Performance Of Initial Public Offerings Research Articles

Multinationality and the performance of IPOs

Does multinationality affect the Initial Public Offering (IPO) performance of entrepreneurial firms? Theoretical arguments can be made for a positive effect of multinationality as well as for a negative effect. We examine this question empirically by analysing IPO data for 240 UK firms. We find that multinationality has significant and positive effects on long-run IPO performance. This suggests that the market perceives entrepreneurial firms with multinational activities as possessing unique intangible assets that are indicative of future financial success. Factors affecting the IPO performance also differ systematically between firms with multinational operations and those without multinational operations. Stocks of intangible assets and the quality of the network significantly affect the performance of entrepreneurial IPO firms that ‘go global’. In contrast, domestic IPO firm performance is affected by offer size and underwriters’ perception of firm quality. The findings have important implications for entrepreneurial firms who are making decisions on ‘going global’ and ‘going public’.

Europe's Second Markets for Small Companies

European stock exchanges have repeatedly opened second markets to list small companies. We explain the motivation for the creation of these second markets, and the reasons why many of them have failed. We find that the average long-run performance of initial public offerings (IPOs) on second markets is dramatically worse than for main market IPOs. However, the second markets have provided firms with the opportunity to raise funds at the IPO and in follow-on offerings. The relative success of London’s AIM, which is an exchange-regulated market with minimal regulations, has led other European stock exchanges to establish similar non-EU regulated second markets. Most of the IPOs on these exchange-regulated markets are offered exclusively to institutional investors, and are equivalent to private placements. These IPOs, which frequently raise only a few million euros, rarely develop liquid trading.

Multinationality and the Performance of IPOs

Does multinationality affect the initial public offering (IPO) performance of entrepreneurial firms? Theoretical arguments can be made for a positive effect of multinationality as well for a negative effect. We examine this question empirically by analyzing IPO data for 240 U.K. firms. We find that multinationality has significant and positive effects on long run IPO performance. This suggests that the market perceives entrepreneurial firms with multinational activities as possessing unique intangible assets that are indicative of future financial success. Factors affecting the IPO performance also differ systematically between firms with multinational operations and those without multinational operations. Stocks of intangible assets and the quality of the network significantly affect the performance of entrepreneurial IPO firms that “go global”. In contrast, domestic IPO firm performance is affected by offer size and underwriters’ perception of firm quality. The findings have important implications for entrepreneurial firms who are making decisions on “going global” and “going public”. This paper is forthcoming in Applied Financial Economics.

The impact of underwriter reputation on initial returns and long-run performance of Chinese IPOs

This study examines initial returns and subsequent long-run performance of Chinese initial public offerings (IPOs) over the period 2001–2008, with specific emphasis on the impact of underwriter reputation. We develop three proxies for underwriter reputation based on either the registered capital of each underwriter, the relative market share, or the number of all IPOs managed by each underwriter. We find little influence of underwriter reputation on the level of IPO underpricing, but a significantly positive relationship between underwriter reputation and the level of IPO long-run performance, which is meaningful for both academics and professionals. Although the significantly negative three-year market-adjusted buy-and-hold abnormal return suggests a potential loss to investors who hold Chinese IPOs in the long run, investing in IPOs managed by more prestigious underwriters helps mitigate the loss. The results are robust to various checks that control for the problem of endogeneity or correct for cross-sectional dependence of observations in the buy-and-hold abnormal returns.

Internationalization and the IPO performance of new ventures

This study of the relationship between internationalization and IPO performance examines 184 privately held venture capital-backed U.S. technology-based new ventures. Internationalization subjects new ventures to high agency risks, as communication and monitoring of activities become more difficult. Yet, foreign activities can enhance resource stocks of new ventures via market knowledge and coordination capabilities. The study finds that solely domestic new ventures receive higher valuations at initial public offerings (IPOs) than do new ventures with a high proportion of foreign sales. This conclusion informs that investors perceive that agency risks outweigh the possible benefits of enhanced resource endowments from foreign activities. In addition, high international intensity new ventures execute IPOs later than solely domestic ventures. As IPOs are the primary means by which investors receive a return on their investments, this finding has significant implications for entrepreneurs seeking capital and for their investors.

Shareholders' Rights and the Effect of the Origin of Venture Capital Firms on the Underpricing of US IPOs

Manuscript Type: Empirical Research Question/Issue: This paper examines whether firm performance at initial public offerings (IPO) is differentially affected by the origin of Venture Capital (VC) firms. Empirical investigations consider both the anti-director index and the anti-self dealing index of the country of origin of a specific VC firm as indicators for its level of legal protection of shareholders' rights. Research Findings/Insights: We find that underpricing of US IPOs is negatively related to the rating of the legal protection rights of VC firms within the VC syndicate of an IPO firm, and the effect is more significant in the subsample of IPOs involving foreign VC firms. There is also evidence of a complementary role played by the legal protection rights of foreign VCs and board independence of IPO firms in reducing underpricing. Further robustness tests confirm empirical findings controlling for the selection bias of IPO firms by foreign VCs, and using the effect of the protection rights of the country of origin of the lead, largest, board member, or oldest, i.e., most experienced, VC firm. There is also evidence of a positive but marginally significant effect of the legal protection rights of VC firms on the long-term performance of their portfolio companies. Theoretical/Academic Implications: Our paper suggests that the institutional framework and national legal differences should matter in considering the effect of VC firms on IPO performance. We find strong support for the institutional perspective whereby institutional predictions were largely supported. Our results also expand on prior research on VC syndication and show that in addition to VC monitoring, the shareholders' protection rights of the country of origin of foreign VC syndicate members would signal the quality of portfolio companies at IPO. Moreover, the complementary role between the legal protection rights of the country of origin of foreign VCs and board independence indicates that firm performance is the outcome of complex mechanisms involving both firm and country-level settings. Practitioner/Policy Implications: Evidence on the association between IPO performance and the origin of VC firms suggests that policy-makers and practitioners should view legal protection of shareholders' rights as a global issue. Since VC investments are valuable for the development of small and medium-size enterprises, our results should contribute to our understanding of cross-border partnering and the quality of partners within the VC industry.

VC Board Representation and Performance of US IPOs

Abstract: This paper studies the impact of five dimensions of venture capitalist (VC) power on the likelihood of the board representation of VCs in their portfolio firms at the initial public offering (IPO) as well as the effect of the latter on IPO performance. The dimensions of VC power are based on Finkelstein's (1992) four dimensions of power which are ownership power, structural power (i.e., the VC's rank within the firm's financial hierarchy), expert power (i.e., VC industry specialization), and prestige power (i.e., the number of IPOs the VC has been involved with so far). We add controlling power (i.e., how pivotal the VC is to the voted decision) to these four dimensions. We find that all five dimensions of power have a significantly positive impact on the likelihood of VC board membership. While controlling for the possible endogeneity of the latter, underpricing and the IPO premium are higher if there is VC board membership, which is consistent with both the grandstanding and management support hypotheses. Our results suggest that VCs improve IPO performance and that they do not just maintain a strong presence in better performing companies after the IPO.

An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO*

An initial public offering (IPO) is one of the most critical events in the life of a firm. As the IPO market continues to attract attention from both entrepreneurs and investors, research examining the relationship between the firm's characteristics and its IPO performance is growing. In this paper, we use the upper echelon perspective to empirically examine the relationship between the firm's chief executive officer (CEO) and the firm's time to IPO, a relationship that has so far received little attention. Using data obtained from 237 IPOs in the U.S. software industry, we found that the CEO's prior executive experience, network, and age are significantly related to the new firm's time to IPO. This study extends the understanding of the important role of the CEO in the IPO and provides investors greater insight into those variables that influence the speed with which firms go public.

Underwriter Quality and Long‐Run IPO Performance

We analyze the relationship between the quality of underwriters and the long‐run performance of initial public offerings (IPOs) in light of underwriter marketing, certification and screening, and information production. We find that higher underwriter quality (measured by the number of managing underwriters, underwriter reputation, and absolute price adjustment) predicts better long‐run performance, even when returns are value weighted. We compare underwriter quality measures and find that the effects of the number of managing underwriters and underwriter reputation are mutually complementary and are especially strong among IPOs with high uncertainty, while absolute price adjustment, which is more likely to be associated with information production than marketing or certification/screening, loses significance. Our findings are consistent with the marketing and certification and screening roles of investment banks but lend little support for the information production role of underwriters.

'Green,' Are You Lovin’ It? An Examination of the Environment-friendly IPOs and SEOs

We employ a sample of 748 environmentally-friendly (or “green”) firms listed on U.S. stock exchanges to extend studies of the effects of socially responsible investment (SRI) on stock investment returns and the performance of initial public offerings (IPOs) and seasoned equity offerings (SEOs). Our empirical tests document positive and statistically significant excess returns for our environmentally-friendly firms and their IPOs and SEOs, in contrast to our control IPO and SEO samples which underperform. In summary, a “green” equity premium is evident in returns calculated from a variety of benchmarks.

The Role of Institutional Investors in Initial Public Offerings

In this article, we use a large sample of transaction-level institutional trading data to analyze the role of institutional investors in initial public offerings (IPOs). The theoretical literature on IPOs has long argued that institutional investors possess private information about IPOs and that underpricing is a mechanism for compensating them to reveal this private information. We study whether institutions indeed have private information about IPOs, retain their information advantage in post-IPO trading, and are able to realize significant profits from their participation in IPOs. We also study institutional IPO allocations and allocation sales to analyze whether institutions play an important role in supporting IPOs in the aftermarket and are rewarded by underwriters for playing such a role. We find that institutions sell 70.2% of their IPO allocations in the first year, fully realize the “money left on the table,” and do not dissipate these profits in post-IPO trading. Further, institutions hold allocations in IPOs with weaker post-issue demand for a longer period, and they are rewarded for this by underwriters with more IPO allocations. Finally, institutional trading has predictive power for long-run IPO performance, especially in IPOs in which they received allocations; however, this predictive power decays over time. Overall, our results suggest that institutional investors possess significant private information about IPOs, play an important supportive role in the IPO aftermarket, and receive considerable compensation for their participation in IPOs.

After Market Pricing Performance of Initial Public Offerings (IPOs): Indian IPO Market 2002–2006

This paper is motivated by the apparent belief that IPOs are underpriced on the initial listing day and thereafter underperforms compared to the market benchmark. While evaluation of the listing day performance seems straightforward on surface, it actually invokes several complications for the subsequent performance measurement. This paper focuses on the evaluation of price performance of IPOs up to a period of 36 months including the listing day. It also examines the usefulness of IPO characteristics at the time of issue to seek an explanation for the post-issue price performance. The paper presents fresh evidence on IPO performance, i.e., short-run underpricing and long-run underperformance for 92 Indian IPOs issued during the period 2002–2006. It is reported that on an average the Indian IPOs are underpriced to the tune of 46.55 per cent on the listing day (listing day return vis-à-vis issue price) compared to the market index. Another contribution of this paper is the evaluation of the long-run post-issue price performance of Indian IPOs. The long-run performance of IPOs up to a period of 36 months are measured by using the two most promising evaluation techniques, i.e., wealth relative (WR) and buy-and-hold abnormal rate of return (BHAR), both being adjusted with market index, CNX-Nifty. Further, the results evidence that the underperformance is most pronounced during the initial year of trading, i.e., up to 12 months from the listing date followed by over�performance. To get possible explanations for long-run underperformance for Indian IPOs, factors like underpricing rate (listing day return), offer size, leverage at IPO date, ex-ante uncertainty, timing of issue, age of IPO firm, rate of subscription, promoter groups retention, and price-to-book value (as proxy for growth) are considered. Evidence is found, that initial day return, offer size, leverage at IPO date, ex-ante uncertainty, and timing of issue are statistically significant in influencing underperformance. However, there is no evidence favourable to the age of the IPO firm, rate of subscription, promoter group's retention, and price-to-book value impact on the long-run underperformance. The empirical results suggest that the investors who are investing in IPOs through direct subscription are earning a positive market-adjusted return throughout the period of study. But investors who have bought shares on the IPO listing day are earning negative returns up to 12 months from the listing date and expect to earn positive market-adjusted return thereafter. For future research, we suggest the extension of this analysis for additional explanatory variables including issue fundamental characteristics of IPO firms. The scope of the research study could even be improved by extending the time period of study prior to 2002.

New evidence on the pricing and performance of initial public offerings in Thailand, 1997–2008

This paper examines the pricing and performance of initial public offerings (IPOs) on the Stock Exchange of Thailand (SET) from 1997 to 2008. Underpricing is calculated using headline underpricing and underpricing issuer loss, loss by market value, and loss by issuer price. The results show underpricing of 17.60%, 5.01%, 6.94%, 6.68% and 16.10%, respectively. This is significantly lower underpricing than documented in Thailand before the 1997 Asian financial crisis. Post-listing performance is assessed using monthly cumulative abnormal returns, buy-and-hold returns, and wealth relatives. The findings show that Thai IPOs generally outperform market benchmarks up to 24 months and underperform thereafter.

Initial returns of Malaysian IPOs and Shari'a‐compliant status

PurposeThe purpose of this paper is to investigate the initial return patterns of Malaysian initial public offerings (IPOs) and whether shari'a‐compliant status would alter such patterns.Design/methodology/approachThe effect of shari'a‐compliant status on the patterns of initial return of IPOs is analyzed using a sample of 386 IPOs issued between January 1999 and December 2007.FindingsThe preliminary results indicate that over the study period, the initial returns of Malaysian IPOs drop substantially from 94.91 percent reported from the pre‐crisis period of 1990‐1998 to 31.99 percent, a level more comparable to that reported in advanced markets. Since the initial returns do not revert to pre‐crisis levels, the new low IPO underpricing trend is more likely to be associated with the removal of pricing restraints. The results of regression analyses on the full sample, however, suggest that there is no drastic change with respect to factors that drive initial returns in Malaysian IPOs. With regards to shari'a‐compliant status, IPOs of this subsample show similar profiles to those of non‐shari'a counterparts. However, other than demand, the two subsamples are driven by different factors. Initial returns of shari'a‐compliant IPOs are driven by the size and type of offers, whereas those of the non‐shari'a IPOs are driven by risks.Research limitations/implicationsFuture studies should re‐examine the issue by taking into consideration the extensiveness of a firm's compliance to shari'a rules and other predictor variables.Originality/valueThis paper is one of the first to examine the effect of shari'a‐compliant status on the performance of IPOs.

VC Board Representation and IPO Performance

This paper studies the impact of five dimensions of venture capitalist (VC) power on the likelihood of VC board representation in their portfolio firms at the initial public offering (IPO) as well as the effect of the latter on IPO performance. The dimensions of VC power are based on Finkelstein’s (1992) four dimensions of power which are ownership power, structural power (i.e. the VC’s rank within the firm’s financial hierarchy), expert power (i.e. VC industry specialization), prestige power (i.e. the number of IPOs the VC has been involved with so far). We add controlling power (i.e. how pivotal the VC is to the voted decision) to these four dimensions. We find that all five dimensions of power have a significantly positive impact on the likelihood of VC board membership. While controlling for the possible endogeneity of the latter, underpricing and the IPO premium are higher when there is VC board membership, which is consistent with both the grandstanding and management support hypotheses. Our results suggest that VCs have a real impact on IPO performance and that they do not just maintain a strong presence in better performing companies after the IPO.

The under-pricing of IPOs in the Gulf cooperation council countries

We document the phenomenon of under-pricing initial public offerings (IPOs) for 47 Gulf firms that went public between 2001 and 2006. The IPOs had, on average, initial abnormal returns of 290 percent, far exceeding those documented for both developed and emerging markets. In aftermarket performance, we find that these IPOs provide investors with negative abnormal returns over a one-year period, which seems to be consistent with findings in other industrial and emerging markets. The empirical models fail, however, to provide us with a satisfactory explanation using the common independent variables employed in the literature. Nevertheless, it appears that country- and industry-specific characteristics, in addition to the timing of the offers, play a key role in explaining IPO behavior in the region. This paper's empirical findings support the hypothesis that investors are initially over-optimistic about an IPO's performance, but grow more pessimistic over time.

Short- and Long-Run Performance of Initial Public Offerings in Postapartheid South Africa

This paper examines the impact of liberalization on initial public offering (IPO) performance in postapartheid South Africa. Results indicate a significant reduction in IPO underpricing in the postapartheid period relative to the level reported for IPO offerings in the apartheid period. Significant long-term underpricing for periods of up to two years following the IPO is noted. Many IPO offerings in South Africa are delisted and acquired or merged within three to five years of the IPO offering. Subsequently acquired IPOs are found to be more underpriced than are nonacquired IPOs, a result consistent with the use of IPOs as a means of facilitating acquisitions and mergers.

Leverage, liquidity and IPO long‐run performance: evidence from Taiwan IPO markets

PurposeThe purpose of this paper is to examine the long‐run performance of initial public offerings (IPOs) in Taiwan with a five‐factor model on a calendar time basis.Design/methodology/approachBesides the Fama‐French three factors, the paper also incorporates leverage and liquidity into the factor model to measure IPO five‐year performance. The sample consists of 261 IPOs issued in Taiwan over‐the‐counter during 1991 and 2002. The actual data cover the period from January 1991 to December 2007.FindingsContrary to findings of previous studies on US IPO markets, the paper finds that Taiwan IPOs experience better long‐run performance than the market even after adjusting for the common factors in the capital markets.Originality/valueThis paper argues that survival rate of Taiwan IPOs would be the reason why Taiwan IPOs do not underperform in the long run.

The Construction and Contributions of “Implications for Practice”: What's in Them and What Might They Offer?

“Most reviewers’ checklists of leading management journals list the criterion, “relevance for practice.” Authors comply with this criterion by pointing out what implications their results might have for practice. Evidence in the form of successful implementations of the results in practice is not required. Essentially, the authors are only supposed to point out what implications practitioners, as they socially construct them, can possibly draw from their results. If the reviewers’ construction of relevance is in accordance with the author’s, the criterion of relevance has been met . . .” (Kieser & Leiner, 2009: 522–523; italics in original).

Underwriter reputation, earnings management and the long‐run performance of initial public offerings

AbstractThis study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.