IPO Firms Research Articles

Social capital and the pricing of initial public offerings

Using a large sample of 4,892 IPOs in the United States, we establish that the level of social capital in the county of the IPO firm's headquarters is negatively associated with the level of IPO underpricing. The results hold for a range of robustness tests, including those addressing endogeneity. Additionally, the relation between social capital and IPO underpricing is weaker among IPO firms with less information uncertainty and stronger for IPO firms with more agency problems. We also show that social capital affects IPO underpricing through changing IPO firms’ earnings management activities. Further, high social capital is associated with a higher likelihood of the IPO being oversubscribed, higher total proceeds raised in the IPO, a greater number of IPO shares issued, and lower total IPO administrative fees. Social capital also influences seasoned equity offerings (SEOs), in the form of lowering SEO underpricing and SEO discount. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of firm securities issuance.

Wealth Effects of Share Repurchase Decision of IPO Firms: Evidence from India

The present study shades light on the short-term wealth effects of the share repurchase decision of Indian IPO firms on their stock prices. For the years 2000–2019, the sample considers the IPO companies who announce buybacks within 5 years after their listing. By evaluating short-term fluctuations in stock prices around the buyback announcement date, wealth effects have been quantified using the event study approach. According to our empirical investigation, investors responded favourably to the news and produced positive 1.13% nonsignificant abnormal returns on the event day. Further investigation finds that these companies likewise endure erratic stock performance in the days that follow the announcement, with the exception of the day when they actually purchase back their shares, which produced positive and significant abnormal returns to investors of 0.92%. Also, over the event window, the results are positive at 10.69% and significant. Our results show that investors favourably view share repurchase by IPO firms and can regard it as a sound investment strategy. This study also adds to the scanty literature about newly listed firms’ payout preferences.

Long-Term Performance Puzzle: High Growth IPO Firms and the Moderating Role of Post-IPO Strategies

Long-Term Performance Puzzle: High Growth IPO Firms and the Moderating Role of Post-IPO Strategies

The role of national context in the relationship between founder CEO and IPO performance

PurposeAlthough founders are often replaced with external CEOs prior to firms making IPOs, firms that do retain founder CEOs generally perform better at IPO. However, this relationship may be contingent upon context. This study aims to investigate how national context influences the relationship between a founder CEO and IPO long-run performance. The authors hypothesize that founder-CEOs will perform better in IPO firms in countries where managerial discretion, future orientation, and the level of conformity to professionalize management are high, and uncertainty avoidance is low.Design/methodology/approachUsing insights from the upper echelon and institutional theory, the authors used hierarchical linear modeling to analyze over 1,000 firms across eight countries.FindingsFounder CEOs perform best in IPO firms in a national context where managerial discretion is low, uncertainty avoidance is high and the level of conformity is high.Originality/valueThis study contributes to a growing area of cross-national IPO research in management by investigating the relationship between culture, management and IPO performance.

IPO Timing in Family and Non-Family Firms: Investigating the CEO’s Characteristics Role

The aim of the paper is to investigate the influence of the family nature of the firm on the time to going public and, overcoming the dichotomy between family and non-family firms, addressing the family firms heterogeneity in terms of CEO characteristics. Grounding our regression analyses on a sample of IPO firms went public in Italy from 2000 to 2020, our paper offers theoretical contributions and has practical implications. Findings demonstrate the existence of a positive relationship between family firm status and IPO timing, corroborating previous research claiming that the family influences IPO features. Moreover, empirical results point out that while CEO age increases the time to IPO in family firms, when the CEO is also the company founder, family firms go public earlier. This evidence supports literature advocating that age and founder status matter in shaping family decision making process.

Do Share Allocations to the Indigenous Investor Drive the Demand for IPOs?

The purpose of this paper was to investigate the impact of allocating shares to the indigenous (Bumiputera) investors on the oversubscription ratio of IPO. This factor is unique to Malaysian IPOs and would enable us to reflect the signaling theory. Data on 348 IPO firms listed on Bursa Malaysia over a span of 17 years from 2002 to 2018 were examined using a cross-sectional regression analysis. The findings demonstrated no significant impact arising from the fractions of shares allocated to Bumiputera investors on the oversubscription ratios, except that the revised guidelines on the Bumiputera equity requirement had a significant negative influence on oversubscription. Further tests showed that the influence of such share allocation on oversubscription was moderated by firm size, which was proxied by market capitalization. The findings lend support to the signaling theory, indicating that the demand for IPOs will be slightly higher for larger firms listed in bigger markets.

Textual Information and IPO Underpricing: A Machine Learning Approach

This study examines the predictive power of textual information from S-1 filings in explaining IPO underpricing. Our empirical approach differs from previous research, as we utilize several machine learning algorithms to predict whether an IPO will be underpriced, or not. We analyze a large sample of 2,481 U.S. IPOs from 1997 to 2016, and we find that textual information can effectively complement traditional financial variables in terms of prediction accuracy. In fact, models that use both textual data and financial variables as inputs have superior performance compared to models using a single type of input. We attribute our findings to the fact that textual information can reduce the ex-ante valuation uncertainty of IPO firms, thus leading to more accurate estimates.

Financial Literacy and IPO Underpricing

AbstractUsing an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens’ financial literacy has an important and consistent influence on IPO underpricing.

Long-run Stock Return of IPO Firms in India: Examining Investment and Profitability Hypothesis

The finance literature has analysed several aspects of the IPO market, namely, hot issue market, initial under-pricing, and long-run underperformance. Among them, findings of long-run underperformance are particularly significant as it indicates that investors incur losses on a perpetual basis by investing in a portfolio of IPO firms. According to the OECD (2019) , during 2009–2019, the number of IPO issuances by non-financial firms in India were the third-highest globally. In the case of India, only a few studies have investigated the long-run performance of IPO firms. Accordingly, the present study fills a void in this arena. The study, along with the conventional event study techniques, deploys the Fama-French Five-Factor model for analysis of long-run underperformance. The study estimates investment and profitbility factors for India following the methodology illustrated by Fama-French (2015) . The study finds that long-run underperformance by the IPO firms is not absolute but specific to the sample and methodology used for analysis. It also finds that underperformance is prevalent in high IPO volume years. The regression results for IPO firms as portfolios in the capital asset pricing framework do not show any long-run underperformance. This finding supports the conclusion that the long-run underperformance by IPOs reported in the previous studies results suffers from sample and methodology bias. The analyses in the five-factor framework show the plausibility of higher investment by IPO firms resulting in lower market return. IPO firms make above-industry-average capital expenditure, and their profitability converges with the industry after issue.

Board diversity and post-IPO performance: the case of technology start-ups

ABSTRACT IPO firms in the technology industry are regarded as vulnerable due to their limited resources, inexperience, and relatively short technology and product lifecycles. They also lack a track record to signal to the market that they are equipped with sufficient ability to overcome the challenges faced in this highly competitive environment. This study examines whether board diversity helps IPO firms perform better in such a challenging environment; furthermore, we explore the potential contingencies that magnify or weaken the benefits of board diversity by examining how its impact is moderated by firm size and board tenure. Using a sample of 363 IPO events within technology firms over 11 years, we find that higher board diversity is associated with better post-IPO performance; however, a larger firm size and longer board tenure decrease the value created by board diversity. The findings are robust to alternative measures of performance and board diversity. Our study contributes to the literature by demonstrating the significant impact of board diversity on the performance of technology IPO firms as well as explaining the conditions under which boards effectively execute their resource dependence roles.

Litigation risk, underpricing, and money-losing IPOs

We examine the impact of firms' pre-IPO earnings on the relationship between litigation risk and IPO underpricing. We confirm the insurance effect of the lawsuit avoidance hypothesis; however, we find that the use of underpricing to reduce litigation risk is mainly associated with firms with negative earnings at the time of going public. Our results are robust to the timelines over which sample firms were sued, alternative underpricing measures, the addition of various control variables to our baseline regression models, and different proxies to categorize IPO firms. We also investigate the relationship between litigation risk, pre-IPO earnings, and underwriter gross spreads. The results indicate that, when dealing with firms facing a high risk of litigation, underwriters charge significantly higher spreads to negative-earnings issuers than profitable IPO firms.

Underpricing and aftermarket performance of IPOs during the Covid-19 period: Evidence from Istanbul stock exchange

The effect of uncertainty on IPO underpricing, short-term performance after IPO, and hot-and-cold-IPO market cycles have received a great deal of attention in the literature. This study revisits these issues of IPO activities under the Covid-19 pandemic with a focus on the Turkish IPO market. Measuring the underpricing and aftermarket performance of IPOs based on the cumulative abnormal returns of the first, second, third, fourth, fifth, tenth, and twenty-first days, we examine how underpricing and aftermarket performances are influenced by Covid-19 and some uncertainty proxies, such as some company characteristics (age, total assets), offering characteristics (gross proceeds, IPO price risk), and aftermarket variables (first-day trading volume, standard deviation of stock prices after the IPO) after controlling for firm, industry and market level variables (first-day trading value, the portion of the firm offered to public, price-earnings ratio, dummy variables for technology, manufacturing, and financial institutions sectors, standard deviation of a market index, moving average return of a market index). The study documents that while an IPO launched during the Covid-19 period has larger underpricing, an average IPO firm that is older, has more assets, generates larger proceeds, trades more on its first day of trading, is expected to fluctuate less after the IPO has a smaller underpricing at its initial public offering. Empirical results show that short-term market-adjusted abnormal returns of IPO firms during the pandemic are much larger than those before the pandemic.

Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers

We examine whether and how industry peers use tax avoidance as a strategic mechanism to maintain their relative competitive positions. We exploit a unique setting where a relatively large private firm obtains capital, visibility, and creditability by going public (i.e., an IPO), imposing significant competitive pressure on its industry peers. We find that peer firms increase tax avoidance after large IPOs. Further analysis shows that the increase of tax avoidance is driven by firms with high growth needs and firms with high operating uncertainty, suggesting that tax aggressiveness is aligned with other strategic risk-taking changes to improve industry competitiveness. We rule out two alternative explanations: 1) existing peers use relative product market power to hedge against tax risk and engage in tax avoidance; 2) peers mimic the tax avoidance behavior of IPO firms. The main finding is supported by the difference-in-differences test with coarsened exact matching and a battery of robustness tests, including alternative measures and alternative large IPO selection criteria.

Founders' Role with IPO Firms

Founders' Role with IPO Firms

The strategic value of retaining a young entrepreneurial IPO firms original insiders: Applying resource-based view in the Australian IPO context

Australia is an ‘Anglo-Saxon’ Pacific-Rim country that has strong features of both relational (Asian) and economic (Anglo) corporate governance. Extending resource-based view (RBV) into this unique context we predict that safeguarding the pre-initial public offering (IPO) top management team (TMT) members and directors (insiders) firm-specific investments by continuing to retain a few insiders even after an IPO is more important than blindly adopting agency-theory US inspired regulations. To test our predictions, we hand collected a sample of young Australian firms to document whether institutional pressures to adopt board independence and replace the founder, or original, pre-IPO insiders by Australian companies negatively impacts post-IPO financial performance. Consistent with our predictions we find the presence of a few of the original insiders significantly improves post-IPO financial performance. These findings contribute to RBV theory and have implications for Asia Pacific corporate governance.

The influence of green innovation on default risk: Evidence from Europe

This paper examines the relationship between green innovation and default risk using a sample of 26,904 firm-year observations across 35 European countries from 2003 to 2019. We find that green innovation is negatively related to firms' default risk, proxied by the market-based probability of default and accounting-based Altman's Z’‘-score and Zmijewski's ZM-score. The results are robust using an OLS fixed-effect regression and an alternative two-step GMM analysis to exclude the possibility of reverse causality. We also find that the mitigating effect of green innovation on default risk is more significant in market-oriented countries than in bank-oriented countries. However, such a mitigating effect loses significance in IPO firms. Finally, the investigation of firm risk channels shows that the mitigating effect is mainly driven by improved profitability and market value rather than reduced leverage channels. As the first study on the link between eco-innovation and credit risk, the present study's findings provide valuable guidance for the policymaker, corporate managers, investors, and other stakeholders.

The long-run abnormal returns and the subsequent SEO characteristics of profit-exempted IPO firms in Taiwan

<p>The deregulation of IPO requirements changes the industrial structure. Focusing on Taiwan’s unique profit-exempted IPO requirements, this study confirms that deregulation not only leads to IPO clustering, but also to a concentration in chemical and bio-pharmaceutical industry. The profit-exempted IPO issuers actively release optimistic information about future growth and take advantage of overvaluation to increase IPO revenue by misleading investors into mispricing the IPO. This results in poor long-run abnormal stock returns when stock price reverses after the IPO to correct the mispricing. In addition, some profit-exempted companies continue to use mispricing to raise equity capital and issue new shares after the IPO. For profit-exempted IPO companies, the characteristics of seasoned equity offerings within three years after IPO are significantly different from other companies. They are more likely to issue shares after IPO with shorter interval, larger size, and more frequent than non-profit exempted IPO firms. This study finds that the phenomenon of profit-exempted issuers raising capital is more consistent with the market timing theory.</p> <p> </p>

Does Information Disclosed in “Use of Proceeds” from Prospectuses Affect IPO Initial Underpricing?

AbstractWe study the impact of intended use of proceeds disclosed in the section of “Use of Proceeds” in prospectuses on ChiNext IPOs' initial underpricing. After splitting the entire period into two non‐overlapping sub‐periods to control for regulatory changes and after controlling for the firm‐level characteristics and market conditions, we find that the overall information disclosed from “Use of Proceeds” affects IPO initial underpricing significantly over the two sub‐periods. Moreover, the intended use of IPO proceeds in several specific categories affects underpricing too. The proceeds raised for IPO firms' information platform and research and development over the second sub‐period while the proceeds to promote marketing and sales and to expand existing products over the first sub‐period are significantly and positively related to initial underpricing. The significance changes for the IPOs with the opportunity to change their use of proceeds after IPOs. We explore the causes and effects to explain our findings.

Cash shortfalls in IPO firms

We find that most IPO firms will run out of cash soon if they did not receive proceeds from IPOs. The cash shortfalls are not caused by increases in capital expenditure, R&D, M&A, or debt repayment and persist during the 5 years after IPO. Negative net cash flows help explain the persistent cash shortfalls. These results are consistent with the funding horizon theory. IPO firms with more initial cash shortfalls also have lower cash flows in the next 5 years, suggesting that initial cash shortfalls can be used to predict the future operating performance of IPO firms.

Employee Welfare, Social Capital, and IPO Firm Survival

We examine the impact of employee welfare and social capital on the prospect of firms remaining quoted on a stock exchange. We analyze a panel sample of US-listed firms from 2000 to 2016 and track the outcome to the end of 2021. We find that entrepreneurial firms remain listed longer when employee welfare is better, and firms are located in a better social capital region. We also find that employee welfare positively complements the impact of social capital on prolonging the likelihood of remaining quoted. Our results are robust to endogeneity, effects of financial crises and COVID-19, and various model specifications.