Traditional IPO Research Articles

SPAC IPO의 장기 영업성과

As SPAC IPOs increase in Korea, market interest is growing, but related research is lacking. In this study, we track the performance of SPAC IPOs, especially changes in operating performance before and after listing. For this purpose, we use a sample of 62 SPAC IPOs conducted between January 2010 and December 2022 to compare the operating performance of the year immediately before listing and the third year after listing. As a result, efficiency indicators tend to worsen, but the operating performance of SPAC IPOs as measured by profitability indicators does not worsen. These results are significantly different from the widely known phenomenon that stock performance in the IPO market, not only in the United States but also around the world, shows significant long-term underperformance and, consistent with this phenomena, operating performance of SPAC IPOs also shows significant long-term underperformance. Therefore, unlike the USA, SPAC investors in Korea are not continuous losers, and the SPAC IPO system is likely to be a good policy alternative to traditional IPOs.

The iSPAC

Special purpose acquisition companies (SPACs) are one of the most celebrated investment vehicles in recent years. Relative to traditional IPOs, SPACs are much more cash-strapped and speculative. Resultantly, the scope for SPACs remains sparse for certain segments of the financial system notwithstanding the SPAC euphoria surrounding the financial markets: one notable exception is Islamic banking and finance. The Islamic banking business model is based upon the ethical ontologies and epistemologies – informed by the divine sources of Quran and Sunnah: the Shariah – operating with the mandate to promote socio-economic justice through a fair redistribution of wealth while embargoing speculative trading or investments and adopting a risk-sharing model between economic agents. Unsurprisingly, – owing to the speculative nature of SPACs – the Islamic finance industry remains reluctant to participate in the SPAC-mania despite the frenzy engulfing global securities markets. This work addresses the misaligned incentives inherent in a conventional SPAC structure and proposes alternative SPAC structure terms i.e., the iSPAC, which potentially mitigates the noted misaligned incentives and offers less dilutive SPAC terms to shareholders. Specifically, iSPAC structure terms address the issues of speculation (gharar), information asymmetry, and transparency in the pre-IPO phase, which may lead to adverse selection and moral hazard. Equally, the proposed structure reconciles post-IPO operational and investment-related risks such as the treatment of proceeds, interest rate (riba), opportunity costs, and management costs in consort with unethical behavior i.e. cashing-out opportunities that may lead to uneven redistribution of wealth thereby, widening the socio-economic voids in the society.

Signing Blank Checks: The Roles of Disclosure and Reputation in the Face of Limited Information

ABSTRACT We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or “blank check” companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G24; G34; M41; M50.

Investor Reaction to SPACs’ Voluntary Disclosures

ABSTRACT SPACs are formed to combine with and provide a private firm public trading status and a capital infusion. Firms that enter the public market through a SPAC combination are believed to possess greater voluntary disclosure discretion than traditional IPOs as they obtain their public trading status through a merger. Consistent with regulators’ concerns, recent research finds that SPACs use this discretion opportunistically by issuing optimistic guidance. This study examines how investors respond to these disclosures. We find that optimistic projections increase retail purchasing, which is higher than that of institutional purchasing. Additionally, we find that investors partially see through the optimism and exit at the redemption date. Furthermore, we find that institutional investors increasingly divest their holdings for combinations with optimistic projections. Investors as a whole, however, fail to see through the optimism, as combinations with optimistic projections considerably underperform in the two years following the combination. Data Availability: All data are publicly available from the sources identified in the text. JEL Classifications: M41.

Characteristics and Application of Corporate Fund-raising Forms: Based on SPAC and IPO

After a record year in 2021, there is a sharp slowdown in transactions in the global IPO market in the first and second quarters of 2022. The global IPO market has fallen into low inflation, the global economic growth rate has declined, and the Russian Ukrainian war has led to a sharp sell-off in the IPO market. This article is written against such background, and mainly analyzes two ways of listing, SPAC, and IPO. Based on the analysis and comparison of the process, advantages and disadvantages of SPAC and IPO, this paper summarizes the choices and reasons for investors to choose different listing methods for different companies. On this basis, the future development trend of traditional IPO and SPAC IPO is predicted. The analysis of the two listing methods in this paper is based on the current market performance, and there may be unforeseen changes in the future.

SPACs

Abstract Going public by merging with a Special Purpose Acquisition Company (SPAC) is much more expensive than conducting a traditional IPO. We rationalize why some companies merge with a SPAC by listing the potential benefits. We analyze the agency problems that certain SPAC features address. SPAC IPO investors and deal sponsors have earned remarkably high annualized average returns, although we warn that recent deals are likely to disappoint. Public investors in the merged companies have earned very low market-adjusted returns on an equally weighted basis, although high redemptions on the worst deals have limited the amount of money that they lost. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

An Overview of the SPAC Market: Problems, Solutions, and Prospects

This paper aims to present the current problems, solutions, and prospects of SPACs in the United States. First, the report introduces how SPACs function and merge with private companies. Then, it examines the advantages and disadvantages of the SPAC process, especially when contrasted with traditional IPOs. Finally, moving to more current events, it establishes the decline of SPACs in the past year before concluding with the new rules proposed by the SEC. We will also predict the future of SPACs and how the SEC's reforms will impact the market. The paper provides a bird's-eye view of the current status of SPACs in the United States, serving as a foundation for any expectations regarding SPACs.

SPACs: An overview and assessment of returns

AbstractSpecial purpose acquisition companies (SPACs) originated in the 1980s. A SPAC is a shell company formed by a sponsor to raise capital through a SPAC IPO to acquire or merge with an existing (target) private company. In a SPAC IPO, the units issued, consisting of (1) shares of common stock and (2) warrants, are typically priced at a nominal $10. Until 2022, SPAC IPOs were an increasingly popular alternative to traditional IPOs. We provide an overview of SPACs and an assessment of two measures of returns to SPACs, one is market‐adjusted buy and holds abnormal returns, and the other is risk‐adjusted abnormal returns by estimating a three‐factor regression model. The return calculations are based on 299 SPAC completed mergers between January 2013 and December 2021. Our results indicate that the main driver in a series of regressions, including various explanatory variables in explaining deSPAC returns, is the extent of warrants issued in a SPAC IPO, and robustness checks confirm these results.

Risk and Reputation

Direct listing is an innovative alternative to a traditional initial public offering. Since direct listing was revived in 2018, there have been many lingering questions, particularly about the liability of financial advisors involved in the process. In a traditional IPO, a company retains an investment bank as an underwriter; the underwriter takes on a degree of financial risk and lends credibility to the company’s offering, often directly marketing the offering to potential investors. In a direct listing, however, investment banks act as financial advisors but do not assume financial risk or market the sale of securities. Section 11 is an important antifraud provision of the Securities Act of 1933, which imposes liability on all offering participants meeting the statutory definition of underwriter. Whether that definition fairly encompasses financial advisors is unsettled, resulting in uncertainty for both investors and offering participants. After arguing for the application of the Lehman Brothers interpretation of the underwriter definition, this Note then argues that financial advisors are not likely to be statutory underwriters under that interpretation. This Note therefore recommends against the application of section 11 liability to financial advisors. After briefly discussing the risks this conclusion implies for investors, this Note discusses what should be done. One scholar has suggested that section 11 liability should be imposed on financial advisors through exchange rules. But increasing liability is not without costs. Reframing the question as a choice between negligence-based liability and scienter-based liability, this Note points to the possibility that an increase in liability could undermine the primary benefits of direct listing. Drawing on a framework developed by Professor Assaf Hamdani, this Note finally discusses the possibility of using direct regulation in concert with scienter-based liability to incentivize financial advisors to be effective gatekeepers.

Novel alternative assets within a transmission mechanism of volatility spillovers: The role of SPACs

This study investigates the volatility spillovers between Special Purpose Acquisition Companies (SPACs) and a set of alternative instruments comprising traditional IPOs, merger arbitrage, hedge replication funds and equities, utilizing a time-varying spillover approach. Our empirical findings, based on high frequency dataset comprising 2,136 observations for the period 10/01/2020–06/08/2021, show that the level of volatility spillovers is moderate and consistent throughout the sample period. The SPAC market displays a relative neutral reaction within the channel of the diffused shocks, suggesting possible portfolio diversification gains for different types of investors.

Special Purpose Acquisition Companies (SPACs): The Private Sector's Solution to Government Overreach

This research was designed to examine the growth in popularity of Special Purpose Acquisition Companies, particularly the U.S. Federal Government’s responsibility for such growth and their concerns and proposed solutions. I will attempt to answer the following questions: (1) What characteristics of SPACs or the market operating environment led to the explosion in SPAC transactions, (2) What was the U.S. Government’s role in igniting SPAC growth, (3) What concerns the U.S. Government has communicated regarding SPACs, (4) What solutions is the U.S. Government proposing to address their concerns, and finally, (5) My analysis of the aforementioned questions. I rely on qualitative research methods to support my argument. Additionally, I incorporated quantitative data from SpacInsider.com to buttress my arguments. Future research papers will require primary research as well as multivariable regression analyses to better understand which factors are pushing SPAC growth, and which policy options have the desired impact of reducing the use of SPACs for going public and increasing the use of traditional IPOs. My qualitative research uncovered an outsized role played by the U.S. Government in the growth and popularity of SPACs. Additionally, precedent research demonstrated that the U.S. Federal Government’s proposed solution of additional regulations will not work and will, instead, create a new alternative investment vehicle in the same fashion that overregulation of IPOs led to SPACs. To solve the concerns regulators have voiced, officials charged with developing and altering the IPO regulatory framework must loosen the grip of listing-crushing regulations. If smaller businesses were able to access the markets via an IPO, they would do so because there is more certainty in the legal grounding of an IPO, and the process is an established one familiar to the business world. Any actions, on the government’s part, to tighten already strangling regulations will lead to more of the same.

Reaching for Yield in the Going-Public Market: Evidence from SPACs

This paper provides a unified explanation for the existence, time-series variation, and recent boom of the Special Purpose Acquisition Company (SPAC). We begin by documenting four empirical patterns regarding U.S. SPACs: (1) SPAC issuance boomed in 2007 prior to the Global Financial Crisis and accelerated from 2015 to 2020. (2) The market share of SPACs is strongly positively correlated with equity market sentiment. (3) SPAC operating firms are smaller, younger, and riskier at the moment of going public than firms that IPO traditionally. (4) SPAC firms grow at similar or even higher rates compared to IPO firms in the three years after going public. We develop a theoretical framework of segmented going-public markets that can jointly explain these facts. Our model demonstrates that the SPAC and IPO market structures generate differing incentives for intermediaries in the two markets. SPAC sponsors act as non-bank certification intermediaries and match yield-seeking investors with smaller and riskier operating firms, while investment banks take larger and safer operating firms public in the traditional IPO market. Finally, given these findings, we discuss the importance of aligning sponsors with long-term investors and provide recommendations for an improved SPAC structure.

Investment Bankers as Underwriters: Barbarians or Gatekeepers? a Response to Brent Horton on Direct Listings

Direct listing clearly has the potential to meaningfully disrupt the IPO process. Changes to permit primary offerings via direct listing will help private companies to overcome some of the obstacles imposed by our securities laws and listing rules. Primary offerings by direct listing would allow for a dramatic increase in efficiency in public offerings, providing further incentive for private companies to finally provide liquidity to their shareholders while saving on the tremendous cost associated with a more traditional IPO by eliminating the need for underwriters. Despite the positive impacts that direct listings will have on the IPO process, in their current form, they do present a variety of potential risks to investors. Corporate governance concerns, particularly as they relate to dual-class ownership structures and indefinite founder control, have already begun to manifest in recent direct listings. Investors run into both short and long-term risks if the rules around direct-listings are left as they currently stand: largely undefined and filled with unknowns. Without regulatory action, companies will continue to push the boundaries of what is possible with such filings, with investors along for the ride.

SEC approves Nasdaq rule change to permit direct listings without an IPO

Purpose To explain the rule changes in Nasdaq’s new Listing Rule IM-5315-1, approved by the US Securities and Exchange Commission (SEC) on February 15, 2019, that permit direct listings on Nasdaq without an initial public offering, similar to the New York Stock Exchange (NYSE) rule changes approved in 2018. Design/methodology/approach Explains the legislative and regulatory background, historic limitations on direct Nasdaq listings, and de-tailed provisions of Nasdaq’s new Listing Rule IM-5315-1. Findings The direct listing alternative to an IPO may appeal to cash-rich companies that do not need the publicity or new capital associated with a traditional IPO. Originality/value Expert analysis from experienced securities litigation and corporate governance lawyers.

Cryptocurrency and Blockchains: Retail to Institutional

A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in his/her/their 2008 proposal for: “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market. TOPICS:Currency, exchanges/markets/clearinghouses, exchange-traded funds and applications Key Findings • A set of crypto exchanges are evolving into institutional-strength entities with law-of-one-price, clearing and settlement, custody services, and user algorithms to deal with fake inflated trade volumes. • Pure public blockchains with well-known “blockchain trilemma” problems like high energy consumption, low performance, governance shortcomings, and no clear “how-to-pay” mechanism for ledger-updating in non-crypto applications, are inexorably leading towards hybrid public/permissioned blockchain networks. • Despite their rocky start, STOs and ICOs are leading to direct or electronic IPO markets, while smart contracts running on blockchains with securities trading identifiers and data seem ideal vehicles for administering passive investment products.

The Pricing and Performance of Supercharged IPOs

ABSTRACTThis study examines a new form of initial public offerings, “supercharged” IPOs, where a firm-organized pre-IPO as a pass-through entity undergoes a series of transactions that steps-up the adjusted tax basis of the IPO firm's assets. This step-up imposes tax liabilities on pre-IPO owners, but also creates significant future tax benefits for the firm; the average anticipated deferred tax asset is $486 million ($13 per share) for our sample of supercharged IPO firms. Pursuant to tax receivable agreements, supercharged IPO firms pay a large portion of these tax benefits to pre-IPO owners as they are realized in the future. Future firm performance must be sufficiently strong for the IPO firm and the pre-IPO owners to realize the future tax benefits created by the supercharged transaction structure. We hypothesize and provide evidence of higher IPO offer prices and stronger future performance for supercharged IPO firms relative to traditional IPO firms.JEL Classifications: G14; G32; G34; H25.

U.S. exchange upgrades: Reducing uncertainty through a two-stage IPO

Abstract We examine the effects on IPO uncertainty of an alternative going-public mechanism – the two-stage IPO, where a firm first gets quoted on the OTC market, and then upgrades to a national exchange where it first issues public equity. We find that a two-stage IPO firm experiences lower underpricing and return volatility than does a similar traditional IPO firm. Our study is the first to analyze the impact of U.S. pre-IPO disclosure and liquidity on levels of uncertainty and pricing at the IPO stage. We find that greater disclosure and liquidity during the first stage leads to greater reduction in IPO uncertainty. We control for the potentially endogenous nature of the two-stage IPOs by using a difference-in-difference analysis that utilizes two exogenous OTC market events.

The Impact of Exchange Listing on Corporate Governance: Evidence from Direct Listings

Direct listing offers a new, but unproven method of going public for industrial firms. We use prior direct listings by public non-listed REITs (PNLRs) as laboratory to explore the impact of exchange membership on the corporate governance resulting from these transactions. To that end, we examine companies with publicly owned, but non-listed shares in a unique setting where the impacts of listing are distinct from the confounding effect of capital raising inherent in a traditional IPO. Our evidence suggests that younger, more profitable PNLRs with better governance and professional management are more likely to directly list. Moreover, we find that internal corporate governance improves beyond the exchange’s requirements upon listing. The data indicates institutional ownership increases following the listing and we confirm these changes are not due capital raising.

Information Production by Institutions and Information Extraction by Underwriters in Hybrid IPO Auctions

We analyze the informational properties of hybrid IPO auctions using a large and unique database of institutional bids from Chinese IPO auctions. We find strong evidence of information production by institutions about the intrinsic values of IPO firms and of underwriters extracting and using this information in IPO pricing. The IPO offer price is more sensitive to bids from institutions able to produce more precise information. In particular, we find that the offer price is more sensitive to bids from domestic institutions, compared to bids from foreign institutions who are likely to have less knowledge or experience about the Chinese firms and financial market due to geographic, legal, and cultural distances. Institutional bidding information also has predictive power for IPO initial returns and long-run post-IPO stock returns. Finally, institutions are compensated for their information production: institutions able to produce more precise information get significantly larger allocations in better performing IPOs; this difference in IPO allocations between better and worse performing IPOs is greater for institutions able to produce more precise information. Overall, “dirty” uniform price hybrid IPO auctions appear to be an effective alternative to the traditional book-building IPO mechanism, so that our analysis has important implications for IPO mechanism reform in developing countries.

The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms

The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.