IPO Filing Research Articles

Cross-border acquisitions: The case of SPACs

We examine one aspect of special purpose acquisition companies (SPACs) in the U.S. market, namely their focus on foreign targets. Using a sample of 1737 SPAC IPO filings and 537 SPAC mergers with targets from 28 countries between 2003 and 2022, we study both the geographic preference revealed in SPACs' IPO filings and the geographic location of target firms in the subsequent acquisitions. Our results show that 69% of SPACs with a declared foreign focus are subsequently successful in acquiring a foreign target. However, they take longer time to identify and complete mergers compared to those with a domestic focus. When a merger is announced, SPACs with U.S. targets exhibit significantly higher announcement returns compared to those with foreign targets, with an even more pronounced difference when targets are from China or other emerging markets. Post merger, all SPACs exhibit poor market-adjusted returns. SPACs with Chinese targets suffer the worst one-year post-merger stock performance, whereas those with targets from other emerging markets perform considerably better than the rest of their peers. Further examination suggests that country-level factors, such as investor protection and accounting standards, are significant determinants in post-merger market performance of SPACs engaged in cross-border acquisitions.

IPO Failure Case Study—The Case of Logicreation

China's economy has shifted from a high-speed development stage to a high-quality development stage, and there is an urgent need for scientific and technological innovation to promote high-quality development. Since August 24, 2020, when the first batch of enterprises under the registration system of the GEM board were listed on the market, as of August 20, 2023, a total of 345 enterprises on the Shenzhen Stock Exchange have terminated their IPOs, and the reasons for the failure of their IPOs are more or less the same. In this paper, we take Beijing Logicreation Information & Technology Co., Ltd. (hereinafter referred to as Logicreation) as a case study to deeply investigate the reasons behind its IPO failure. By analyzing the information disclosed by the case company in the GEM audit, it is found that the reasons leading to Logicreation's failure to meet the requirements of the IPO audit can be broadly divided into two aspects. On the one hand, it is due to business compliance issues, while on the other hand, it also lies in its own unstable profitability. In view of the reasons for the failure of Logicreation's IPO, this paper suggests that the company should improve its internal control and clarify the relevant standards, improve its product structure and its profitability, so as to be ready for the next IPO filing. At the same time, it gives other enterprises to be listed a certain experience to learn from, and improves the chances of success of GEM IPO.

IPO withdrawals: Are corporate governance and VC characteristics the guiding light in the rough sea of volatile markets?

More than 25% of all US firms that file for an IPO withdraw their offering from registration. Our study, which includes 3438 US domestic first-time IPO filings between 1997 and 2014, examines whether in times of high market volatility, high-quality corporate governance and VC backing may serve as a signal and thus reduce the withdrawal probability. Our results from an interaction term analysis support the view that corporate governance characteristics, but not the VC backing per se, tend to provide signals in highly volatile markets. In addition, our paper delves into the effect of VC characteristics. Local VCs tend to reduce the withdrawal probability. The same holds for VC syndication, particularly in highly volatile markets. Finally, our findings lend support to the conclusion that in highly volatile environments, reputable VCs tend to follow the dual-track strategy or postpone the IPO of their portfolio firms more often than in less volatile markets.

Post-IPO Geographic Expansion

Transitioning to public ownership affects where firms invest. Post-IPO, we find that firms conduct more geographically diversifying acquisitions on the intensive and extensive margins, relative to both withdrawn IPO filings and seasoned matched peers. The effect is larger for IPO filers that are large relative to their local economy, and smaller for IPOs led by less active underwriters. We find little evidence of geographic expansion after seasoned equity offerings, suggesting that capital raised does not drive the expansion decision. Our results suggest that going public alleviates significant geographic-based information frictions faced by private firms.

On the Pricing Information in the Initial IPO Filing

U.S. IPO filings have delayed the disclosure of pricing information since 1995. Despite the resolution of valuation uncertainty induced by this pricing delay, the offer price revision intensity and the efficiency of the first price range are unrelated to the incidence and extent of the pricing delay. Moreover, price revisions from the last amendment to the offer price can be predicted with price revisions up to the last amendment date, and with IPO characteristics and market-wide returns known at the last amendment date. Together, these findings suggest that price range adjustments during the IPO registration period are sticky as they fail to reflect public information.

The Carbon Footprint of Bitcoin

Summary Participation in the Bitcoin blockchain validation process requires specialized hardware and vast amounts of electricity, which translates into a significant carbon footprint. Here, we demonstrate a methodology for estimating the power consumption associated with Bitcoin's blockchain based on IPO filings of major hardware manufacturers, insights on mining facility operations, and mining pool compositions. We then translate our power consumption estimate into carbon emissions, using the localization of IP addresses. We determine the annual electricity consumption of Bitcoin, as of November 2018, to be 45.8 TWh and estimate that annual carbon emissions range from 22.0 to 22.9 MtCO2. This means that the emissions produced by Bitcoin sit between the levels produced by the nations of Jordan and Sri Lanka, which is comparable to the level of Kansas City. With this article, we aim to gauge the external costs of Bitcoin and inform the broader debate on the costs and benefits of cryptocurrencies.

Do IPO filing prices reflect firm quality?

PurposePrior research suggests that institutional investors prefer higher priced stock, while individual investors prefer lower priced stock. The purpose of this paper is to examine whether the IPO filing price reflects firm characteristics that are commonly associated with quality, including size, age, earnings, underwriter reputation and venture capital backing.Design/methodology/approachThe authors used t-tests, Wilcoxon rank sum tests, logistic and ordinary least squares regressions to test the hypotheses.FindingsThe authors find that IPO filing prices are positively related to measures of quality, except venture backing, which impacts prices non-linearly. Ceteris paribus, small (large) venture backed firms’ filing prices are set significantly lower (higher).Research limitations/implicationsFirm managers set IPO filing prices high when they believe the firm is likely to attract institutional investors due to its size, quality and certification, and will set prices low otherwise.Practical implicationsIndividual investors should be wary of IPO firms with lower prices. Managers should be cognizant of the positive relationship between IPO quality and price.Originality/valueThis study provides evidence that IPO prices reflect firm quality and may be set deliberately to attract individual investors when institutional investor demand is expected to be low. It also provides evidence that venture backing affects IPO prices non-linearly, consistent with the grandstanding hypothesis.

The Carbon Footprint of Bitcoin

Participation in the Bitcoin blockchain validation process requires specialized hardware and vast amounts of electricity, which translate into a significant carbon footprint. Here we demonstrate a methodology for estimating the power consumption associated with Bitcoin’s blockchain based on IPO filings of major hardware manufacturers, insights on mining facility operations, and mining pool compositions. We then translate our power consumption estimate into carbon emissions, using the localization of IP-addresses. We determine the annual electricity consumption of Bitcoin, as of November 2018, to be 48.2 TWh, and estimate that annual carbon emissions range from 23.6 to 28.8 MtCO2. This means that the level of emissions produced by Bitcoin sits between the levels produced by the nations of Jordan and Mongolia. With this article, we aim to gauge the external costs of Bitcoin, and inform the broader debate on the costs and benefits of cryptocurrencies. The externalities we discuss here may help policy-makers in setting the right rules as the adoption journey of blockchain has just started.

Walking the Line between Reducing Information Asymmetry and Protecting Proprietary Information: Management Forecasts by Newly Public Firms

This paper investigates the management forecast provision and attributes of firms that redact proprietary information in their IPO filings and thus face an intense tradeoff of protecting their proprietary information yet meeting investors’ information demand. We document that over their first eight quarters post IPOs, redacting firms are as likely to forecast as other IPO firms, consistent with incentives to reduce information asymmetry, but they alter forecast attributes in ways consistent with protecting their proprietary information: they wait longer to issue first forecast, forecast fewer items, forecast less precisely, and avoid forecasting items related to input costs when they redacted supplier contracts. Driven by decreases in proprietary costs and increased incentives to reduce information asymmetry, they also rapidly change their forecast strategy. While redacting firms are less likely to issue forecasts in the first two quarters, they become as likely to forecast by the eighth quarter as non-redacting firms. Our results shed light on how firms attempt to reduce information asymmetry while also shielding proprietary information, and how firms manage their disclosure strategy dynamically.

Raising Capital after IPO Withdrawal

We document the outcomes of every withdrawn U.S. IPO (994) from 1998 to 2011. While prior literature has studied post-withdrawal IPO re-filings and M&A outcomes, one in three firms subsequently raises private capital. Presuming that capital needs motivate most IPOs, firms in need of cash should dual track a private placement alongside the IPO as an alternative. Firms generating negative cash are more likely to conduct private placements, however, firms raise less capital and do so at inferior valuations. Further, certain regulatory changes focused on easing a private capital raise post withdrawal are shown to have unintended consequences. While prior literature has evidenced this damage by way of negative industry reactions to IPO filings and positive reactions to withdrawals, we find opposite effects during and after the IPO Bubble. We also study market reaction to subsequent private placements and find that reactions across events offset one another. The offsetting reactions offer strong evidence that we are capturing the expected competitive effects of a funded rivals the likelihood of raising capital changes with each event.

What Matters Most? How Tone in Initial Public Offering Filings and Pre-IPO News Influences Stock Market Returns

Before shares of a company are sold to the general public on a security exchange for the first time, regulatory publication requirements force U.S. firms to file an initial public offering prospectus. While accounting information in IPO filings are closely studied by investors and analysts, research must also examine the textual content of these filings. Thus, we measure the proportion of uncertain language. As a result, this paper provides empirical evidence that soft content is not only a major driver of first-day stock market returns, but also persists in the market up 10 days of trading. However, a much stronger impact on stock market prices comes from the pre-IPO news tone. Interestingly, the more uncertainty words appear in pre-IPO news, the higher the following first-day stock market return. It seems that investors mainly focus on the chances of a company rather than on the risks.

Investor Demand for Information in Newly Issued Securities

The existence of informed investors is a necessary condition for informationally efficient prices. Numerous studies examine the role of information suppliers in the price discovery process (e.g., underwriters, analysts, auditors, venture capitalists). From the investor’s perspective, researchers typically rely on proxies for informativeness (e.g., institutional versus retail investors, trade size) due to a lack of observable data. Our study directly measures investor demand for information and its impact on security prices using search traffic associated with corporate filings on the EDGAR system of the Securities and Exchange Commission (SEC). Our analysis focuses on the registration period for IPOs when the lead underwriter solicits information from purchasing investors to establish the firm’s market value. Information asymmetries between investors and the issuing firm are likely to be high during this period, increasing the value of information acquisition. Consistent with the important role of informed investors in the price discovery process, we find that EDGAR search traffic significantly increases for peer firms on IPO filing dates. We also find that investor demand for information is positively related to the probability of IPO success, and can predict both price revisions and initial returns. Overall, our results indicate that information acquisition is reflected in the pricing of newly issued securities.

Does Going Public Affect Innovation?

This paper investigates the effects of going public on innovation by comparing the innovative activity of firms that went public with firms that withdrew their IPO filing and remained private. NASDAQ fluctuations during the book-building phase are used as an instrument for IPO completion. Using patent-based metrics, I find that the quality of internal innovation declines following the IPO and firms experience both an exodus of skilled inventors and a decline in productivity of remaining inventors. However, public firms attract new human capital and acquire external innovations. The analysis reveals that going public changes firms' strategies in pursuing innovation.

IPO Underpricing: Behavioral Bias or Information Production?

Using a sample of venture capital-backed firms going public, we analyze the role played by perceived valuation changes on IPO underpricing. We consider the full trajectory of perceived valuation changes in a firm’s value from its last VC round, to IPO filing, and ultimately to IPO price. We find that perceived valuation change from the last pre-IPO venture capital round to the time of IPO affects the IPO underpricing in a non-linear way. Further analysis indicates that information based theories, not behavioral biases, explain this non-linear result. We also find that the previously documented partial adjustment effect and its non-linear impact on IPO underpricing are related to the trajectory of the perceived valuation changes. Nevertheless, the lack of direct effect of behavioral bias on IPO underpricing stands in stark contrast to prior evidence that shows importance of behavioral biases in settings with many sophisticated parties.

IPOs in Registration

Most studies of IPO activity focus on individual issuer decision (filings, issuances, withdrawals). This study provides a more complete empirical picture of the IPO market by tracking the monthly value of IPOs in registration from 1998 to 2007. The value in registration has a significantly negative effect on IPO filings and a significantly positive effect on issuances, withdrawals and filing size amendments for issuers remaining in registration. Controlling for the value of IPOs in registration, market condition variables (including market return and volatility) play less significant roles on issuance choices than found in the existing literature.

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

The main purpose of this paper is using a unique data set from IPO filings to study the IPO market as a screening device and the going public decision. We find that private firms that are less likely to have the option to access public equity markets receive 54 cents for each dollar they expected to raise in an IPO, whereas firms that are more likely to have the option to go public but sell privately sell at $1.11 for each dollar they expected to receive at the IPO. This result suggests that the lower valuation for firms sold in private markets compared to firms sold in public markets can be at least partially explained by the lower relative bargaining power of private firms. However, owners that took their firms public before selling received, on average, 40% larger payoffs than owners that had the option to go public but decided to sell privately. The results in this study indicate that these differences in valuation are not fully explained by existing theoretical models on the decision to sell privately or in two stages.

Market Volatility and the Timing of IPO Filings

Market Volatility and the Timing of IPO Filings

Market Volatility and the Timing of IPO Filings

We investigate how aggregate IPO filing volume responds to changes in stock market volatility. The filing volume consists of all non-financial firms that filed with the SEC between 1984 and 2004. Controlling for factors shown in the literature to impact primary market activity, notably stock market returns, we find filing volume positively related to changes in market volatility, and the relation is especially pronounced when stock market return is at „normal‟ levels, i.e. neither too high nor too low. The relation also holds at the industry level, in a pooled time-series crossindustry regression context. The relation is more pronounced for IPO filings in „new‟ industries (computers, software, electronic equipment, and telecommunications) relative to traditional industries. These results are consistent with our hypothesis that the ability to discover investor valuations before deciding to sell shares gives firms filing with the SEC an „option‟ on the uncertain offer price. This option has value not only in a strong stock market but also in a volatile market. Furthermore, option theory implies that the marginal effect of volatility on this option is highest in „normal‟ stock markets.

Private matters

Why do private firms stay private? Empirical evidence on this issue is sparse, as most private firms in the U.S. do not report their financial results. We investigate why private status matters by taking advantage of a unique dataset of large, leveraged private firms with SEC filings. Unlike a number of other studies, we find that neither the existence of growth opportunities, nor the desire of firm founders to diversify, is a principal determinant of the decision whether or not to retain private status. Rather, the existence of private benefits of control appears to serve as the most significant incentive to stay private. Family-controlled firms have significantly lower probabilities of filing for an IPO, while a board structure that grants management relatively more autonomy lowers the probability of an IPO filing as well. Cross-sectional analysis of profitability and ex post performance suggests that while private benefits of control may encourage firms to stay private, they do not have detrimental effects on firm efficiency. In contrast, firms controlled by private equity specialists appear to place a low value on control benefits and are likely to go public as a means of cashing out.

What Can We Learn from IPO Comparables Besides Valuation? IPO Shadow Stocks, Oversubscription Rates and Investor Sentiment in the Hong Kong Market

IPO comparable stocks that are discussed by the local media around the IPO filing period are known in Hong Kong as IPO shadow stocks. I show that IPO shadow stocks experience significant price run-ups during the IPO filing period of the public offering tranche. The level of run-ups is positively associated with the level of media coverage of IPO stocks before the IPO filing date. Utilizing a unique dataset that provides information on IPO subscription rates, I find that higher run-ups of IPO shadow stocks are associated with higher IPO demand. The subscription rate is highly relevant in explaining IPO initial returns, and its presence overshadows most other factors commonly studied in the literature, such as prior market and industry returns. I further examine whether both the price run-up and oversubscription are due to leakage of information from institutional subscribers' demand (information diffusion hypothesis), or stimulated attention by over-optimistic investors in hot issue markets (stimulated attention hypothesis). In my empirical analysis, I find significant price reversals of IPO shadow stocks after the IPO listing dates. Further, the price run-ups of IPO shadow stocks of smaller firms and those subject to more severe short sale constraints have stronger predictive power for IPO demand. These results support the stimulated attention hypothesis and are inconsistent with the information diffusion hypothesis, suggesting that investor sentiment may be the dominant determinant of IPO demand in the Hong Kong market.