-year by using two measures (buy-and-hold return and cumulative abnormal returns) to test the long-run returns of newly listed companies. Finally, the research incorporates both the traditional matching methodology (issue year and size) along with propensity score matching methodology. Findings FIPOs of US companies underperform DIPOs and their matched DIPOs; furthermore, FIPOs underperform the index of the two listing countries they use the most (UK and Canada). Although the choice of a reputable underwriter mitigates underperformance, the choice of listing in a foreign country only may be a result of possible high valuations accorded by foreign investors who buy US-listed companies on the domestic exchange possibly for reducing exchange rate risk and gaining US diversification without incurring additional costs. It is, thus, possible that US companies that undertake Foreign IPOs not only escape potentially higher Security and Exchange Commission regulations and disclosure but also benefit from higher valuations in the foreign markets. Originality/value To the best of the authors’ knowledge, this is the first study to investigate the long-term performance of US firms bypassing the US capital markets in pursuit of their initial equity offering elsewhere. Caglio et al. (2016) investigated why firms decide to pursue such equity raising activity but fail to investigate the firms’ actual performance after issuing equity. This research fills such a gap in the literature and is important for both academics and practitioners. Practitioners can use this information in assessing the quality of such investments in the long-run, and firms can use such information when determining the different options of issuing equity. Further, regulators should be aware of the implications that increased regulations have on capital raising activities in their domestic market.

Crisis Conditions and Performance of IPO Firms: Impact of Founder-CEOs and Foreign Listings

IntroductionPeriodically, there exists a publicly-traded company that has the good fortune to have an entrepreneurial, visionary CEO that generates long-lasting, organic growth (Joel Shulman, Forbes, 2012).ENTREPRENEURS WHO ARE SUCCESSFUL IN growing their firm and securing financing for making an initial public offering (IPO) face the likelihood that they will be replaced by a professional manager (Wasserman, 2003). The literature shows that founders are replaced due to particular firm characteristics such as exceptionally high or low firm growth, the founder's functional background, and ownership structure (Boeker and Karichalil, 2002). Yet, entrepreneurs who are not replaced and become founder-CEOs of a publicly traded company tend to perform better than non-founders in the IPO process (Gao and Bain, 2011; He, 2008; Mousa and Wales, 2012; Nelson, 2003). Although founders do perform better in IPOs, little is known about how market conditions play a role in the relationship between founder and non-founder-CEO performance in IPOs.Market conditions have been indicated to affect multiple aspects of IPOs such as the number of IPOs being made (Pastor and Veronesi, 2005). Furthermore, investor sentiment changes with environmental conditions (Barberis et al., 1998). Investors are subject to representativeness, generalizing about a person or phenomenon with minimal information (Busenitz and Barney, 1997), as well as periods of conservatism and overconfidence (Barberis et al., 1998) depending on environmental conditions. It is reasonable to believe that changing market conditions and investor sentiment influence how founder-CEOs are received. Therefore, this paper seeks to address how varying environmental conditions affect IPO firm performance for founder and non-founder-CEOs.Investors, both individual and institutional, receive information about IPOs from various sources including financial analysts, investment banks (He, 2007), the media (Pollock and Rindova, 2003), prospectuses, company-released information, and other outlets. All information received forms a set of narratives in investors' minds about an IPO company. Narratives that we experience are how we make sense of and gain meaning (Weick and Browning, 1986) from our environment. Therefore, the narrative paradigm that considers how people deduce reality from a series of stories (Stutts and Barker, 1999) can help explain the reasons why investor sentiment changes towards founder and non-founder CEOs of IPO firms in different environmental conditions.Culture and origin also influence how narratives are formed and perceived. Therefore, narratives across cultures need to be considered in the relationship between founder-CEOs and IPO performance. Most often, researchers remove foreign IPOs from their studies and examine one particular market's (usually the United States) domestic IPOs (i.e. Gao and Bain, 2011; Mousa and Wales, 2012; Nelson, 2003). It is important to consider both domestic and foreign IPOs together because foreign listings are prevalent (Doidge et al., 2004) and increasing around the world. How environmental conditions play a role in the reception of foreign stocks with founder and non-founder CEOs also needs to be better understood so that management can time and strategize their public offering accordingly.To analyze different environmental conditions, two-year increments surrounding and during the 2007-2008 financial crisis will be examined. Precrisis, crisis, and two post-crisis periods will also be reviewed. Analyzing IPO performance in distinct market stages will indicate which characteristics determine success in each stage and how certain factors become more or less important over time.The motivations for conducting a study about founder-CEOs in domestic and foreign firms before, during, and after the most recent stock market crisis are both academic and practical. From an academic standpoint, a growing literature stream is interested in understanding how management influences the IPO process. …

International IPO Markets and a Foreign IPO Puzzle

We analyze a firm’s decision to conduct initial public offerings (IPOs) internationally. Global IPOs (issuing both domestically and abroad) raise significantly more capital in the international markets than any other form of IPO. Though over eight percent of firms conducting an IPO between 1995 and 2010 choose to conduct Foreign IPO (issuing only abroad), this form of IPO fails to raise significantly more proceeds than matching IPOs with similar firm characteristics. This constitutes a “Foreign IPO Puzzle.” We consider several explanations for this puzzle. Our results are consistent with firms attempting to take advantage of hotter IPO markets, more efficient pricing, better legal environment, better opportunities for a subsequent SEO, and stronger currencies. None of these hypotheses fully explains away this puzzle.

Corporate Governance and Investors' Perceptions of Foreign IPO Value: An Institutional Perspective

This article investigates stock market responses to different constellations of firm-level corporate governance mechanisms by focusing on foreign initial public offerings (IPOs) in the United States. We build on sociology-grounded research on financial market behavior and use a “nested” legitimacy framework to explore US investor perceptions of foreign IPO value. Using a fuzzy set theoretic methodology, we demonstrate how different combinations of monitoring and incentive-based corporate governance mechanisms lead to the same level of investor valuation of firms. Moreover, institutional factors related to the strength of minority shareholder protection in a foreign IPO's home country represent a boundary condition that affects the number of governance mechanisms required to achieve high value perceptions among US investors. Our findings contribute to the sociological perspective on comparative corporate governance and the dependencies between organizations and institutions.

Country risk and valuation of US‐listed foreign IPOs

PurposeMany foreign firms have made their initial public offering (IPO) debuts in the USA, without first being listed in their home market. The purpose of this paper is to investigate the association of a wide range of country risk measures with the valuation of foreign IPOs.Design/methodology/approachBased on the law and finance literature, it is hypothesized that IPO firms domiciled in countries with higher country risk are worth less, other things equal. This hypothesis is tested with a sample of international companies making their IPO debuts in the USA between 1986 and 2002.FindingsIt is found that several commonly used country‐level variables explain the observed IPO valuation differences across countries. In particular, the index of economic freedom, developed by the Heritage Foundation, and the Transparency International's corruption index have a significant impact on post‐offer IPO valuations. Specifically, IPO firms hailing from countries with more economic freedom and less corruption are associated with higher valuation in the aftermarket.Originality/valueThe paper investigates whether some commonly‐used country risk measures affect the valuation of newly US‐listed foreign firms.

Institutions and Foreign IPO Firms: The Effects of “Home” and “Host” Country Institutions on Performance

In the current study, we develop an institutional embeddedness explanation of foreign initial public offering (IPO) performance. To explain the performance differentials of these firms, we investigate the effects of both “home” and “host” country institutional signals on IPO underpricing using a sample of foreign IPOs listed in two different institutional environments, namely, the U.S. and U.K. stock exchanges. Supporting the view that signals are institutionally embedded and that their value is not universal, we find the salience of signals associated with country of origin is contingent on the institutional environment of the listing exchange.

The Signaling Hypothesis Revisited: Evidence from Foreign IPOs

AbstractWhile the signaling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch (1989)), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein, and Welch (1993), Michaely and Shaw (1994)). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs—firms from both financially integrated and segmented markets—in U.S. markets. The evidence indicates that signaling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering (SEO) activities. For firms from integrated markets, in contrast, the analyst-coverage purchase hypothesis appears to matter more in explaining IPO underpricing, and the aftermarket price appreciation explains these firms’ SEO activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signaling hypothesis.

An Analysis of Alternate Paths Used by Non-US Firms to List in US Markets: Revisiting the Bonding Hypothesis

We compare non-US firms that go public using reverse mergers to those using foreign initial public offerings and capital-raising American Depositary Receipts. We find that foreign reverse merger firms do not bond with minority shareholders. We also find that the repeated accessing of US capital markets, mainly through private investments in public equity, does not signal better performance, higher transparency, or enhanced governance structures. Further, we show that foreign reverse mergers originate from countries with higher strength of minority shareholder protection when compared to foreign initial public offerings and capital-raising American Depositary Receipts. We argue that the decision to enlist in the US capital markets by foreign reverse merged companies is driven by the need to finance operations at an early stage of their lifespan rather than the bonding with their minority shareholders.

The Signalling Hypothesis Revisited: Evidence from Foreign IPOs

While the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs - firms from both financially integrated and segmented markets - in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms' seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms' seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.

Country of Origin and Foreign IPO Legitimacy: Understanding the Role of Geographic Scope and Insider Ownership

Foreign firms from emergent economies are increasingly seeking equity capital in developed economies like the United States. Utilizing institutional, signaling, and agency theories this research examines the legitimacy of foreign IPOs (initial public offerings) in the United States. Employing the population of foreign IPOs listed on U.S. stock exchanges between 1997 and 2004, it is demonstrated that firms from countries with governmental policies and institutional practices that protect the economic freedom of its citizens are significantly less underpriced than IPOs of firms originating from countries experiencing lower levels of economic freedom. The evidence further indicates that firms from emerging economies can overcome negative country perceptions associated with lower levels of legitimacy by increasing their international scope of operations prior to beginning the IPO process as well as by retaining acceptable levels of ownership in their respective firms.

Acquiring financial resources from foreign equity capital markets: An examination of factors influencing foreign initial public offerings

An increasing number of firms are making initial public offerings in foreign markets to circumvent constraints in the availability of capital and to provide an exit for their investors. However, previous research on foreign initial public offerings and their determinants is very limited. In this paper, we contribute to this literature by demonstrating that international experience of the management team and pre-IPO ownership by foreign investors are positively related to foreign initial public offerings. We test our hypotheses using data on initial public offerings of European companies from 1991–2001. The results support our hypotheses. The findings have important implications for entrepreneurs, investors, and public policy.

Getting Off to a Good Start: The Effects of Upper Echelon Affiliations on Underwriter Prestige

The initial public offering (IPO) is one of the most critical events in the lifetime of a young firm. Prior research has shown that firms tend to have successful IPOs if they go public with the endorsement of a prestigious lead underwriter. This paper examines the antecedents to receiving endorsement by a prestigious underwriter and links this to the experience base of a firm's upper echelon. We theorize that the amount and type of upper echelon experience serve as important symbols of a young firm's legitimacy to critical outsiders. We introduce a typology of upper echelon experience that distinguishes between upper echelon upstream, horizontal, and downstream employment-based affiliations and suggest that these different types of upper echelon affiliations allay different types of endorser concerns regarding firm legitimacy, affecting the endorsement process. Further, we theorize that the relationships between upper echelon experience and investment bank prestige will be moderated by technological uncertainty. We test our assertions on a comprehensive sample of public and private biotechnology firms that were founded between 1961 and 1994 and that went public between 1979 and 1996. Analyses of the five-year career histories of the over 3,200 executives and directors that make up the upper echelons of these firms show that firms with upper echelons with affiliations with prominent downstream organizations (i.e., pharmaceutical and/or healthcare companies) and with prominent horizontal organizations (i.e., biotechnology companies) are more likely to attract the endorsement of a prestigious investment bank. We also find that the greater the range of upper echelon affiliations across the categories of upstream, horizontal, and downstream affiliations, the more prestigious the firm's lead underwriter. We also find that these latter results are moderated by technological uncertainty. The present research has implications for the study of organizational legitimacy, interorganizational endorsements, and entrepreneurship.