UK Alternative Investment Market Research Articles

Earnings Management and the Reputation of Nomads Around IPOs: The Experience of the UK Alternative Investment Market

The research problem We examined whether the reputation of the nominated advisor (Nomad) impacts the accrual and real earnings management of initial public offering (IPO) firms on the Alternative Investment Market (AIM) of the London Stock Exchange in the UK. Motivation and theoretical reasoning While the role of Nomads on the AIM is a significant determinant in ensuring the integrity of the financial reporting quality of their advisee firms, to date, there has been no analysis of the impact of Nomads on such reporting activities. The test hypothesis The main hypothesis of this study tested whether IPO firms that appoint a more reputable Nomad exhibit a lower level of accrual-based and real-based earnings management during the IPO. Target population The initial sample of this study consisted of all IPO firms that went public on the AIM between January 1998 and December 2008. After restricting the sample to non-financial IPO firms with the necessary data available to estimate accrual and real earnings management and Nomad reputation, the final sample consisted of 432 IPO firms that are backed by 80 Nomads over the sample period. Adopted methodology Two real earnings management activities were examined: sales-based manipulation and discretionary expenses–based manipulation. Discretionary accruals were estimated as a proxy of accrual earnings management. To construct the unweighted index of Nomad reputation (NOMAD), data were manually collected for the number of IPOs backed by a Nomad, proceeds of IPOs backed by the Nomad, the Nomad’s age, and the Nomad’s credit score. Analyses Following prior research, several techniques and regressions were employed to test the hypothetical relation between Nomad reputation and accrual and real earnings management. As for robustness, both Heckman and instrumental variable (IV) regressions were used to control for sample selection bias, and a three-stage least squares (3SLS) estimation approach was used to test for the two-way interaction between Nomad reputation and earnings management. Findings This paper found evidence that more reputable Nomads on the AIM play a significant role in constraining the use of accrual-based and real-based earnings management during the IPO year by their advisee IPO firms. This is also the first evidence on the significant role of reputable financial institutions and intermediaries in monitoring the financial reporting quality in less regulated markets such as the AIM in the UK.

PENGARUH BIAYA AUDIT TERHADAP KUALITAS AUDIT DAN DETERMINAN BIAYA AUDIT

PENGARUH BIAYA AUDIT TERHADAP KUALITAS AUDIT DAN DETERMINAN BIAYA AUDIT

Nomad Reputation and Earnings Management around IPOs: The Experience of the UK Alternative Investment Market

This paper investigates whether the reputation of the Nominated Advisor (Nomad) impacts accrual and real earnings management of Initial Public Offering (IPO) firms on the Alternative Investment Market (AIM) of the London Stock Exchange in the UK. While role of Nomads on AIM market is a significant determinant to ensure to the integrity of the financial reporting quality of their advisee firms, to date, there has been no analysis of the impact of Nomads on such reporting activities. This paper finds evidence that more reputable Nomads on the AIM market play a significant role to constrain the use of accrual-based and real-based earnings management during the IPO year by their advisee IPO firms. This evidence is robust, controlling for endogeneity and selection issue. In addition, the results show that IPO firms with more reputable Nomads experience a better long-run stock return performance and a lower failure rate in the following periods.

SMEs and Junior Stock Markets: A Comparison between European and Japanese Markets

The financing of SMEs has been a central concern for industrialized countries over the last couple of decades. Stock markets dedicated to SMEs, called junior markets, are increasingly seen as an alternative to bank financing. This article examines the functions of the junior markets that are located in continental Europe and in Japan. Based on the analytical framework developed by Lazonick and O’Sullivan (2004) and Lazonick (2007), we evaluate the functions performed by junior markets through the listing criteria and ongoing requirements and through the collection of market statistics. Market models appear to be heterogeneous: continental European markets lie between the UK Alternative Investment Market (AIM) and the oldest Japanese junior markets. According to their organization, they may stimulate more growth or exit. This contribution can play a useful role in informing policy makers about junior markets. JEL Codes: G10, G24, O30

Determinants of Audit Fees : Evidence from UK Alternative Investment Market

The main purpose of this study is to examine the determinants of audit fees in the Alternative Investment Market (AIM) using a sample of 23 machinery equipment companies covering the period from 2007 to 2011. The factors that have been hypothesised to be having a significant correlation with audit fees are auditee size, auditee complexity, audit risk, and auditor size. The results show that auditee size and auditee complexity are the main significant determinants of audit fees in the AIM. The findings also indicated a positive relationship between audit timing and audit fees. However, there was not significant evidence of a positive correlation between auditee risk and audit fees, which demonstrated that risk perceived by the auditor does not affect the value of fees. The results also indicated that there is no difference in the fees value between large or small clients. Moreover, the study demonstrated that there is no correlation between providing non-audit service and audit fees. Therefore, it is believed that the differences of these results with other studies in this field are due to the differences in the regulatory framework of the market selected as a sample for this study.

A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments

AbstractWhile earnings management around IPOs has been researched in a number of settings, there has been a relative absence of work that analyses the impact of the regulatory environment on such activities. We find that the regulatory environment does impact the real and accrual earnings management activities of IPO firms. Our results show that IPO firms listing on the lightly regulated UK Alternative Investment Market (AIM) have higher (lower) levels of accrual‐based and sales‐based (discretionary expenses‐based) earnings management around the IPO than firms listing on the more heavily regulated Main market in the UK.

What is the role of public feeder markets in developing technology-based small firms? An exploration of the motivations for listing on AIM since the GFC

In the aftermath of the 2007 global financial crisis, stock markets experienced a sharp decline in listings and a marked reduction in initial public offerings (IPOs). This paper explores the factors determining UK technology-based small firm (TBSF) listings on the UK alternative investment market (AIM) and whether this market has a role to play in their future development. A case-study approach is used to contrast the experiences of five recent AIM-listed TBSFs with five TBSFs approaching private equity investment exit, i.e. considering an IPO exit. The paper concludes that macro market conditions, rather than managerial resource-based or AIM market structural factors, were most influential in TBSF pecking-order preferences to undertake IPOs. From a managerial resource-based perspective, lifelong entrepreneurs were more likely than serial entrepreneurs to favour an IPO exit, as it supported their aims to continue to manage and grow UK-based companies. In addition, with a more buoyant and sustainable AIM market, TBSF investors are more likely to choose IPOs. To conclude, AIM played an important role in the development of listed UK TBSFs. A more buoyant AIM could ease the UK finance escalator's flow, facilitating more rapid UK TBSF growth.

Governance, Ownership Structure, and Performance of Entrepreneurial IPOs in AIM Companies

AbstractManuscript TypeEmpiricalResearch Question/IssueThe study investigates the impact of venture capital (VC) ownership on corporate governance characteristics in entrepreneurial companies listed on the UK's Alternative Investment Market (AIM). In particular, the paper examines the impact of venture capital funds on the firm's governance structure post‐IPO and the dynamic inter‐relationship between corporate governance (CG), venture capital ownership and financial performance.Research Findings/InsightsUsing hand collected data from a sample of 271 entrepreneurial companies admitted to AIM during the period 2000–2007, we measure and track the corporate governance characteristics by constructing a CGAIM50 index. Our findings suggest a high level of VC ownership and its reputation leads to better corporate governance in our sample of entrepreneurial Initial Public Offering (IPO) companies. We also find a positive and significant relationship between corporate governance characteristics and financial performance, which suggests that outside shareholders such as VCs bring managerial know‐how and hence help improve IPO companies' performance.Theoretical/Academic ImplicationsThe study is the first to examine the CG characteristics of entrepreneurial (fast growth) companies on the AIM using a unique index. The inter‐relationship between venture capital ownership structure, corporate governance, and financial performance is modeled using the system GMM estimator of dynamic panel model in addition to the 3SLS methodology.Practitioner/Policy ImplicationsThe study offers practical implications for regulatory authorities and investors, as it highlights that venture capital funds investing in entrepreneurial companies on the AIM have a positive impact on both corporate governance and company performance, which improves after IPO admission, and also on subsequent performance.

Grandstanding and Spinning in VC Backed IPOs on AIM UK

We study a hand-collected dataset that includes 507 IPOs on the UK Alternative Investment Market (AIM) from FY2004 to FY2010. IPOs backed by venture capitalists registered an average underpricing of 25.8 percent; almost double that of non-venture-backed IPOs (14.6%). We provide new empirical evidence that grandstanding and spinning increase IPO underpricing. Conversely venture capitalists provide a certification role when they avoid moral hazard behaviors. Firms may strategically exploit these phenomena to accelerate growth while market regulators have to evaluate this evidence in light of stricter or more prone to laissez faire policies.

The amount of raised capital by small IPOs

Purpose – Given the long lived literature on the small firm funding gap and the contemporary evidence on the easier access to equity finance of the London proximate firms, this study aims to examine the relevance of spatial proximity to London in explaining the amount of monies raised by small British firms at Initial Public Offerings (IPOs) on the UK Alternative Investment Market (AIM).Design/methodology/approach – A cross sectional regression analysis is conducted to see whether proximity to London affects the amount of monies raised by small British firms at IPOs.Findings – The results suggest that proximity to London has a positive effect on the amount of monies raised through IPO and, therefore, there exists a London bias even for those small firms which manage to overcome the equity gap problem and achieve a London listing.Originality/value – The paper contributes to both the economic geography and the small firm regional disparity literature by documenting for the first time that geographic locatio...

Real and Accrual Earnings Management Around Initial Public Offerings Under Different Regulatory Environments

While earnings management around IPOs has been researched in a number of settings, there has been a relative absence of work that analyses the impact of the regulatory environment on such activities. We find that the regulatory environment does impact the real and accrual earnings management activities of IPO firms. Our results show that IPO firms listing on the lightly regulated UK Alternative Investment Market (AIM) have higher (lower) levels of accrual based and sales based (discretionary expenses based) earnings management around the IPO than firms listing on the more heavily regulated Main market in the UK.

The failure of small British Initial Public Offerings on the UK Alternative Investment Market: A research note on spatial and industry effects

This research note investigates the failure probability of British Initial Public Offerings (IPOs) on the Alternative Investment Market (AIM) in terms of spatial proximity to London and operating within the financial services sector. The results suggest that financial services firms in proximity to London experience a higher failure rate on AIM. It is suggested that part of the higher failure rate observed on AIM, compared to the failure rate of small IPOs elsewhere, can be explained by the London dominance of AIM, which favours those financial sector businesses that manage to achieve an IPO.

The UK Alternative Investment Market – Ethical Dimensions

The UK Alternative Investment Market – Ethical Dimensions

Corporate Governance in Alternative Investment Market (AIM) Companies: Determinants of Corporate Governance Disclosure

This study examines the relationship between company and market-related variables, and the disclosure level of voluntary corporate governance practice in the UK's Alternative Investment Market (AIM) companies. AIM is a market that has grown rapidly in the last decade, attracting companies from around the world. It has a 'lighter touch' regulatory regime which has made it more attractive for companies seeking their first listing, or companies seeking an overseas listing in a well-respected market. Using a sample of 300 financial reports and accounts of AIM companies, we carry out regression analysis which indicates that age, company size, board size and the presence of turnover (i.e. the company is active) are positively associated with the adoption, and disclosure, of recommended governance practice. Our study also reveals that more highly geared AIM companies tend to make less disclosure. Overall, our findings suggest that the internal dynamics of AIM companies exert a greater influence on voluntary corporate governance disclosures than do market-related factors. We contribute to the literature on AIM companies and corporate governance in two main ways. First, we provide evidence on the extent of disclosure of corporate governance by AIM companies, an area where research has been largely absent. Secondly, we provide some insights into which company-level and market-related variables may be significant to corporate governance disclosure. Our findings have implications not just for the UK but also for overseas companies listed on AIM, and for countries who either have, or are considering introducing, a similar market.

Selecting a risk-adjusted shareholder performance measure

The emergence of ‘alternative’ investment opportunities, the current bear market and the Wall Street analysts' conflict of interest debacle have put pressure on current investment performance measurement methodologies. This paper presents a survey of classic and modern performance measures and assesses them against objective criteria. Depending upon the market, industry or group of assets studied and the preferences of investors, different measures gain favour, and key questions to address when selecting an appropriate performance measure are proposed. The arguments are demonstrated empirically for the global financial services sector, for which strong evidence in support of using Sharpe ratio-based measures is documented. As a comparison, the paper also looks at firms listed on the UK Alternative Investment Market (AIM), for which a divergence of rankings based on alternative measures is illustrated. General implications for risk management and asset allocations across different asset classes are discussed.