Time Of IPO Research Articles

Industry Technological Changes, Venture Capital Incubation, and Post-IPO Firm Innovation and Performance

This paper investigates whether industry technological changes affect the timing of venture capital-backed IPOs. Venture capitalists (VCs) shorten incubation periods and take portfolio companies public when the industry exhibits high levels of technological change. This technology timing of IPOs reflects the VCs’ efforts to raise future capital. In particular, during periods of greater technological change, VCs that conduct IPOs after shorter incubation periods obtain more subsequent funding. However, portfolio companies with shorter incubation periods earn fewer patents, are less likely to survive, and experience worse stock returns after their IPOs. These findings provide new insights into VCs’ strategic exit decisions due to changes in the technological environment, as well as how their decisions affect the post-exit performance of their portfolio companies.

Net Asset Value Discounts in Listed Private Equity Funds

This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our results have particular relevance to the pricing of unlisted private equity funds where no market prices are observable. We find that funds start at a zero initial premium and adapt to the long-term average of -26 % after two years. Premia can be explained by investor sentiment and to some extent by liquidity, but not by managerial ability. A decrease in premia over the first few quarters after a fund's IPO seems to be caused by the timing of fund IPOs. Private equity fund premia also depend on disclosure requirements and systematic risk, which suggests that some information about the fund's portfolio is not reflected in net asset values. Premia predict future stock returns, which also display seasonalities that are related to the calendar year as well as to the fund's fiscal year.

IPO Timing, Buyout Sponsors’ Exit Strategies and Firm Performance of RLBOs

This paper studies the impact of buyout sponsors’ IPO timing on the LBO restructuring process and subsequent exit strategies. I find that LBO duration is negatively related to hot IPO market conditions. Further, following IPOs, RLBOs with shorter LBO duration experience greater deterioration of performance and higher probability of bankruptcy. This suggests that sponsor’s efforts to enhance operating efficiency succumb to market timing. IPO timing does not affect sponsor’s exit strategies and monitoring post IPO. Sponsors keep an active long-run presence with more reputable sponsors more likely to exit by facilitating takeovers.

Market Timing and Exit Choices: IPO v. Acquisition

Our results shed new light on interpretations of statistical evidence of market timing in prior research on IPO timing and exit choice. We examine IPO and acquisition waves and exit choices for 7082 venture-backed private companies over the 29-year period from 1978 through 2006. Consistent with other literature, we hypothesize that levels of IPO and acquisition activity and the choice between IPO and acquisition may be affected by market timing or by pseudo market timing that reflects variations in (i) information asymmetry, (ii) capital demand, and (iii) the relative cost of the alternatives. Based on any of several testing criteria and using either the full sample, or sector-specific subsamples, we find evidence of pseudo market timing. IPOs are selected during periods when market-wide demand for growth capital is high, adverse selection costs are low, the value of protecting private information is low, and market values have been rising. We find no consistent support for the market timing hypothesis, that issuers are more likely to select IPOs during periods when investors are over-optimistic such that subsequent market returns are negative, negatively related to IPO activity, or lower than market returns after exits by acquisition.

Do Banks Price Their Informational Monopoly?

Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks banks to use the private information they gain through monitoring to borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's creditworthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market.

How Does Reputation Influence a Firm's Decision to Issue Corporate Bonds? New Evidence from Initial and Seasoned Public Debt Offerings

Why does a firm make the financially significant decision to issue bonds and what influences that decision? We find ex-ante characteristics determining creditworthiness and incentives to raise external finance are influential, but direct bond market reputation is more important: for a given set of characteristics a firm is more likely to issue if it has done so previously. We offer a new analysis that complements existing studies of private versus public bond issues, the scale and timing of IPOs and the effect of reputation on the financing of the firm. Our paper offers a theoretical extension of the Holmstrom and Tirole (1997) framework and an empirical assessment using a panel of 983 US firms from 1995-2004 to show firms with greater reputation and signals of creditworthiness and incentives to raise external finance access bond markets with higher probability than other firms.

The Dynamics of Going Public

This paper develops a real options model in which firms may use the timing of their IPOs to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares and underprice more during cold markets, and that issuers are younger on average during hot markets.

Do Banks Price their Informational Monopoly?

Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market.

Earnings Quality at Initial Public Offerings

Financial reporting around the time of IPOs is consistent with listed firms reporting more conservatively than previously as private firms, consistent with the results in Ball and Shivakumar (2005). We hypothesize that IPO firms supply the higher quality financial reports demanded by public investors, who face higher information asymmetry than private investors. The market mechanisms for enforcing this demand include monitoring by internal and external auditors, boards, analysts, rating agencies, the press and other parties. Once public, firms are subject to greater regulatory scrutiny and penalties. From the point of releasing the public prospectus document onwards, IPO firms face a greater threat of shareholder litigation and regulatory action if they do not meet higher reporting standards. The evidence is overwhelmingly in favor of this hypothesis. We show that the evidence reported by Teoh, Welch and Wong (1998) in support of the alternative hypothesis, that IPO firms opportunistically inflate earnings to influence the IPO price, is unreliable for a variety of reasons. We provide cleaner evidence, from samples of U.K. and U.S. IPOs, that IPO prospectus financials are conservative by several standards. We conjecture that the types of bias we observe in conventional estimates of discretionary accruals occur in a broad genre of studies on earnings management around large transactions and events.

Evidence on What CFOs Think About the IPO Process: Practice, Theory, and Managerial Implications

Many privately held companies aspire to go public through an initial public offering. But the IPO process is time-consuming, expensive, and fraught with uncertainty. With the aim of shedding light on the process and reducing at least some of the uncertainty, the authors asked several hundred CFOs to share their experiences and perceptions with regard to six specific aspects of the IPO process: (1) motives for going public; (2) the timing of IPOs; (3) criteria for choosing an underwriter; (4) cause of IPO underpricing; (5) IPO signaling; and (6) reasons to stay private. The main findings from the survey are summarized below: •The primary motive for going public is to create a currency-publicly traded shares-that can be used to fund acquisitions. •CFOs strongly base the timing of their IPOs on overall stock market conditions, while paying relatively little attention to IPO market conditions. •CFOs choose underwriters based on their overall reputation and industry expertise. Somewhat surprisingly, issuers did not express much concern about the underwriter fee structure. •CFOs view underpricing mainly as a means of compensating investors for taking on the risk of IPOs in the after-market. •The two strongest perceived positive signals for issuer quality are a history of strong earnings and the use of a reputable investment bank. The strongest negative signal is the sale of insider shares in the IPO. •The primary reason for staying private cited by the CFOs of private companies is the desire to maintain decision-making control.

Bookbuilding, the option to withdraw, and the timing of IPOs

The ability to withdraw IPOs when demand is weak increases expected proceeds and provides issuers with option value. To enhance this value, the SEC adopted in 2001 the ‘public-to-private’ safe harbor Rule 155 and simplified Rule 477 for withdrawing offerings. The option value can exceed the underpricing associated with soliciting investor demand. Hence, issuers might prefer bookbuilding despite the associated underpricing even if they could sell via fixed price at full expected value. The option value increases faster than underpricing with ex ante uncertainty, generating predictions regarding the use of bookbuilding and the timing of IPOs, and leading to a distinct theory of hot IPO markets.

The Determinants of Corporate Board Size and Composition: An Empirical Analysis

Many theories have been proposed to explain how corporate boards are structured. This paper groups these theories into three hypotheses and tests them empirically. We utilize a unique panel dataset that tracks corporate board development from the time of a firm's IPO through 10 years later. The data indicate that: (i) board size and independence increase as firms grow in size and diversify over time; (ii) board size - but not board independence - reflects a trade-off between the firm-specific benefits of monitoring and the costs of such monitoring; and (iii) board independence is negatively related to the manager's influence and positively related to constraints on such influence. These results are consistent with the view that economic considerations - in particular, the specific nature of the firm's competitive environment and managerial team - help explain cross-sectional variation in corporate board size and composition. Nonetheless, much of the variation in board structures remains unexplained even when all three hypotheses are combined, suggesting that idiosyncratic factors affect many individual boards' characteristics.

Corporate governance and firm value for small and medium sized IPOs

This paper proposes to include corporate governance characteristics in the explanation of underpricing at the time of IPOs. It shows that the investment banks and the issuers take the characteristics of the corporate board into account when valuing the issue, while investors adjust for the ownership structure in the aftermarket. Moreover, empirical tests provide some proofs about a simultaneous relation between the initial underpricing and the offer price-to-book, and suggest that price adjustment in the aftermarket includes the board characteristics as valued in the offer price.

Underpricing versus Gross Spread: New Evidences on the Effect of Sold Shares at the Time of IPOs

This paper verifies the relationship between the direct and indirect costs according to the number of primary and secondary sold shares. While the gross spread increases in the dilution factor, it is endogenously related to the participation ratio. Although not significantly related to the gross spread, the participation ratio increase in less risky IPOs following a period of positive market conditions. Consistent with Habib and Ljungqvist (2001), the higher the gross spread paid at the time of the IPO, the lower the first-day return. However, less risky firms with a higher participation ratio hire the services of more prestigious underwriters who charge a lower direct cost, but a higher indirect cost, in order to compensate investors.

Initial Public Offerings: An Analysis of Theory and Practice

We survey 336 CFOs to compare practice to theory in the areas of IPO motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is for acquisition purposes. CFOs base IPO timing on overall market conditions, are well-informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm-specific characteristics. Finally, we find the main reason for remaining private is to preserve decision-making control and ownership.

Stock Prices and IPO Waves

We develop a model of stock valuation and optimal IPO timing when investment opportunities are time-varying. IPO waves in our model are caused by declines in expected returns, increases in expected profitability, or increases in prior uncertainty about average profitability. The model predicts that IPO waves are preceded by high market returns, followed by low market returns, and accompanied by high stock prices. These as well as other predictions are supported empirically. Stock prices at the peak of the recent bubble, which was associated with an IPO wave, are consistent with plausible parameter values in our rational valuation model.

The Decision of Venture Capitalists on Timing and Extent of IPOs

We analyze the venture capitalist's decision on the timing of the IPO, the offer price and the fraction of shares he sells in the course of the IPO. A venture capitalist may decide to take a company public or to liquidate it after one or two financing periods. A longer venture capitalist's participation in a firm (later IPO) may increase its value while also increasing costs for the venture capitalist. Due to his active involvement, the venture capitalist knows the type of firm and the kind of project he finances before potential new investors do. This information asymmetry is resolved at the end of the second period. Under certain assumptions about the parameters and the structure of the model, we obtain a single equilibrium in which high-quality firms separate from low-quality firms. The latter are liquidated after the first period, while the former go public either after having been financed by the venture capitalist for two periods or after one financing period using a lock-up. Whether a strategy of one or two financing periods is chosen depends on the consulting intensity of the project. In the separating equilibrium, the offer price corresponds to the true value of the firm.

The Role of the Value Added by the Venture Capitalists in Timing and Extent of IPOs

The Role of the Value Added by the Venture Capitalists in Timing and Extent of IPOs

Clustering Patterns in Initial Public Offerings

I develop a model of the IPO timing decisions of firms in an industry. The outcome of an IPO makes public previously private information, reducing the degree of asymmetric information among investors. This leads other firms in the industry to go public, even though they do not have immediate financing needs. The main result of the paper is that the offer prices of early IPOs predict the subsequent IPO volume. Investors with favorable information tend to indicate weak interest in the early offerings, so that their signals remain private and provide further profits in the anticipated wave of IPOs. The tendency to conceal favorable signals creates an asymmetry in the information content of the offer prices of early IPOs. High prices obtain only when information is favorable, but low prices need not imply unfavorable information, as investors with high signals may have strategically indicated weak demand. As a result, high prices reduce the subsequent informational asymmetry to a greater extent than low prices do, triggering more firms to go public.

The Timing of Initial Public Offerings: A Real Option Approach

This paper analyzes the timing of IPOs by treating the going-public decision as a real option. Investors value the private firm using publicly observed market prices of firms from the same industry. With stochastically evolving market values firm insiders want to leave open the option of taking the firm public later, after a positive price shock. Going public exercises this option, which must be viewed as a cost of undertaking an IPO. Optimal exercising of the option dictates that IPOs should only occur after price run-ups. Firms never go public in a down market because the value of waiting is too great. These incentives can lead to clustering of IPOs near market peaks. The results generalize to seasoned issues. Each equity offering is for a unique fraction of the total ownership claim for the firm and is associated with its own timing option. Each equity issue is independent of all the others, and therefore the timing of an offering is unaffected by subsequent issues. Each equity issue is likely to follow an abnormal price increase.