Post-issue Operating Performance Research Articles

Long-term underperformance of public versus rights offering firms

The authors compare the post-issue stock and operating performance of rights issue versus public offer firms using Korean data. The authors find that the stock returns of rights issue firms are less negative than those of public offering firms during the three years subsequent to the seasoned equity offering. The authors further find that the profitability of rights offering firms is superior to those of public offering firms and that the ratio of sales to assets for rights issue firms is much higher over the post-issue period. The results substantiate Heinkel and Schwartz’s (1986) and Eckbo and Masulis’ (1992) theoretical models that posit firms with better quality tend to select the rights issue rather than public offer method when issuing seasoned equity.

The real effects of primary and secondary equity markets on firm performance

PurposeThe purpose of this paper is to investigate the real effects of primary and secondary equity markets on the post-issue operating performance of initial public offering (IPO) firms.Design/methodology/approachThe author utilizes the intended use of proceeds as a proxy variable for the primary market and the investment-to-price sensitivity and the informativeness of stock prices as alternative proxy variables for the secondary market. The compositional data, and non-parametric quantile regressions which are more robust to outliers than standard least square regressions, are employed for Indonesian equity market over the period of 1999-2013.FindingsWhile confirming that firm operating performance can be explained by the firm’s motivation to go public, the author also shows that the operating performance is positively affected by investment-to-price sensitivity and negatively affected by stock price informativeness. The stock prices affect investment decisions by the way that the more liquid a stock is, the more informative its price is, and the more relevant stock prices are in investment decisions. These findings still hold after controlling for ownership structure.Originality/valueDeparting from the existing literature, the author investigates the role of primary and secondary equity markets for firm performance in an integrated framework because both markets interact closely in reality. The author shows that public listed firms can benefit both from the capital-raising function of the primary market and from the informational role of the stock prices of the secondary market. A measure of stock price informativeness, 1−R2, however, must be understood in the context of thin trading in the sense that the level of liquidity affects the level of stock price informativeness.

Behavioral Timing, Valuation and Postissue Performance of UK Initial Public Offerings

ABSTRACTUsing a sample of 1,926 UK initial public offerings (IPOs) launched from 1987 to 2007, this study introduces a new angle on testing the behavioral timing hypothesis in the context of UK IPOs via investigating relationships between the magnitude of IPOs misvaluation and postissue stock price and operating performance. IPO misvaluation is measured using (i) an intrinsic value of the firm estimated using residual income valuation model and (ii) intensity of IPO issuance activity. The findings show that stock price and operating underperformance in the postissue are directly linked to the degree of IPOs' misvaluation. Specifically, the stock price and operating performance are found to be significantly and robustly different between hot markets IPOs and cold market IPOs 3 years postissue. We also show that overvalued IPOs have lower long-run stock returns, but outperforming operating performance, than undervalued IPOs do. Our findings are broadly consistent with the behavioral explanations of the poor stock price and operating performance, supporting the U.S. results of Purnanandam and Swaminathan [2004] and Loughran and Ritter [2000].

The Post-Issue Operating Performance of Indian IPO Firms

This paper investigates the change in post-issue operating performance of 300 Indian IPO firms over a three-year period relative to their pre-issue levels. Further, it explores, whether the issuing firms signal their value at the time of issue through underpricing and whether operating performance of issuing firms is reflected in their long-run stock price performance. The accounting ratios have been used as the proxy for the long-run performance of the issuing firms. Using several performance measures, it has been found that IPO firms are not able to sustain the pre-IPO levels of profitability in the after-market period.

The Post-Issue Operating Performance of China's H-Share Companies and the Effect of Underpricing

The Post-Issue Operating Performance of China's H-Share Companies and the Effect of Underpricing

Is there still a Berlin Wall in the post-issue operating performance of European IPOs?

This paper studies the post‐IPO operating performance of a sample of 555 European firms that went public between 1995 and 2006. Consistent with previous findings, we observe a decline in post‐issue operating performance of IPO firms. However, firms located in emerging European countries perform even worse after the IPO than firms located in developed European countries. Our results suggest that this less successful post‐issue operating performance by firms located in emerging countries can be explained by a more aggressive use of accruals and a better timing of the IPO in order to coincide with a period of high operating performance.

Intended use of IPO proceeds and firm performance: A quantile regression approach

This paper investigates the link between intended use of proceeds and the decline in post-issue operating performance of IPO firms. It distinguishes between capital and strategic motives and employs quantile regressions to examine the Indonesian equity market over the period of 2000–2010. The overall evidence shows that post-issue performance can be explained by firm motivation to IPO issue with the capital motive being the critical driver of good performance in Indonesia. Investment in fixed assets and in stock market shares lead to better performance while other usages lead to poor performance. The results are robust to accounting for ownership structure and to alternative classifications of IPO intent. These results have policy implications for the management of IPO proceeds.

Intended Use of Proceeds and the Post-Issue Operating Performance of IPO Firms: A Quantile Regression Approach

This paper investigates the link between intended use of proceeds and the decline in post-issue operating performance of IPO firms. After taking into account special features of the compositional data containing zero values, a quantile regression analysis is employed for the Indonesian equity market data over the period of 2000-2010. The results show that the post-issue performance can be explained by different types of intended use of proceeds. Fixed asset investment and investment in stock market shares will lead to better operating performance for average and high performing firms only. Allocation to other usages leads to poor operating performance. The findings were found to be robust when ownership structure was included in the models. These results have policy implications for the management of IPO proceeds.

Is There Still a Berlin Wall in the Post-Issue Operating Performance of European IPOs?

This paper studies the post-IPO operating performance of a sample of 555 European firms that went public between 1995 and 2006. Consistent with previous findings, we observe a decline in post-issue operating performance of IPO firms. However, firms located in emerging European countries perform even worse after the IPO than firms located in developed European countries. Our results suggest that this less successful post-issue operating performance by firms located in emerging countries can be explained by a more aggressive use of accruals and a better timing of the IPO in order to coincide with a period of high operating performance.

Private debt, unused credit lines, and seasoned equity offerings

We study a sample of SEOs to examine the impact of private debt and unused credit lines on SEO underpricing and long-run stock and operating performance. We do not find significant effects of private debt financing on SEO underpricing and long-run stock underperformance. However, firms with more bank debt and unused lines of credit exhibit significantly better pre-issue operating performance. Changes in operating performance from the pre-issue year to the post-issue period are negatively related to the size of unused credit lines. Capital spending decreases with the size of unused credit lines in the year prior to SEOs, but increases following SEOs. Our overall evidence suggests that the post-issue operating performance we observed may be a result of overinvestment, which is enhanced by unused credit lines.

Post-Issue Operating Performance Of Nasdaq IPOs

In the ’90s bullish stock markets, it was the IPO which created the bubble of ‘excessive exuberance’, particularly in the technology-heavy NASDAQ market. In our study we have taken a fair sample of NASDAQ IPOs issued during 1990-2000 in order to examine the post-issue operating performance of these IPOs. We have found that during 1990-1995, the mean post-issue one-month return was 1.67%, the mean six-month return was 4.28%, and the mean one-year return was 5.23%, respectively. This could be compared with the results for the 1996-2000 period when the mean one-month return was 3.29%, mean six-month return was 16.96%, and the mean one-year return was 19.97%, respectively. As for the debt/asset and debt/equity ratios for the same two periods, the former was 11.98% and 15.23% for the two periods, and the latter ratio was 5.38% in 1990-1995 and 3.13% in 1996-2000. This clearly shows that the NASDAQ bubble was mainly created by the equity issues, not by the issuance of debt securities. Using the multiple regression equations, we also have found that only the first-day closing price was consistently and negatively associated with annual returns. Obviously, the phenomenon of initial underpricing played a big role in determining the annual return of the NASDAQ IPOs during the last decade in the U.S. securities markets.

What Drives the Issuance of Putable Convertibles: Risk‐Shifting, Asymmetric Information, or Taxes?

This paper presents the first empirical analysis of firms’ rationale for issuing putable convertible bonds in the literature. We distinguish between three possible rationales for the issuance of putable convertibles: 1) the risk‐shifting hypothesis, 2) the asymmetric information hypothesis, and 3) the tax savings hypothesis. The results of our empirical analysis can be summarized as follows. First, putable convertible issuers are larger, less risky firms, having larger cash flows, smaller growth opportunities, and lower bankruptcy probabilities as compared to ordinary convertible issuers. Second, putable convertible issuers have lower preissue market valuations, more favorable announcement effects, and better postissue operating performance when compared to ordinary convertible issuers. Third, putable convertible issuers have better postissue long‐run stock return performance as compared to ordinary convertible issuers. Finally, putable convertible issuers typically have greater tax obligations and better credit ratings than ordinary convertible issuers. Overall, the results of our univariate as well as multivariate analyses provide support for the asymmetric information and tax savings hypotheses, but little support for the risk‐shifting hypothesis.

Corporate governance and long run performance of seasoned equity issuers

This paper examines the effect of corporate governance on the likelihood of issuing Seasoned Equity Offerings (SEO) between 1990 and 2005. It also examines the long-run post-issue performance using operating and stock return measures. Our results suggest that well-governed firms are less likely to issue equity. Nevertheless, when they do so, they outperform both matching non-issuers and issuers with minimal shareholders’ rights from pre- to post-issue—with the highest operating out-performance occurring in the two post-issue years. A negative correlation exists between the post-issue performance and the anti-takeover measures, primarily, the protection associated with management entrenchment. Nonetheless, measures of board structure do not appear to affect the post-issue operating performance. Overall, corporate governance appears to be an effective internal control mechanism that restrains managers’ incentives to either take an SEO issuance decision that does not serve the interests of shareholders or invest the capital raised in value-destroying projects.

R&D as a Signal for IPO Firms

This paper examines the pre-IPO R&D investment as a costly signal for firm quality. We find that firms with high pre-IPO R&D investment experience superior post-issue operating performance compared to low or no pre-IPO R&D firms. There is a positive relation between the pre-IPO R&D investment and the probability and size of subsequent seasoned offerings. Firms with high pre-IPO R&D investment also issue seasoned equity at more favorable terms. Additionally, high pre-IPO R&D firms reduce their R&D investment after their IPOs, indicating an overinvestment of R&D before their IPOs, consistent with the notion that R&D is used as a costly signal by firms.

Post-issue operating performance of firms listing on the JSE

Various studies conducted in the United States (US) have documented several anomalies with initial public offerings (IPOs). Ibbotson (1975) and Ritter (1984, 1991) document short-run underpricing, cyclical hot issue markets and long-run underperformance. These findings are not peculiar to the US. Long run IPO underperformance is documented in the United Kingdom (UK) (Levis, 1993), and Brazil (Aggarwal, Leal and Hernandez, 1993). In South Africa research on IPO performance on the Johannesburg Securities Exchange (JSE) has produced mixed results (Lawson, 1996 and M'kombe and Ward, 2002). These contradictory findings indicate that the long run performance of IPOs varies over time and long-run returns are sensitive to the sample period and methodology used (Ritter and Welch, 2002 and Brav, 2000). This study examines the change in operating performance of 391 firms that listed on the JSE between 1990 and 2003. Using a fixed-effects panel data regression model, factors such as the changes in profitability, investment and growth, tax, leverage and cost of credit are examined over a three year period. Profitability of IPO firms declines significantly in the third year after listing. In addition, tax payments increase permanently and significantly. These results are consistent with findings by Pagano, Panetta and Zingales (1998) and Jain and Kini (1994). Moreover, they are also consistent with M'kombe and Ward (2002)'s results of long-run underperformance of South African IPOs and Ritter (1991) and Loughran and Ritter (1995)'s discovery of long-run IPO underperformance in the US. Similar to Ritter's (1991) results, IPO volume in the South African market fluctuates. The highest concentration of IPOs occurred during the technology fuelled bull market of 1998 and 1999 whereas the lowest concentration occurred during the global recession of 2001 to 2003.

The Operating and SharePrice Performance of Initial Public Offerings: The UK Experience

We study the post-issue operating performance of UK Initial Public Offerings. Using several measures, we find that the performance of firms going public on the Official List deteriorates significantly after the issue. On the contrary, IPO-firms on the Alternative Investment Market (AIM) use the IPO as springboard for growth without sacrificing their profitability. The AIM is, indeed, the first market where operating performance is not found to be declining after the IPO. The listing on the AIM does not affect significantly the leverage of the firms, but gives the opportunity to raise fresh funds, both at the time of the initial offering and through further (debt or equity) capital raisings. Conversely, the permanent decrease in leverage after the IPO on the Official List characterizes the flotation on this market as a mean to rebalance the firms' capital structure.

Industry Screening: Evidence from Seasoned Equity Offerings

Investors may rely on industries to judge the quality of seasoned equity Offerings. In this paper, we propose an industry screening hypothesis where poorer industrial growth prospects deter lower-quality firms from issuing equity. We expect issuer quality to be negatively associated with industry growth opportunities. Our empirical evidence shows that low-growth industry issuers outperform those from high-growth industries in their announcement period cumulative abnormal returns and post-issue operating performance. These results are robust against alternative explanations. We interpret these findings as evidence for the existence of the industry screening eect.

Seasoned Capital Offerings: Earnings Management and Long-Run Operating Performance of Indian Firms

The present study examines the behavior of seasoned offering firms surrounding their issue period for the capital issues offered during the period 1995-96 to 1998-99. Analysis of earnings management practices of firms though show apparent differences in terms of discretionary current accruals between issuers and non-issuers as well as between debt issuers and equity issuers, these differences are not statistically significant. This finding is consistent with Korean findings of Yoon and Miller (2002). Perhaps earnings management is all pervasive and is not just confined to seasoned offering firms in emerging markets unlike the markets in developed countries. Analysis of adjusted operating performance of firms show important differences for equity offering and debt offering seasoned firms. Similarly earnings management appears to have negative impact on the immediate post-issue operating performance while in the long-term it appears to have a positive impact for equity issuers. The latter result contradicts the findings of Rangan (1998) and Teoh et, al (1998). Analysis of influence of earnings management on stock market performance of seasoned offerings shows insignificant role of discretionary current accruals in explaining post-issue stock returns. Similarly analysis of determinants of SEO decision shows that run up in adjusted operating performance prior to offer has no impact - thus contradicting the view that seasoned offerings are timed to meet better operating performance - and that information asymmetry has positive influence on the decision to issue seasoned equity.

Post-IPO Operating Performance, Venture Capitalists and Market Timing

We analyse the post-issue operating performance of 304 venture-backed and 264 non-venture UK IPOs 1985-2000. IPOs exhibit a significant five-year, post-issue operational decline over the full sample period. However this is driven by a particularly poor performance by venture-backed and non-venture IPOs during the 1998-2000 bubble while underperformance by both is insignificant 1985-1997. Cross-section regression results indicate a significantly positive relationship between post-IPO operating performance and venture capitalist certification 1985-1997 and a negative relationship with initial returns 1998-2000. We conclude that the bubble period points to the influence of both market timing and investor sentiment on long run operating performance.

Ownership and operating performance of Chinese IPOs

We examine changes in operating performance of Chinese listed companies around their initial public offerings, and focus on the effect of ownership and ownership concentration on IPO performance changes. We document a sharp decline in post-issue operating performance of IPO firms. We also find that neither state ownership nor concentration of ownership is associated with performance changes, but there is a curvilinear relation between legal-entity ownership and performance changes and between concentration of non-state ownership and performance changes. Our results are robust to different performance measures and industry adjustments. These findings suggest that agency conflicts, management entrenchment, and large shareholders’ expropriation co-exist to influence Chinese IPO performance, and the beneficial and detrimental effects of state shareholdings tend to offset each other.