IPO Activity Research Articles

The effects of the global financial crisis on ipo pricing and investor participation: Insights from India

Global financial crisis of 2008 is one of the most catastrophic event in the history of financial markets since Great Depression. More than ten years from the global financial upheaval, though the economy has returned to normal, however, the event led to some permanent changes in the global economy, policy framework and financial markets. This paper evaluates one of the important impacts of global financial crisis i.e. on the primary markets. An attempt has been made to assess the effect of the financial crisis on IPO activity and performance in the Indian Markets. The purpose of the research is to study analyse the after effects of global crisis on the level of underpricing, subscription ratio and investor's participation. The research indicates that the there is a huge correction in the level of underpricing and subscription ratio post financial crisis. It can be concluded that, both the lead manager's and investor's community became cautious in evaluating the new issues hitting the financial markets.

Social Progress and Capital Formation

The rate of business formation is higher in countries that rank better on dimensions of social progress. This creates a need for investment capital and helps drive a positive relation between social progress and IPO activity. For example, my results suggest that a one standard deviation improvement in a country’s Social Progress Index is associated with an additional 0.372 IPOs and a $69.416 increase in cumulative IPO proceeds raised per million people. The relation is stronger for emerging markets than for developed markets. Social progress is also positively correlated with the proportion of IPO firms that receive venture capital funding.

Raising Equity under Deregulation: Evidence from the JOBS Act

The Jumpstart Our Business Startups (JOBS) Act has not led to a sustained recovery in IPO activity, but to poorer-quality firms raising public equity. Firms going public under the Act are largely cash-starved, pay dearly to raise equity, and often rely on further public issues to avert financial distress. Proceeds raised are used to do more hiring, repay debt, and boost executive pay, but not to increase investments. Many firms lose exemptions sooner than allowed by the Act, whereupon they face higher compliance costs. The JOBS Act has not revived public equity markets and may have even undermined their attractiveness.

Institutions and IPO activity: a multi-country study

ObjetivoAnalisar os efeitos diferenciais que as instituições têm na atividade de IPO (Oferta pública inicial en inglés) dos países.Design/metodologia/abordagemEm uma amostra de 64 países em um período de 15 anos (2000-14). Testamos as variáveis: estado de direito, evitação de incerteza e masculinidade em subamostras de países desenvolvidos (27) e, emergentes (37) para explorar sua influência no nível de atividade doméstico do IPO.ResultadosPara os países desenvolvidos, apenas a evitação de incertezas e a masculinidade são significativas. Nos países emergentes, a evitação de incertezas e o estado de direito são significativos.Limitações/implicações de pesquisaO uso de diferentes estruturas de classificação de países poderia produzir resultados mais detalhados e focados na influência que as variáveis de nível de país têm na atividade de IPO.Implicações práticasAs empresas multinacionais poderiam usar essas descobertas para decisões relacionadas a seus possíveis IPOs subsidiários.Originalidade/valorEste é um novo trabalho empírico que relaciona instituições à atividade de IPO usando subamostras de países emergentes e desenvolvidos. Também se concentra na atividade de IPO, em vez da infravaloración/performance do IPO, e contribui para estender a literatura do âmbito IPO para os contextos globais não-anglo.Palavras-chaveIPOs, Emergentes, Desenvolvidos, Instituições, Cultura

Share Issuance and Expected Returns Around the World

Practitioners and academics often consider IPO activity as a gauge of investor optimism and market valuation. This study investigates the cross-sectional implications of this concept at the country level. We use sorting and cross-sectional tests to examine linkages between past share issuance and future returns across 78 countries for years 1995-2015. We find convincing and robust evidence that the share issuance is negatively related with future returns across countries. Markets with high past stock issuance markedly underperform markets with low stock issuance. This phenomenon is particularly strong across small countries, but insignificant within across large ones.

Why Venture Capitalists Stray From Their Industry Comfort Zones

Within the industry of venture capital I analyze what are the contributing factors that lead to venture capitalist investing outside of their preferred investment industry, despite a documented subpar result when doing so. I find that the greatest contributing factor to be the VC’s preferred industry deal flow, where low deal flow significant increases the likelihood of a VC making non-preferred industry investments. The next greatest contributing factors are if the VC has a high percentage of recent investments that are non-preferred industry investments or if the VC has low levels of VC industry specialization. Additionally, higher recent IPO activity in a non-preferred investment industry, higher past experience levels, lower round numbers, higher the number of co-investing VC investors, all significantly increase, although to a lesser extent, the likelihood of a VC investing outside of their preferred investment industry. No support is shown that VCs make non-preferred industry investments for the purpose of diversification.

COMPETITION AND MERGER ACTIVITY IN THE U.S. TELECOMMUNICATIONS INDUSTRY

AbstractIn this article we examine the U.S. telecommunications industry during a period of rapid deregulation to determine the effects of a deregulatory shock on industry competition and merger activity. We show that merger activity exhibits a clear wave‐like pattern, regardless of the listing status of the participants. Increased competition and IPO activity following deregulation increased cash‐flow volatility and probability of exit while the introduction of new technology increased dispersion of economic efficiency across the industry. These changes resulted in a significant increase in merger activity. Competition also played an important role in shaping “who buys whom?”

Market timing and pseudo market timing: an empirical examination of IPOs in India

PurposeThe purpose of this paper is to examine the impact of market timing and pseudo market timing on equity issuance decisions of IPOs in an emerging economy – India. Indian new issues market provides a perfect setting to test market timing against pseudo market timing due to two reasons. First, the US literature shows that most underpriced IPOs are highly overvalued and in India, the authors have the evidence of underpricing of IPOs. But whether Indian IPOs are overvalued or not it is yet to be tested. Second, majority of IPOs were issued in India only after the 1991 economic reforms which may signal the evidence for pseudo market timing hypothesis.Design/methodology/approachThe authors use direct test to examine the impact of market timing and pseudo market timing variables on the IPO activity. The direct tests of market timing and pseudo market timing hypotheses are based on the positive relation of market timing variables and market conditions variables with IPO activity. The authors examine the long-run performance of IPOs by using the calendar-time regression approach to test market timing against pseudo market timing. This serves as indirect test of market timing and pseudo market timing. Evidence of market timing using indirect test shows that there is a decline in the long-run stock performance of IPOs.FindingsThe results show that in India, firms issue equity not just due to market conditions but they also issue equity in order to time the market. The results of market timing are also supported by the calendar-time approach results. However, the authors find that the evidence of market timing is stronger for hot issue markets as compared to cold issue markets.Originality/valueThis is the first study to comprehensively examine market timing and pseudo market timing using direct and indirect tests for an emerging market context.

M&A synergies and trends in IPOs

The recent decline in IPO activity can be explained by the small firms' increasing preference for being acquired rather than growing independently. This paper sheds light on this explanation by focusing on the nature of the firms facing this decision and their potential merger synergies. First, the above explanation should be particularly true for Young Innovative Companies (YICs), which are often superior to incumbents in originating innovations but face greater difficulties in bringing them to the market. Second, a firm's trade-off between being acquired and remaining independent strongly depends on the extent of the synergies arising from a potential merger, which are however difficult to assess ex-ante. Using a new, text-based measure of business similarity as a proxy for M&A synergies, we document that YICs facing the potential to develop larger synergies are the main responsible for the decline in IPOs. Compared to 15years ago, the quarterly number of IPOs conducted by these firms has decreased by 20. At the same time, while M&A activity of other firms has declined, the number of acquisitions involving this particular type of firms has remained stable over time.

Market Forces and CEO Pay: Shocks to CEO Demand Induced by IPO Waves

I develop a simple competitive equilibrium model and derive the prediction that CEO pay-size elasticity increases when more firms compete for an inelastic supply of managers. Using industry-level IPO waves as a proxy for increased competition for CEOs, I find that pay-size elasticity increases by 6% with a one-standard-deviation increase in IPO activity. This effect is stronger in specialized industries. In addition, increased IPO activity leads to a greater likelihood of executive transitions between firms. These findings indicate that market forces play a key role in the determination of CEO pay.Received August 6, 2015; editorial decision September 24, 2016 by Editor Francesca Cornelli.

Equity Regulation and U.S. Venture Capital Investment

There is a growing consensus that the long-run per capita growth rate of the U.S. economy has drifted lower since the early 2000s, consistent with a perceived slowdown in business dynamism. One factor that may have contributed to this is a downshift in venture capital investment and its failure to recover in line with stock prices, as pre-2003 patterns would suggest. Critics have argued that this is associated with the increased regulatory burden for publically traded firms to comply with the Sarbanes-Oxley Act of 2002 (SOX). There is inconclusive evidence of SOX deterring firms from becoming publically traded as indicated by IPO activity, a proxy reflecting several factors that may not be as tied to innovation as venture capital. Earlier tests of SOX’s impact on venture capital activity, which tended to focus on cross-sectional evidence, were hampered by a short time-series sample following the Internet-stock bust of the early 2000s. Taking advantage of the large-sized rise, fall, and recovery in stock prices since then, this study assesses whether the time-series behavior of venture capital investment shifted following SOX. We find evidence of a time-series break in the middle of our sample, consistent with the passage of SOX. Estimates indicate that the slower post-SOX pace of venture capital investment is mainly attributed to a reduced elasticity of such investment with respect to stock prices rather than to a simple downshift in the level of investment. Our estimates suggest that a cost-benefit analysis of SOX could be worthwhile, especially given concerns that the long-run growth rate of U.S. productivity and GDP has been unusually sluggish and the emerging consensus that excessive debt financing—not equity financing—is more tied to the subset of financial crises associated with severe macroeconomic downturns.

Are Tunisian and Egyptian Share IPO Markets Hot or Cold?

This paper seeks to detect hot and cold IPO cycles in the Tunisian and Egyptian share market using a Markov regime switching model. Using a set of IPO activity measures (number of IPOs, level of underpricing, market conditions and duration), we established a model which estimates these activity measures in hot and cold periods respectively. We depicted the turning points for each activity measure. It is found that these markets are cold in the major period. As in regards to cycles, the segmentation method gives almost the same periods, except for the market condition measures (Trading volume for Tunisian stock market and Stock Market Returns (SMR) for Egyptian stock market) which give a different segmentation.

Family Firms IPO Activity and Pricing: Evidence from Poland.

Lack of sufficient capital is sometimes one of the barriers for the development of family firms. In a situation when the company owners do not have the possibility to recapitalize the company, or no possibility of increasing the scale of the use of foreign capital, an important source of funding may become an issue of shares directed to external entities. The article analyzes the activity of family firms in the process of raising capital through the issue of shares on the public market of securities - Stock Exchange and in the alternative trading system – NewConnect market. The analysis was conducted based on data from 2013-2015. In that period the share issues of family firms accounted for 30% of all IPOs on the Warsaw Stock Exchange and 43% on the NewConnect market. The article also examined the phenomenon of stock prices underpricing in the initial public offering. The scale of underpricing in family firms and other companies was compared.

Determinants of IPO Activity: Does IPO Activity Fluctuate in Accordance with the Business Cycle? Evidence from European Firms

The literature on corporate financing is quite extensive. However, researchers have so far not shed light on the IPO determining factors in Europe as a whole. This paper addresses three main questions observing more than 9000 IPOs performed during a period from 1991 to 2014. First, the macroeconomic and country-specific factors leading to IPO fluctuation in Europe are identified. Second, the question whether firm characteristics change prior to the IPO, indicating window dressing of the financial statements, is addressed. Finally, various firm characteristics are considered to identify differences between firms in successful and withdrawn IPOs, as well as IPOs during a boom cycle and a recession. I am able to reject the hypothesis that IPO fluctuation follows the business cycle. IPO activity rather follows the path of stock market returns, suggesting that firms act opportunistically, taking advantage of relatively low equity costs. There is strong evidence that the number and volume of IPOs follow a mean reverting tendency. Successful firms, in addition, disclose lower interest burden relative to EBITDA, indicating that investors value high funding costs negatively, penalising firms that follow the pecking order theory. More precisely, firms that want to raise equity due to high interest burden, are more likely to fail with their IPO.

Company's Characteristic Influencing the Success of Bank IPOs

The background of this study is Bank requirement to make fund available for business expansion, renewall of technology, research and development. Upon company's listing in stock exchange (Jakarta Stock Exchange). Bank will have fresh founds from public (investors) as a result of stock selling to public. One of investments that most investors prefer in capital market is IPO. IPO is a moment, which the initial stock is published and offered to public. The objective of this study is to analyze company's characteristic influencing the success of Bank IPO. This study takes 21 publicly listed banks at Jakarta Stock Exchange (JSE) as the object of this study and there are 7 variables elected as the parameters of the success of IPOs. Data analysis used in this study is from prospectus and data transaction of the company that was publishd in Jakarta Stock Exchange. The result of this study conclude that there is no variables (size effect, age at the offering, IPO Activity, initial return, market level, number of risk factors, and insider ownership) that influence the success of the Bank IPOs aftermarket.

IPO in the countries of the Gulf Cooperation Council

Abstract The Arab States of the Gulf Cooperation Council (GCC) host one of the fastest developing, yet one of the most closed groups of securities markets in the EMEA region. This study provides an analysis of the regional securities market and compares it with global securities’ market trends for the period 2000 to 2014. The study refers to regional IPO activity as a reflection of the level of maturity of the local economy. An IPO Market Ratio is introduced in this study as an instrument for measuring the national economy so as to be able to further compare it to other economies. The study provides descriptions of the financial markets of all GCC economies, outlines their developmental history, and develops a ranking of GCC countries based upon weighted normalized IPO Market Ratio data. The collected information and the results of the analysis are presented both in table and graphical formats.

Going public via special purpose acquisition companies: Frogs do not turn into princes

Special purpose acquisition companies (SPACs) are cash shells that try to buy private operating firms to which they confer a public-listing status. Private operating firms tend to use SPACs as an alternative way to get listed, particularly in years with weak IPO activity and volatile markets, such as 2008 and 2009. In these two years, approximately 31% of firms went public through a SPAC acquisition rather than through an IPO. Our results from the analysis of 127 SPAC acquisitions and 1128 IPOs during the wave of “new-generation” SPACs starting in 2003 lend support to the conjecture that particular small and levered firms with low growth opportunities tend to use this vehicle. SPAC acquisitions also may be fueled by the cash-out motives of existing shareholders. Venture capitalists and private equity investors tend to refrain from using SPAC acquisitions as an exit route. Tracking long-term abnormal returns, we find that SPAC firms are associated with severe underperformance in comparison to the market, the industry and (comparable) IPO firms.

Trends in IPOS: the evidence from cee capital markets

The purpose of this paper is to investigate IPO developments across five CEE countries between 2003 and 2012. Using a wider range of methods and different data sets we intend to complement the previous research. Applying descriptive statistics, relevant local developments are analysed first before being compared with leading European markets (London Stock Exchange and Deutsche Börse). We also investigated the assumption that a growing market has an explanatory power for the accelerating IPO activity. For this purpose we performed a Spearman correlation analysis. The data were evaluated at the significance level of α = 5 %. All CEE capital markets recorded strong dynamism over the observed period. All fundamental capital market parameters increase the attractiveness of individual capital markets, although their values lag behind developed European capital countries. The sole leader in the region is Poland with a flourishing IPO market. Our assumption that a growing market has a positive impact on IPO activities could not be supported by empirical evidence.

Diversification of pre-IPO ownership and foreign IPO performance

We examine the diversification of pre-IPO ownership of foreign-listed firms and how the presence of pre-IPO shareholders from the host country affects foreign issuer’s subsequent IPO and post-IPO activities. Using a sample of foreign-listed Chinese firms, we find that the presence of pre-IPO shareholders from the host country is associated with a significant reduction in direct and indirect IPO costs, especially for issuers without international sales and for firms operating at a loss. Benefits of such pre-IPO affiliation persist into the post-IPO period as manifested in greater analyst coverage and better acquisition performance in the host country. Our paper provides new insight on the value of pre-IPO ownership diversification and identifies one strategy that firms can use to overcome the liability of foreignness.

Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift

Prospectus profit forecasts (PPF) constitute one of the most important discretionary disclosure items in an IPO. I examine such disclosures in the Hong Kong market, where both IPO activity and PPF disclosure rates are at high levels. The median forecast typically ‘underestimates’ future earnings by around 6%. More importantly, PPF disclosure exhibits a strong inverse association with pre-listing owners' retained equity levels (Hughes, 1986; and Li and McConomy, 2004). PPF disclosure is thus more likely in IPOs raising more capital and generating larger floats. I also demonstrate a strong link between PPF disclosure and post-IPO earnings drift.Ensuing forecast errors also bear strong connection with IPO coordinators' initial price determinations as well as with subsequent investor returns. This area usefully extends the related literature (Cheng and Firth, 2000; Chen, Firth and Krishnan, 2001; Jog and McConomy, 2003; Chong and Ho, 2007; and Gounopoulos, 2011), which stresses an association between forecast errors and initial investor returns but ignores the preceding price ‘determination’ process. It also suggests that forecast errors serve as a valuable ex-post proxy for the amount of ex-ante uncertainty surrounding issuer value (Beatty and Ritter, 1986; Falconieri, Murphy and Weaver, 2009). This study also demonstrates a connection between final offer price ‘determinations’ and the information content and “superiority” of PPFs (Brown, Richardson and Schwager, 1987). Finally, and in contrast to final offer price ‘determinations’, initial investor returns strongly anticipate post-IPO earnings drift.