French Initial Public Offerings Research Articles

When Do Shareholder Agreements Add Value? Mitigating Superprincipal-Agency Conflicts in Family Firms

Researchers are divided on whether shareholder agreements (SAs) improve or hurt firm value. We offer family firms as a context where SAs add value and explain why; SAs limit “superprincipal” agency conflicts between family owners and other family members. A panel of French firms and a second study of French Initial Public Offerings show shareholders value SAs more in family than in nonfamily firms. Among family firms, SAs add greater value when weak governance undermines family owners’ resistance to other family members’ demands. Our study helps reconcile competing theory about SAs and distinguishes superprincipal conflicts from other family-firm agency problems.

IFRS adoption, corporate governance and management earnings forecasts

Purpose This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings forecasts’ accuracy disclosed in prospectuses for French Initial Public Offerings (IPOs). Design/methodology/approach The analysis is based on cross-sectional regression explaining the absolute forecast errors by using 45 French firms that made IPOs between 2005 and 2016 in two French financial markets: Euronext and Alternext. Findings In agreement with the agency theory and the signaling theory, the authors find that the IFRS adoption and the effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts. As a result, this latter gives a credible signal in constructing and sustaining shareholders’ trust on the transparency and the reliability of such financial information. Research limitations/implications It is plausible that the limited size of the sample represents a limitation of this study. Another limitation is that no other corporate governance attributes such as board meeting frequency, audit committee measures and ownership structure are used. Practical implications Shareholders can take benefit from management forecasts accuracy to structure their investment portfolios efficiently to allocate their funds more effectively and mitigate the costs of adverse selection that they have to face. Furthermore, the authors expect the findings to be interesting to IPO firms, as this study highlights the efficiency of larger and independent boards in decreasing managerial discretion, increasing disclosure quality and supervising management. The results could encourage GAAP-adopters countries to move toward IFRS, as this research reinforces the role of IFRS in enhancing the quality of financial disclosure by offering the required information for shareholders. Originality/value This study is important because the potential investors should assess management earnings forecasts accuracy before they consider it when evaluating IPO firms. Also, this paper has some implications for the financial market. It is recommended that future investors pay more attention, when assessing the accuracy of management earnings forecasts, to the accounting regulations of the financial reporting along with the corporate governance mechanisms. Moreover, this study could incite French regulators to revise the AFEP-MEDEF code. Under this code, it could insist that larger and independent boards are more effective in performing their governing roles than smaller boards.

Ownership Structure and Long-Run Performance of French IPO Firms

Many studies have attempted to explain the long-term underperformance phenomenon of initial public offerings (IPOs). In this paper, we use the specificities of the French market to analyze whether the control-ownership wedge explains IPO long-run performance. Moreover, we investigate whether this relationship is driven by high-tech firms. Using data from a sample of 402 French high-tech and non-high-tech IPOs that went public during 1997-2011, we find that the separation of ownership and control rights of the largest shareholder is negatively associated with long-term performance of French IPOs. This finding indicates that IPOs with disproportional ownership structure underperform other firms in the one- to five-year period following the initial offering. Such separation increases the likelihood that controlling shareholders extract private benefits of control to the detriment of minority shareholders, leading to a low long-term performance. The empirical findings also show that our conclusions are not driven by high-tech firms.

The effect of lockup on management earnings forecasts disclosure in French IPOs

This study investigates the effect of lockup agreements on management earnings forecasts in initial public offering (IPO) prospectuses. Using a sample of 312 French firms that went public over the period 1997–2016, we find that IPOs with lockup agreements are more likely to disclose conservative earnings forecasts. In particular, we provide evidence that IPOs with more locked-up shares and those selecting longer lockup periods, have more accurate management earnings forecasts. In other words, managers of firms with a higher proportion of shares locked up and longer lockup agreements experience greater costs of non-diversification of idiosyncratic risk. They tend, thus, to provide more conservative and accurate forecasts to prevent costs arising from earnings forecast error. These results are robust to a number of sensitivity tests.

The control-ownership wedge and the survival of French IPOs

PurposeThe purpose of this paper is to investigate the effect of the control-ownership wedge of controlling shareholders (excess control) on the survival of French initial public offerings (IPOs).Design/methodology/approachThis paper studies a large sample of 434 French IPOs. The empirical analysis uses the Cox proportional hazard and accelerated-failure-time models. Data are manually gathered from IPO prospectuses.FindingsThe findings support a positive relation between the control-ownership wedge and IPO survival time, indicating that survival is more likely in firms with high excess control levels. This result is consistent with the view that controlling shareholders with a large control-ownership wedge have incentives to preserve their private benefits of control by increasing firm survival chances. The findings also show that older IPOs are more likely to survive, while riskier and underpriced IPOs are more likely to delist.Practical implicationsThe results provide a better understanding of the role of excess control in IPO survival. They also enrich the debate on the efficiency of the one-share-one-vote rule.Originality/valueThe research provides new insights into the role of agency conflicts in IPO survivability. In particular, it explores the effect of dominant shareholders with a control-ownership wedge on survival time.

The impact of the quality of VC financing and monitoring on the survival of IPO firms

PurposeThe purpose of this paper is to analyze the impact of venture capital (VC) involvement on the survival rate of French initial public offerings (IPOs) during the period 1996-2006. The paper examines the link between the survival rates of IPO companies, and several proxies for the quality of venture capitalist financing and monitoring.Design/methodology/approachTo analyze the impact of the involvement of VC on both long and short run post-IPO survival, two methods are used: survival analysis (the Cox proportional hazard), and a logit model.FindingsThis paper shows that the quality of venture capitalist monitoring, measured by the duration of their investment before the IPO, is positively correlated with company survival rates. However, the author does not find the expected result when the author considers the experience of venture capitalists measured by their age.Research limitations/implicationsThe findings are limited to a sample of VC-backed companies that went public.Practical implicationsThe findings have implications for entrepreneurs. When analyzing the advantages and disadvantages linked to the presence of VC firms in the capital of their companies, entrepreneurs should consider that certain types of venture capitalists might be more or less able to be involved in the monitoring and value adding process.Originality/valueTo date, there is no comprehensive study on the French IPO market analyzing both long and short run post-IPO survival of VC-backed companies. This paper fills this gap.

Influence of venture capital, retained ownership and board structure on initial public offering firms - case of France

This study investigates the impact of venture capital (VC), retained ownership and board structure on initial public offering (IPO) in France. Based on a sample of 177 French IPOs over the period 2001-2007, our results show that board independence and VC are negatively and significantly related to the level of underpricing, indicating that these two factors play important roles in mitigating asymmetry information between the issuer and potential investors. Further, this study provides evidence that the level of underpricing is positively associated with board size. However, the CEO duality and retained ownership by insiders are found to be insignificant in explaining the first day returns.

Boards, retained ownership and failure risk of French IPO firms

Purpose– This paper aims to investigate the relationship between corporate governance structures of French initial public offering (IPO) firms and the likelihood of failure and involuntary delisting from the stock exchange in the long run.Design/methodology/approach– A matched-pairs research design was used and 36 delisted IPO firms were compared to an equal number of control IPO firms matched in terms of time, size and industry. Conditional logistic regression analyses were performed, and it was found that corporate governance structures in delisted IPO firms were relatively weak compared to control IPO firms.Findings– A significant negative association was found between the likelihood of exchange delisting and the proportion of independent directors. A positive and significant relationship was also found between the likelihood of exchange delisting on the one hand and the chief executive officer/Chair role duality and the retained ownership by insiders after the IPO on the other hand. However, no relationship was detected between IPO failure risk and board size at the IPO time.Originality/value– Retained ownership and failure risk of French IPO firms.

Offer price, target ownership structure and post-listing liquidity of newly listed firms

Purpose – Initial public offerings (IPOs) underpricing is a world-wide phenomenon in the stock market. It is generally explained with asymmetric information and risk. The purpose of this paper is to complement these traditional explanations with a theory where investors also worry about the after-market illiquidity that may result from asymmetric information after the IPO. Design/methodology/approach – The model blends such liquidity concerns with adverse selection and risk as motives for underpricing and liquidity. The model's predictions are supported by evidence for 798 French IPOs realized between 1995 and 2008. Using various measures of liquidity, the author finds that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing. Findings – The author finds evidence that less liquid the aftermarket is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing. Practical implications – The study provides empirical evidence that shares outstanding and author IPO characteristics play a vital role on post-IPO liquidity. According to the results obtained, three IPO characteristics, that is, relative size, blockholder and underpricing of offering have an explanatory for the liquidity and trading activity of the shares outstanding. It should be noted that this explanatory power is much greater before isolating the market effect. Nevertheless, given the evidence to show that these operations are executed during upmarket periods when trading volume is high, the non-exclusion of the market effect may attribute these variables with more explanatory power than they actually possess. Be that as it may, even after eliminating the market effect, their explanatory capacity is still considerable. Originality/value – The author has found that underpricing is negatively related to the breadth of shareholders but positively related to institutional shareholders after the IPO. When a company is underpriced, it is likely, on average, to have a higher breadth of shareholder base and lower concentration of large outside investors.

IPO first-day returns: Skewness preference, investor sentiment and uncertainty underlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performed between 2002 and 2012, we find that IPOs with high initial returns have higher idiosyncratic skewness, turnover and momentum. This finding provides empirical evidence for investors' preference for stocks with lottery-like features and investor sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying factors.

English

In this paper, we examine the impact of discretionary current accruals on the performance of French IPO companies. We first note income-increasing earnings management in the first year as a public company and not in the year before the IPO (Initial Public Offerings). Based on a sample of 139 French IPOs over the period 1999 to 2007, including 38 failures, we also document that companies associated with aggressive earnings management in the IPO process, tend to suffer from subsequently poor returns and to delist for performance failure after IPO. However, we find no evidence to suggest that the level of initial return is negatively related to discretionary current accruals. Key words: Initial public offerings, earnings management, initial return, long-run stock market performance, delisting risk.

Long-run performance of IPOs and the role of financial analysts: some French evidence

This paper examines the long-run performance of French initial public offerings (IPOs) carried out between 1991 and 2005. Using various methodologies, we found that IPOs in our sample performed poorly relative to the comparison portfolios over the 1991–2005 horizon in contrast to that reported by prior studies of the French market. This abnormal long-run performance is more severe for orphan IPOs (those without financial analysts’ recommendations) than for non-orphan IPOs the first year following the offerings (a statistically significant difference). In contrast to the widely held belief, this evidence suggests that analyst coverage is indeed not important to the issuing firm. Investors pay more attention to non-orphan IPOs when they are not book built, venture capital backed, underwritten by a large syndicate and less underpriced. Over the 1991–2005 period, an analyst's affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis. During the first year of issuance, analysts’ recommendations are associated with the success of a newly public firm. However, once we extend the horizon to 3 or 5 years after the issuance, we can find that analysts’ recommendations are not significantly related to the long-run performance of IPOs.

How Do Underwriters Value Initial Public Offerings? An Empirical Analysis of the French IPO Market*

textabstractThis paper investigates how French underwriters value the stocks of companies they bring public. Underwriters often use several valuation methods to determine their fair value estimate of the initial public offering (IPO) firm's equity. We investigate five of these valuation methods: peer group multiples valuation, the dividend discount model, the discounted cash flow model, the economic value-added method, and underwriter-specific methods. We document that underwriters base their choice for a particular valuation method on firm characteristics, aggregate stock market returns, and aggregate stock market volatility in the period before the IPO. In addition, we examine how underwriters combine the value estimates of the valuation methods they use into a fair value estimate by assigning weights to these value estimates. We demonstrate that these weights also depend on firm-specific factors, aggregate stock market returns, and aggregate stock market volatility. Finally, we show that underwriters discount their fair value estimate to set the preliminary offer price of the shares. This discount is higher for IPO firms with greater valuation uncertainty and lower for companies that are brought to the market by more reputable underwriters and that are forecasted to be more profitable.

Underpricing versus gross spread: New evidence on the effect of sold shares at the time of IPOs

This paper sheds light on the impact of initial owners’ decisions to reduce underpricing at the time of initial public offerings (IPOs). Using a sample of 172 French IPOs, empirical findings indicate that the larger the percentage of primary and secondary shares sold, the higher the gross spread paid by initial owners, which reduces underpricing. Above a certain level of primary shares sold, however, underpricing increases. In contrast with prior research on US IPOs, initial owners endogenously determine the fraction of primary and secondary shares sold. When a firm goes public in the Nouveau Marché, the market for high-growth firms, initial owners are more concerned about the signalling effect of the sale of their secondary shares than the dilutive effect of primary shares. Therefore, they pay a larger gross spread in offerings with a higher participation ratio in order to reduce underpricing.

Block‐holder ownership, family control and post‐listing performance of French IPOs

PurposeWhile advantageous, the role of family control is under‐explored in finance. Family ownership can help guarantee stability of business and long‐term planning. The purpose of this study is to examine whether block‐holder ownership differentially affects the long‐term performance of initial public offerings (IPOs), and verifies whether this effect differs between family and non‐family IPOs.Design/methodology/approachUsing a sample of 163 French IPOs from 1996 to 2000, this paper examines the links between family control and the first‐year market performance. It focuses on IPOs where both families and Venture Capitalists (VCs) are engaged to lock‐in their shareholdings for a period of one year following the IPO date, and are thus expected, at least in the case of families, to provide an effective monitoring during this period.FindingsThe main findings bring support to the entrenchment hypothesis and show a negative, but weak, relationship between block‐holder ownership and the first year market performance (p=10 per cent). Moreover, there is cubic relationship between family ownership and post‐listing market performance where the first‐year buy‐and‐hold first decreases, then increases, and finally reverts to decline.Originality/valueWhile most of prior research focuses on the association between ownership and governance effects on firms’ performances in publicly‐owned firms, this study demonstrates links between family control and performance in issuing firms operating in France, where family‐controlled IPOs are a common model of corporate governance.

The association between management earnings forecasts, earnings management, and stock market valuation: Evidence from French IPOs

This study investigates managers' motivations to engage in earnings management through purposeful interventions in the setting of discretionary accruals, in the context of initial public offerings (IPOs) in France. Firms issuing forecasts in their prospectuses are expected to differ from nonforecasters in the level of earnings management during the year following the public offering. Within the context of contracting theory, four research questions are addressed. First, are IPO firms issuing forecasts more inclined to manage earnings 1 year after an IPO compared to nonforecasting firms? Second, is a forecasting firm's level of earnings management conditioned by earnings-forecast deviation? Third, is earnings management by IPO forecasting firms affected by contractual and governance environments? Fourth, how do investors see through earnings management following IPO earnings forecasts, i.e., how do stock market participants value earnings components (i.e., nondiscretionary and discretionary accruals)? Our findings document that in the year following an IPO, the magnitude of earnings management is much higher for forecasters than for nonforecasters. Results also show that a firm's accrual behavior is affected by earnings-forecast deviation, but the relationship is moderated by contractual and governance constraints. Finally, it would appear that French investors do not adequately readjust the relationship between reported earnings and a firm's market value for the year in which earnings are subject to manipulations.

The price of power: Valuing the controlling position of owner–managers in French IPO firms

Going public often creates an agency conflict between the owner–manager and minority shareholders. This problem is especially severe in countries with poor legal investor protection, such as France. We examine the controlling position of owner–managers in French initial public offering (IPO) firms. We find that investors anticipate the increased agency conflict associated with a lock on control and lower firm value when the owner–manager is more powerful. Shareholder agreements in which the owner–manager agrees to share control with other pre-IPO owners enhance firm value. We also report that higher cash flow ownership by the owner–manager is positively related to firm value when he is not in full control. Finally, we document that the large (non-pecuniary) private benefits of control in France may motivate owner–managers to retain control after the IPO.

Is there Any Specific Equity Route for Small and Medium-Sized Family Businesses? The French Experience

This article presents a precise typology of French initial public offerings (IPOs) with the underlying aim of suggesting that small and medium-sized family businesses could have a specific approach to capital dilution. Our analysis breaks free from the traditional “family versus nonfamily business methodology” and is based first on a global cluster analysis. We aimed to prove that family businesses were not only different but also specific. Empirical results make it possible to consider that there is a specific attitude among family businesses aiming at quotation. The sample is composed of 131 IPOs. The study covers the period from January 1997 to May 1999 and includes all the IPOs that ocurred during these two-and-a-half years. This period was probably the most active period for the French sections of the stock exchange dedicated to small and medium-sized companies. What inspired this study was our feeling that there was a new competition between venture capitalist companies and the stock exchange: recent experience on the financial markets clearly highlights the fact that many companies preferred to go public rather than to significantly open their equity structure to private investors. Consequently, the first aim of this research was to prove that the equity route of some small and medium enterprises (SMEs) no longer follows the linear process of dilution as supposed by the classical financial theory (Myers, 1984). The second aim was to demonstrate that the approach of small and medium-sized family businesses is closer to the classical equity route (regular process of dilution), whereas fast-growing and young companies prefer to go public.

An Optimal IPO Mechanism

We analyse the optimal Initial Public Offering (IPO) mechanism in a multidimensional adverse selection setting where institutional investors have private information about the market valuation of the shares, the intermediary has private information about the demand, and the institutional investors and intermediary collude. Theorem 1 states that uniform pricing is optimal (all agents pay the same price) and characterizes the IPO price in terms of conditional expectations. Theorem 2 states that the optimal mechanism can be implemented by a non-linear price schedule decreasing in the quantity allocated to retail investors. This is similar to IPO procedures used in the U.K. and France. Relying on French IPO data we perform a GMM structural estimation and test of the model. The price schedule is estimated and the conditions characterizing the optimal mechanism are not rejected.