Post IPO Research Articles

Risk disclosure in IPO advertisement and the quality of the firm

We compare the IPO issuing firms in India that disclose risk in their advertisements with the firms that do not disclose such risks and find 31% higher underpricing in firms that disclose risk. For the risk disclosing firms, we find a significantly higher subscription from institutional investors. The difference in the subscription from retail investors for the two groups of firms is insignificant. The firms that disclose risk in their ads have superior performance in the post IPO period as compared to the firms that do not disclose such risk.

How does your garden grow? The interface of employee and sales growth post IPO

AbstractResearch SummaryFirms often succumb to a growth imperative, yet little is known about how congruence between various forms of growth affects firm value. We argue that the (in)congruence between net hiring rates (e.g., growth in the number of employees) and sales growth has significant implications for firm value, assessed via Tobin's Q. We further contend that R&D expenditures and industry dynamism—factors that influence a firm's ability to realize value creation—moderate the relationship between growth pattern and firm value. We use a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006 to test our conceptual model. Findings indicate that employee‐dominant growth is most strongly associated with firm value, and that high levels of R&D expenditures and industry dynamism intensify these relationships.Managerial SummaryGrowth is a goal and challenge for many firms, and navigating the various demands of growth represents a particularly promising opportunity for firms that recently went public. We study how firms can manage the growth process in a way that enhances firm value. Using a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006, we explore the interplay of employee and sales growth rates on value creation. We find that an employee‐dominant growth pattern was more strongly related to firm value than the other patterns. Our findings also suggest that managers, especially those in firms that invest in R&D and operating in dynamic industries, should avoid a strong focus on sales growth without also ensuring growth in employees.

The going public decision of business group firms

IPOs affiliated to business groups represent a large fraction of new issues in global markets. Groups are characterized by stronger private benefits of control and an internal funding advantage. Consistent with these features, group firms are more selective when going public than standalone firms. In particular, group IPOs are larger and older firms and engage less in market timing than standalone IPOs. Group firms invest less and are more profitable post IPO. Private benefits of control also affect the within-group selection of IPO firm. Our findings illustrate novel selection effects in public markets due to pre-IPO control structures.

Acquisition Motivated IPOs: The Indian Evidence

This paper attempts to study the takeover activities of newly public (IPO) Indian firms using a two-pronged approach. Firstly, it investigates the role of an IPO firm in the post IPO M&A market as a target and/or as a bidder. Secondly, it examines the acquisition activity of IPO firms around the IPO period. The results of this study point out that Indian IPO firms have a higher propensity to enter the post IPO M&A market as acquirers rather than targets. Further results indicate that the number of acquisitions made by IPO firms increase dramatically in the post IPO period across industries.

Acquisition motivated IPOs: the Indian evidence

This paper attempts to study the takeover activities of newly public (IPO) Indian firms using a two-pronged approach. Firstly, it investigates the role of an IPO firm in the post IPO M&A market as a target and/or as a bidder. Secondly, it examines the acquisition activity of IPO firms around the IPO period. The results of this study point out that Indian IPO firms have a higher propensity to enter the post IPO M&A market as acquirers rather than targets. Further results indicate that the number of acquisitions made by IPO firms increase dramatically in the post IPO period across industries.

Divergences of Opinion and Long Term Performance of Post Stocks Initial Public Offerings at Indonesia Stock Exchange

This study examines and analyzes the effect of divergence of opinion on long-term performance of stock post IPO with initial return control variable, firm size, offering size, reputation of underwriter and return on equity. The study was conducted using 2004-2013 data, with 157 IPO companies in Indonesia capital market. The test is done by using multiple linear regression. The results of this study found that the divergence of opinion has a positive effect on the long-term performance of post-IPO shares. This occurs in the long-term performance period of post-IPO shares with an abnormal cumulative measurement of return12 months, 24 months. The result of opinion divergence regression and variable of all control with long term performance of stock post IPO revealed significant result at period of 12 months and 36 months. By measuring the buy and hold of abnormal returns, the opinion regression divergence with the long-term performance of post-IPO shares is significant in the 12-month period. The regression result of opinion divergence and all control variables with long-term performance of post-IPO shares is significant in the period of 12 months and 24 months. Variable characteristics of companies that are considered by investors in IPO stock transaction are firm size, initial return, offer size and reputation of underwriter. The implication of this study shows that risk factors play an important role in long-term performance of post-IPO shares.

Pre IPO and Post Ipo Operating Performance Evaluation on Indian Select Companies

This paper investigates the relationship between pre IPO factors over post IPO operating performance and whether there is a change in operating performance of companies after IPO. The study involves 25 companies listed on Indian stock exchanges (BSE and NSE) listed during 2013–2015. Pre IPO factors involve dilution of ownership and pre IPO profitability and operating performance indicators are Return on Assets, Return on Equity/Net worth. Findings confirmed that there is no significant change in return on assets, return on net worth/equity and asset turnover ratio of the companies after IPO. Pre IPO profitability had an impact on return on assets and return on equity while pre IPO profitability and dilution of ownership does not have any impact on asset turnover ratio.

Trust within Boards Under Crisis

Board dynamics are a function of many variables. We look into board dynamics through the lens of one of the underlying factors, trust. Trust between board members is one of the foundational elements for effective functioning of the board. To develop a feel for dynamics of the board as a whole, we use a simple conceptual framework based on relationships between each of the members. Further, we focus on emerging growth stage companies ranging from angel and venture funded through post IPO.

The JOBS Act and Post IPO Performance of EGC Firms

This study examines whether the Jumpstart Our Business Startups Act (JOBS Act) makes it possible for lower quality firms to go public in terms of worse post IPO performances. The JOBS Act creates a new category of issuer, the Emerging Growth Company (EGC), and eases disclosure requirements for IPO firms with EGC status. Measuring firm’s post IPO performances using different profitability margin ratios and stock returns, I find that post IPO profitability within four years is significantly lower for IPO firms with EGC status after JOBS Act than IPO firms with EGC status before JOBS Act. Stock returns within four years post IPO are not significantly different. Taken together, the findings indicate that the JOBS Act’s eased disclosure requirements has made it possible for lower quality firms to go public and the market has not yet reacted negatively to lower quality firms going public.

IPO Signaling Theory: A Revisit

The theoretical model in this study predicts signaling and non-signaling equilibriums can coexist within perfectly competitive stock markets, with signaling evident in larger IPO proceeds. Introduction of market incompleteness into the theoretical framework demonstrates signaling is evident in better post IPO price support, equivalently evident in less negative or more positive post IPO price drift. Within context of markets that are incomplete, separating signaling equilibriums are shown not to be amenable to assumptions of valuation uncertainty. Separating signaling equilibriums constitute, however, dominant equilibriums within context of presence of information asymmetry between issuers and investors. In presence of frictions within product markets, assumptions of information asymmetry within incomplete stock markets generate separating or mixed signaling equilibriums. A distinguishing feature of the signaling framework in relation to prior work is a departure from a priori categorization of IPO parameters as signals of quality. This abstraction nonetheless, the signaling framework endogenously generates distributions of IPO underpricing as sufficient statistics for identification of signaling equilibriums. The theoretical model predicts characterization of IPO underpricing as left on the table during IPOs is theoretically appropriate only within context of mixed signaling equilibriums. Given mixed signaling equilibriums imply presence of market frictions within product markets, IPO issuers act rationally whenever they leave money on the table during IPOs. Study predictions, obtained endogenously without recourse to underpricing as a signal of quality, constitute significant departures from and improvements on prior models of IPO signaling theory.

A New Test of the Signaling Theory of IPO Underpricing

This study leverages on a new model of IPO signaling theory in Obrimah (2017a) to develop an empirical algorithm that enables tests of signaling theory within which the incentive to signal private information is a conditional, as opposed to an unconditional incentive. Suppose comparable high or low quality firms issue new public equity in close proximity, with high quality issuers choosing to signal private information. Empirical results show signaling of private information by high quality issuers enables positive post IPO price drift. Consistent with quality rationales for signaling of private information, conditionally identified signalers are characterized by significantly smaller SEO underwriting and gross spreads or higher SEO underpricing in relation to non-signaling lower quality issuers. Consistent with predictions of prior models of IPO signaling theory, the empirical algorithm yields larger SEO proceeds for signalers in relation to non-signalers. Comparisons of forecast power show the conditional formulation of signaling incentives far outstrips unconditional formulations at predicting SEO activity. Combined, empirical findings indicate formulation of signaling incentives as conditional as opposed to unconditional incentives in Obrimah (2017a) renders IPO signaling theory, hitherto discredited by empirical findings in Jegadeesh et al. (1993), a viable theory for explaining cross-sectional differences in IPO underpricing.

IPOs, the level of private equity engagement and stock performance matters: Empirical evidence from Germany

Research on IPOs commonly focuses on the relation between firms’ pre IPO ownership structure and subsequent stock performance. We extend the literature by additionally focusing on companies’ post IPO ownership structure, in particular, private equity capital engagement, to analyse IPOs stock performance matters. For this purpose, we employ a unique dataset on German IPOs from 2004 to 2014 that allows us to identify companies’ ownership structures before and after the IPO. We compute stocks’ market-adjusted returns and information ratios for the first 200 trading days to answer two research questions. First, do stocks of companies that were (partially) owned by private equity investors prior the IPO show a different performance after the IPO than stocks of companies without prior investments of private equity investors? Second, does the extent of private equity investors’ involvement at the IPO (i.e. their pre and post IPO shareholdings) influence the stock performance following the IPO? We do not find evidence that stocks of companies, which had private equity investors as shareholders prior to the IPO, outperform stocks of companies without private equity investors per se. However, for the subsample of companies that had private equity investors as shareholders, we document that the stronger the private equity investors reduce their engagement the stronger is the performance of the issued stock.

Relationship between Underpricing and Post IPO Performance: Evidence from Indian IPOs

Deterioration in post IPO operating performance is a well-established fact in financial economics literature. The current article extends this discussion by exploring the relationship between post IPO performance deterioration and underpricing. Level of underpricing is used as a proxy for signalling. The analysis was done by dividing the whole sample into two groups: low underpricing group and high underpricing group and then examining the trend in post IPO performance deterioration for both the groups. The expectation was that the group with low underpricing would show more deterioration in performance than group with high underpricing. Study found that overall performance of firms deteriorated for both the groups but the difference in trend was not found to be significantly different and hence the difference in change in performance for both the group cannot be attributed to underpricing. Our results supported the results obtained by Jain and Kini ( 1994 ), Jegadeesh, Weinstein and Welch ( 1993 ) and Garfinkel ( 1993 ). However, like Jain and Kini ( 1994 ) we also do not conclude against signalling model.

Redacting Information at the Initial Public Offering

Nearly 40% of IPO firms redact information from their SEC registration filings. These firms exhibit characteristics consistent with the need to shield proprietary information from potential rivals. They experience greater underpricing, but pre-IPO insiders reduce underpricing-related wealth transfers by selling proportionately less of the firm’s shares at the IPO, raising more equity financing in later seasoned equity offerings, and selling their own holdings at a relatively slow pace. The information environment of redacting firms reflects proportionately more private information than that of non-redacting firms post IPO, but this difference abates by the fourth year. Consistent with the view that redacted proprietary information provides competitive advantages, redacting firms exhibit superior financial performance post IPO. The results illustrate tradeoffs in balancing firms’ needs to protect proprietary information with their capital needs, investors’ needs for information to price securities, and pre-IPO owners’ liquidity needs.

Profit Milestones and Changing Risks and Expected Returns of Venture Capital Projects: An Empirical Exploration Using Comparable Companies

We use a sample of 218 Nasdaq companies with negative earning at the time of IPO as comparables to estimate the changes in risk profiles of venture capital (VC) projects for three development stages defined by post IPO profit milestones. Our results show that there were significant declines in the average specific risks as companies move sequentially to stable earning stages. When total risks need to be compensated, the expected rates of returns would also decline due mainly to declines in the specific risks. These results reconcile well with those drawn from perception based surveys of VC practitioners.

IPO's: The Impact of Venture Capital Links?

This paper examines the effects of venture capital (VC) backing on the performance of listed companies on the Australian securities market. We examine measures of the IPO pricing, operational performance after the IPO and market performance after the IPO for a matched sample of VC and non VC-backed IPOs between 1999 and 2005. We find evidence consistent with the certification/monitoring model that VC-backed companies are able to go public more quickly and at higher valuations than non VC-backed companies. The evidence on post IPO performance was mixed with some support for the certification/monitoring model and the adverse selection/grandstanding model. However, after partitioning the sample into old and young VC firms we find clearer evidence of the certification/monitoring role performed by older VC firms whereas younger VC firms show evidence of adverse selection/grandstanding effects.

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.

Adverse Information and Allocations: Evidence from the Korean Modified Bookbuilding IPOs

The analyses of the comprehensive IPO bookbuilding information of the Korean KOSDAQ market from 2000 to 2002 show that adverse information from institutional investors drives down the offering price, creating close to a 100 percent initial return on average. Policy makers in the Korean IPO market regulate both price updating during bookbuilding process and allocation to institutional and retail investors. The primary findings of this research include: i) Institutional investors, particularly high yield fund investors, provide adverse information primarily in hot issues, ii) More shares are allocated to institutional investors when strong pre-market demands are revealed, iii) Investment bankers decide the offering price far lower than the market clearing price when institutional investors show strong interests, and iv) Underpricing from the market clearing price is severe, however, the aftermarket initial return is not particularly high when more shares are allocated to institutional investors. The overall results support the adverse information view. Institutional investors game the market by taking advantage of regulatory constraints on price update and allocation and underwriters mandatory stabilization on the post IPO markets.

Ownership Structure and IPO Underpricing

Abstract: Stoughton and Zechner (1998) and Brennan and Franks (1997) argue that underpricing can be employed to determine post IPO ownership structure, and thereby to influence monitoring and/or control of the company post issue. This paper employs unique data relating to shareholdings of firms listing on the London Stock Exchange, and provides compelling evidence that IPO underpricing does not arise from efforts to determine the ownership structure of the post IPO firm. It is suggested that research is directed elsewhere to find an answer to the underpricing phenomenon, and for means other than IPO underpricing to affect post IPO ownership structure.

Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts

We consider the problem of providing a risk averse manager effort incentives in a setting where there is a binding minimum that can be paid. An implication is that the contract may be strictly preferred by the manager to outside opportunities. We show that stocks can dominate options as a means of motivation only if non-viability risk is substantial, as in financially distressed firms or start-ups. Options dominate stocks for all other firms. These results hold regardless of the existing portfolio of the manager or the risk of being fired. The basic theoretical insight also illuminates the role of bonuses based on the stock price, the behavior of compensation over time, and the way in which compensation changes as a firm moves between different parts of its life-cycle, as for example, as a startup progresses from the pre to post IPO stages, or a foundering firm emerges from bankruptcy. While this is primarily a theoretical paper, we provide some evidence that low bankruptcy risk is indeed correlated with less use of stock.