Initial Public Offering Firms Research Articles

The short- and long-lived effects of IFRS mandate on IPO firms in emerging market economies

PurposeThis study aims to examine the short- and long-lived effects of the International Financial Reporting Standards (IFRS) mandate on the quality of reporting information of initial public offering (IPO) firms in emerging market economies.Design/methodology/approachThe study used several difference-in-differences models for a sample comprising 102 Saudi Arabian IPO firms for 2003–2017.FindingsIt found that mandating the application of the IFRS had a significant short-lived but no long-lived effect on IPO firms’ information asymmetry. When information asymmetry was high such as in the primary market, the IFRS succeeded in alleviating the underpricing of IPO firms. Conversely, in the secondary market, with negligible information asymmetry, the IFRS was not beneficial for the long-term performance of companies in the IPO market.Originality/valueThis study is the first of its kind in the emerging market context and has important implications for IPO investors and analysts, IFRS-IPO researchers and policymakers in emerging economies. The results empirically confirmed that the IFRS mandate had solely a short-lived effect and no long-lasting impact, on the problem of asymmetric information in the IPO market. The effectiveness of the IFRS in producing quality financial reporting is contingent upon large-scale information asymmetry and vanishes when investors and analysts have abundant information about listed firms, even for emerging economies such as Saudi Arabia.

After Going Public: How Entrepreneurial Orientation Turns into Strategic Decisions

Initial public offerings (IPOs) provide an opportunity for firms to shake off financial constraints. This new access to resources enables newly public firms to finance growth through acquisitions. At the same time, liberation from financial constraints enables firms to follow their entrepreneurial orientation (EO). However, it remains unclear how EO translates into strategic decisions and shapes acquisition strategies precisely when constraints are relaxed at the IPO. Consequently, this study aims to investigate the relationship between EO at the IPO and the acquisition behavior of newly public firms. We argue that firms with a high level of EO thoroughly choose their strategy and engage in resource-intensive actions that they rate as valuable. Based on this, we hypothesize that these firms acquire more selectively but more intensely. Moreover, we hypothesize that boundary conditions such as the competitive environment and rivals’ strategic flexibility moderate this relationship. We empirically investigate our hypotheses for a sample of 2,292 IPOs between 1996 and 2014 resulting in 11,316 firm-year observations. We find support for our hypotheses. This study advances the literature on how strategic orientations—such as EO— shape the strategies of newly public firms. Our study has practical implications for shareholders and investors of IPO firms.

Is the new issue puzzle real? Evidence from implied cost of capital

PurposeThis study aims to provide new explanation of the new issue puzzle.Design/methodology/approachThis study uses market implied cost of capital (ICC), rather than ex post realized returns, as proxy for ex ante expected returns, and sheds new light on the question why initial public offering (IPO) firms underperform the market within a 3–5 years period after the offerings.FindingsUsing ICC, the author finds that the market expects to earn higher risk premium for new listing firms than similar firms, which is contradictory to the documented new issue puzzle. The higher expected returns come from higher idiosyncratic volatility for newly listed firms, which are young and have more growth opportunities. The author also reports that investors are negatively surprised by lower-than-expected performances of newly listed firms.Originality/valueThe author’s results provide new empirical evidence that the new issue puzzle does not exist. Previous results observed IPO firms' under-performance is attributable to that ex post realized returns are a noisy proxy for ex ante expected returns, especially for newly listed firms with limited information.

Impact of Quality of Involvement of VC/PE in IPO Firms: Evidence from India

This article draws its primary motivation from the steady rise in the participation and involvement of venture capital/private equity (VC/PE) funds in the Indian IPO market over the last couple of decades. The study explores the involvement quality of the VC/PE managers and its impact on the long-run equity and operating performance of Indian firms issuing securities through initial public offerings (IPOs). Using data for 173 IPOs backed by VC/PE funding (out of a total of 625 IPOs) from 2000 to 2016, the authors show that post-issue, both equity market performance and operating performance of these VC/PE-backed IPOs are unimpressive in general. The information asymmetry, mispricing, and “timing the market” do not seem to be reasons for such long-term underperformance. The authors argue that it may be a case of too much money chasing too few winners in the Indian VC/PE-backed IPO market. The study utilizes a unique, hand-collected data set (from IPO prospectuses) on VC/PE firms’ involvement quality. Findings indicate that the duration and the size of the stake that the VC/PE firms hold in the pre-issue period positively affect the post-issue performance of IPOs. These findings lend support to the previously theorized “monitoring” and “certification” role of VC/PE firms. <b>Key Findings</b> ▪ Both long-term market and operating performance of VC/PE-backed IPOs in India from 2000 to 2016 were unimpressive. ▪ The quality of VC/PE involvement has some impact on the post-IPO performance of investee firms. ▪ The VC/PE-backed IPOs are not engaged in timing (hot and cold periods) the market.

The Effects of Privatization of State-Owned Enterprises on IPO Firms’ Initial and Long-term Returns

Purpose - The purpose of this study was to examine the effects of privatization of Chinese state-owned enterprises (SOEs) on their initial returns and long-term performance after initial public offering(IPO). Design/methodology/approach - This study used 1,599 Chinese IPO firms, some of which were SOEs. The multivariate regression analyses were implemented to analyze their effects. Findings - First, the privatization of SOEs does not have any statistically significant effect on the initial return of IPO firms. Second, the shareholdings of government prior to IPOs for both privatizing of SOEs and non-privatizing firms and for both exchanges of Shanghai and Shenzhen have a statistically significant positive effect on the initial return of IPO firms. Third, the privatization of SOEs has statistically significant negative effect on the long-term returns of IPO firms. Fourth, the state-shareholdings prior to IPOs have statistically significant negative effects on the long-term return of IPO firms. Fifth, the state-shareholdings of the privatizing SOEs prior to IPOs have statistically significant positive effects on the long-term return of IPO firms. Research implications or Originality - The results imply that the higher shareholdings and ownership of the Chinese government on SOEs reduce the information asymmetry for the investors of IPO shares or maybe due to inefficiency of SOEs prior to IPOs lead to lower offer prices or higher opening prices leading to severe underpricing and relatively lower stock market returns in the long-run both for the privatizing firms and for the higher state-shareholding firms, while both factors interactively improve their long-term stock market returns.

Investor awareness or information asymmetry? Wikipedia and IPO underpricing

AbstractWe use the presence of a Wikipedia article for initial public offering (IPO) firms to test theories of information asymmetry and investor awareness. Although we find limited support for the former, our results provide strong support for theories of investor awareness. Specifically, IPO firms with a Wikipedia article exhibit significantly higher underpricing and offer price revisions than do IPO firms without a Wikipedia article. Investor awareness has positive long‐term effects, including greater analyst following and institutional ownership for up to 3 years after the offering. The effect is robust to firm‐specific Google search volume, news coverage, retail trading intensity, social media activity, propensity score matching, and an instrumental variable approach.

New institutional investors in the IPO secondary market: Sentiment or fundamentals?

AbstractWe investigate new institutional investors that do not receive initial public offering (IPO) allocations but invest in the newly public firms after IPOs. We find that many institutions buy the stocks of IPO firms in the post‐IPO secondary market over time. In contrast to retail investors who chase hot IPOs, these new institutions invest in IPO firms with lower valuations at offerings and better fundamentals. These results suggest that new institutional investors' post‐IPO investment decisions are driven by publicly available information on firm fundamentals instead of investor sentiment. Long‐term performance tests confirm that this trading strategy helps institutions identify better quality IPOs.

IPO-Audit Expertise, Audit Quality, and Capital Allocation Efficiency: Evidence from China

Backed by China's economic growth, the initial public offering (IPO) market in China has been one of the most vigorous in the world. In this market, practicing auditors routinely sit on the regulatory committee responsible for screening prospective IPO firms. Against this backdrop, we examine whether IPO-audit expertise can influence IPO-audit quality and capital allocation. We find that auditors with richer IPO-audit experience improve the quality of earnings in IPO prospectus, earn an audit fee premium, and are significantly more likely to be assigned to IPO engagements by audit firms or appointed to the regulatory committee by regulators. We also show that, by enhancing the credibility of information disclosure in IPO prospectus, IPO exper-tise of the regulatory committee members and the IPO engagement auditors improves capital allocation efficiency. Collectively, our evidence implies that a more sophisticated audit profes-sion can contribute to the development of capital market in a country.

Choice between Acquisition and Joint Venture Based on Financial Statement Comparability

This study examined the relationship between target firms’ financial statement comparability and bidder firms’ boundary decisions. The study used initial public offering (IPO) firms as target firms to test the impact of asymmetric information and signaling on investing bidder firms’ boundary decisions, such as joint ventures or acquisitions. In the IPO market, as an experimental setting, bidder firms are unfamiliar with issuing firms because they have little information about them prior to the IPO. This study argues that IPO firms with higher accounting comparability show lower information asymmetry. Consistent with this argument, we found that IPO firms’ accounting comparability has a positive probability of becoming a target for either a joint venture or acquisition, or an acquisition instead of a joint venture. This study contributes to the literature, financial statement comparability, and joint venture and acquisition decisions to measure the degree to which information asymmetry affects corporate investment strategy using a unique experimental setting of IPO firms.

POST‐IPO OPERATING PERFORMANCE IN BANGLADESH

This study attempts to investigate the change in the operating performance of firms as they go from private to public ownership. Using the data of all the non-financial firms, which floated initial public offerings (IPOs) from 2008 to 2015, this study finds that there is a significant decline in operating performance as measured by ROA, asset turnover, ROS, and OCFTA after the IPO and the decline continues for next two to three years with the highest deterioration of operating performance being observed in the immediate next year of IPO. Moreover, when the study uses age, debt ratio, sales, capital expenditure, and IPO event to explain the variation of the operating performance of IPO firms over time, it finds that IPO event negatively affects all measures of operating performance. Finally, the study finds that deterioration of the post-IPO operating performance is more pronounced for firms offering their securities with premium than firms offering securities without premium. &#x0D; JEL Classification Codes: G11, G12, G32.&#x0D;

Who does the media love? A qualitative content analysis of the narratives of founders and nonfounders in IPO firms

PurposeResearchers have investigated the distinctions between founder and nonfounder chief executive officers (CEOs) for different performance variables. Researchers have also investigated the use of media as supplemental information that investors review to make decisions about initial public offering (IPO) firms. Research that investigates founders and nonfounder CEOs of IPO firms in the media is limited but growing. This paper aims to explore how founder and nonfounder CEOs' narratives are portrayed differently in business media following an IPO.Design/methodology/approachUsing insights from the narrative paradigm, 1,057 news paragraphs about CEOs from 19 matched pairs (38 firms) were content analyzed using a contrasting coding strategy.FindingsFounders and nonfounders' narratives differ in three ways. Specifically, founder CEOs are more likely to (1) have their personal background detailed in the media, (2) translate technical business information to easy-to-understand general language and (3) be quoted talking about positive information than nonfounder CEOs.Research limitations/implicationsThe results of this study show the media's role in creating narratives about management and how the experiences of founders and nonfounders are represented differently in the media. The study is limited by only investigating media articles about CEOs and not investigating the entire organizational narrative.Originality/valueThis study adds to the growing literature that investigates the role the media plays in portraying management in the media at time of IPO.

Does Income Equality of Export IPO Firms Hurt Their Market Returns in Korea?: Using Fama-French 5 Factor Model

Purpose - This study investigates the effects of income inequality across provinces of export firms on their initial and long-term stock returns in the Korean initial public offering (IPO) market. Design/Methodology/Approach - Using 520 IPO firms listed on the Korea Exchange (KRX) from 2002 to 2016 and financial and accounting, regional population data and IPO information, we study the effects of income inequality, measured in relative Gini coefficients over provinces of Korea, of export firms on initial returns (IR) and their long-term cumulative abnormal returns (CARs). Findings - The Gini income inequality index is found to have a positively significant effect on the IR of IPO for the whole and the export firm sample, but without statistical significance for the non-export firm sample. Second, the level of exports has a negative and significant effect on the initial returns of IPO for the pooled sample. Third, the income inequality not only affects IR, but also affects the long-term CARs. Fourth, the export ratio does not show any statistically significant effect on the long-term CARs for all the samples in the CAPM model. Fifth, the income inequality index also has a significant positive effect on all the three measures of CARs in the Fama-French 3, 4 and 5 factor models. Research Implications - We propose to allocate IPO shares based on income level, hopefully more shares to be assigned to lower income investors.

Air pollution and initial public offering underpricing

ABSTRACT We examine the impact of air pollution in a city in which an initial public offering (IPO) firm is located to its IPO underpricing. Our findings suggest that when air pollution is severe, the IPO underpricing is high. The results are robust to alternative metrics of air pollution and IPO underpricing, an instrumental variable approach, and a difference-in-differences research design. Additional analyses suggest that (1) seasoned firms located in severe air pollution cities have high crash risk, (2) seasoned firms located in severe air pollution cities have tightened financial constraints and makes more environmental investment, (3) IPO firms in severe air pollution cities have less analyst and institutional investor site visits. These findings support the underlying logic that air pollution worsens a firm’s information environment and financial constraint. We also find that the effect is more salient for IPOs with low analyst following, low institutional investor site visits, and high earnings management, corroborating the information asymmetry explanation of underpricing. Therefore, addressing environmental issues is important to public health as well as to capital formation.

Effects of R&amp;D Investments and Market Signals on International Acquisitions: Evidence from IPO Firms

We investigate how intangible assets in the form of R&amp;D influence firms’ hazards of engaging in international acquisitions. On the one hand, previous research has noted that the tacit and redeployable nature of R&amp;D investments may prompt firms to expand their operations overseas and create value from international acquisitions. On the other hand, it is difficult for other firms to evaluate the quality and prospects of an acquirer’s intangible resources, thereby hampering its ability to finance and execute international M&amp;A deals. In the context of international acquisitions undertaken by firms just completing their initial public offerings (IPOs), we argue and find that the IPO firm’s engagement in post-IPO international acquisition activity is generally negatively related to its R&amp;D intensity. This effect contrasts previous arguments on the internalization advantages possessed by R&amp;D-intensive firms. We also argue that firms able to convey their resources and prospects through such signals as previous international alliances and foreign sales can mitigate information problems presented by their intangibles, and thus carry out and benefit from cross-border acquisitions. We therefore identify an unexamined tradeoff that R&amp;D investments present in the international M&amp;A context and discuss how international signals can facilitate cross-border transactions subject to various market frictions.

Earnings Management and IPO Anomalies—Evidence from Indian Stock Market

This study examines the relationship between the extent of earnings management in a firm, the level of underpricing during an initial public offering (IPO), and their long-term performance. Earnings management has been acknowledged as a matter of concern during IPOs since long; however, its relationship with underpricing and long-term returns remained inconclusive in emerging markets like India. Using a sample of Indian IPO firms, this study finds that firms that manage accruals aggressively in the pre-IPO period have high initial returns and subsequently low stock returns in the post-IPO period. This study also observed that firms that have used abnormal accruals more conservatively while reporting earnings have better returns in the third year after IPO compared to the firms that reported more aggressively. The results are in consonance with the theory of information asymmetry and suggest that valuation of an IPO firm becomes ambiguous with high level of earnings management, which leads to higher underpricing.

How national culture affects IPO decisions? Evidence from Europe and Asia

Purpose The purpose of this paper is to investigate which cross-country characteristics influence the going-public decisions and how the cultural values of the countries affect initial public offering (IPO) firms’ profitability and risk of financial distress. Design/methodology/approach Using a sample of privately held and firms that went public on the European and Asian Stock Exchanges between 2007 and 2011, this paper applies probit model and ordinary least squares regression to examine which cross-country characteristics could affect the decision to go public and how cultural values affect the profitability and risk of IPO firms.[AQ1] In addition, to overcome multicollinearity concerns caused by the use of Global Leadership and Organizational Behavioural Effectiveness culture dimensions, this paper factor analyses the dimensions using principal component analysis. Findings The results are as follows. First, this paper finds that firms in tradition-oriented countries are less likely to go public, while firms in result-oriented countries are more likely to hold an IPO. Second, this paper finds that country characteristics (i.e. financial deepening and taxation) affect the going-public decision. Third, this paper documents that IPO firms in traditionally and result-oriented countries have positive profitability and less risk of financial distress. Practical implications This study is intended for all those European and Asian policymakers and managers who want to improve their knowledge about what different indicators can establish the decision of firms that going-public facing different stages of their lifecycle. Specifically, policymakers wishing to promote IPO-activity in their countries may find it useful to strengthen the set of formal-institutions both to reduce corporate-taxation and to reduce the uncertainty associated with first-time share issuance and investment in such initiatives. This study is also intended for managers of companies that are not yet publicly-traded on their national stock-markets to be helpful to their decision-making processes. Originality/value This paper aims to extend the growing literature on the effects of cross-country factors on economic decision-making in finance and particularly adds to research that investigates the influence of these factors on the IPO decision of European and Asian firms.

The Concurrent Effects of IFRS Mandate and Formal Institutional Quality on the Aftermarket Performance of IPO Firms in Emerging Countries

This paper provides the first empirical investigation seeking to find whether International Financial Reporting Standards (IFRS) mandate, changes in the quality of formal institutions, or, the concurrent effect of these two elements can explain the ongoing phenomenon of the aftermarket performance difference of Initial Public Offerings (IPO) firms. We perceive little awareness of the concurrent effect of IFRS mandate and the quality of formal institutions in emerging countries, although these nations account for more than half of the IFRS mandating countries. We employ numerous Difference-in-Differences (DiD) models utilizing reliable IPO and formal institutional data for Saudi Arabia from 2005 to 2017. Our empirical results show that the absence of IFRS influence in the aftermarket performance of IPO firms led us to posit that the quality of formal institutions is the key player in influencing long-term performance of IPO firms in Saudi Arabia. We uncover evidence showing that an improvement in formal institutional quality increases the long-term performance of IPO firms. We find no evidence of a concurrent effect of changes in formal institutional quality and IFRS mandate on the aftermarket performance of IPO firms. Our results show that what does really matter in relation to the aftermarket performance of IPO firms in Saudi Arabia, are the enhancements in the level of formal institutional quality. Our results provide some important implications for IFRS-IPO research.

Earnings management, corporate governance, and ownership structure of Philippine initial public offerings

Prior studies examined the effect of corporate governance variables on discretionary current accrual, the most widely used measurement of earnings management. The principal-agent conflict implies that the size of the board, the percent of independent directors, CEO duality, and auditor prestige limit discretionary current accruals (DCA). This paper extends past studies by examining the effect of ownership structure on discretionary current accruals. The study determines the level of income-increasing earnings management of initial public offerings (IPOs) in the Philippines and the factors that explain it. Particularly, the paper examines the effect of ownership concentration and largest shareholder ownership on discretionary current accruals. The study uses a final sample of 105 IPO firms in Philippine Stock Exchange (PSE) from 2008 to 2018. Employing the modified Jones’s (1991) model to measure discretionary current accrual and multiple regression analysis, the study finds -4.19% discretionary current accrual on the average. It also reveals that the 2002 Philippine Code of Corporate Governance (PCCG) is ineffective in curbing earnings management. In addition, there is an insignificant relationship between the size of the board, CEO duality, ownership concentration, largest shareholder ownership and auditor prestige, and earnings management. Furthermore, the paper finds a significant relationship between the percent of independent directors, industry sector, return on assets (ROA) and cash flow from operations and earnings management.

The Effects of Going Public on Firm Performance and Commercialization Strategy: Evidence from International Ipos

We study the effects of going public using a unique panel of firms in 16 European countries for which we observe financial data before and after firms' initial-public-offering (IPO) attempts. We compare firms that complete their IPO with firms that withdraw their IPO. We instrument the going public decision using prior market returns. We find that firm profitability goes up after going public—contrary to previous results in the literature. We also find an post-IPO expansion in the number of subsidiaries and countries in which IPO firms operate. Our results are stronger for firms in financially dependent industries and in countries with higher investor protection consistent with going public relaxing financial constraints and with a stronger impact when agency conflicts are lower. Overall, our results are consistent with going public inducing a shift towards a strategy of commercialization to increase profitability.

The Effects of Going Public on Firm Performance and Strategy: Evidence from International IPOs

We study the effects of going public using a unique panel of firms in 16 European countries for which we observe financial data before and after firms' initial-public-offering (IPO) attempts. We compare firms that complete their IPO with firms that withdraw their IPO. We instrument the going public decision using prior market returns. We find that firm profitability goes up after going public—contrary to previous results in the literature. We also find an post-IPO expansion in the number of subsidiaries and countries in which IPO firms operate. Our results are stronger for firms in financially dependent industries and in countries with higher investor protection consistent with going public relaxing financial constraints and with a stronger impact when agency conflicts are lower. Overall, our results are consistent with going public inducing a shift towards a strategy of commercialization to increase profitability. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.