The growth process of IPO firms

This study is aimed to examine the efficiency and productivity growth of Initial Public Offerings (IPOs) firms listed on Karachi Stock Exchange (KSE), Pakistan from 2000 to 2012 by using three stages - Data Envelopment Analysis (DEA) and Malmquist Productivity Index (MPI). The analysis and comparison of the efficiency and productivity growth of IPOs on sectoral basis in the pre and post period of IPOs is also investigated. This is ever first study to measure the pre IPO efficiency across the globe in the field of IPOs. The overall efficiency scores of IPO firms dismal as the percentage of optimum level of IPO firms remain between 5% and 20% in all the three stages in pre and post IPOs. In the analysis of broader categories of sectors; private, state-owned enterprises (SOEs), manufacturing, financial, other services sectors, the results of DEA model of three stages suggest that neither of the sector is constant return to scale (CRS) efficient nor and Variable Returns to Scale (VRS) in pre and Post IPO. Even the efficiency scores are decreased in post IPO after one year. However, in detail sector-wise analysis the only oil and gas sector showed optimal level under VRS in stage 2. Further, SOEs showed some better efficiency than private IPO firms. The overall results of declining trend in total productivity growth of IPOs after three years period in KSE are observed. The overall results suggest that, after acquiring further resources, IPO firms did not improve their efficiency level and productivity growth after the period of three years of IPOs. DOI: http://dx.doi.org/10.5755/j01.ee.27.2.10062

Why Do IPO Firms Have Takeover Defenses?

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.

Since the introduction of the continuous disclosure regime in the Corporations Law in 1994, managers of firms undergoing an initial public offering (IPO) have a specific duty to correct earnings forecasts in their prospectuses, on a timely and comprehensive basis, if they are materially inaccurate. This study examines the extent to which Australian IPOs, with explicit quantitative earnings forecasts in their prospectuses, sufficiently fulfill this duty in accordance with the continuous disclosure requirements. In a sample of 110 IPOs listed on the ASX between the years 1994 to 1997, univariate t-tests and a multivariate model are utilised to test for those factors that influence the disclosure decision of IPO managers. The results of these tests reveal that IPO firms, whilst having a tendency to be over-optimistic in forecasting their earnings potential, do not frequently (24%) release ASX disclosures to correct these inaccuracies. Further, IPO firms have a preference for warning investors of a non-fulfillment of a prospectus forecast rather than an over-achievement. Firms with larger prospectus forecast inaccuracies are less likely to correct or confirm a forecast than those with smaller inaccuracies. However, it remains that confirmations are released where actual earnings are materially different from that forecasted in the prospectus. It is also found that IPO firms' disclosure behaviour can be predicted on a firm-specific basis. Membership in a highly regulated industry and the provision of a greater number of prior earnings figures in the prospectus, are factors that contribute to the likelihood that an IPO will correct a prospectus forecast. Firm size, however, is not found to be a significant influence. Accordingly, these findings suggest that IPO discretionary disclosure behaviour is selective, based on the content of the news, size of the revision and specific characteristics of the firm, rather than comprehensive as required under the continuous disclosure provisions.

Pre-offering earnings and the long-run performance of IPOs

PurposeThis study aims to examine the short- and long-lived effects of the International Financial Reporting Standards (IFRS) mandate on the quality of reporting information of initial public offering (IPO) firms in emerging market economies.Design/methodology/approachThe study used several difference-in-differences models for a sample comprising 102 Saudi Arabian IPO firms for 2003–2017.FindingsIt found that mandating the application of the IFRS had a significant short-lived but no long-lived effect on IPO firms’ information asymmetry. When information asymmetry was high such as in the primary market, the IFRS succeeded in alleviating the underpricing of IPO firms. Conversely, in the secondary market, with negligible information asymmetry, the IFRS was not beneficial for the long-term performance of companies in the IPO market.Originality/valueThis study is the first of its kind in the emerging market context and has important implications for IPO investors and analysts, IFRS-IPO researchers and policymakers in emerging economies. The results empirically confirmed that the IFRS mandate had solely a short-lived effect and no long-lasting impact, on the problem of asymmetric information in the IPO market. The effectiveness of the IFRS in producing quality financial reporting is contingent upon large-scale information asymmetry and vanishes when investors and analysts have abundant information about listed firms, even for emerging economies such as Saudi Arabia.

Earnings Quality of Malaysian IPO firms: The Effect of Share Moratorium Provision and Institutional Ownership

The relationship between venture capital backing and the top management team quality of firms going public and implications for initial public offerings

This paper appraises the existing approaches used to measure the underpricing of Initial Public Offerings (IPOs). The conceptual problems surrounding the measurement of IPO underpricing are noted to be significant and suggest that underpricing costs and returns may need to be evaluated with reference to the particular characteristics of individual offerings. For example, details of the number of primary shares on offer, the effect on corporate control of listing, the information effects resulting from listing, the liquidity of shares pre-offer, the impact of speculative activity on post-listing firm value and, finally, the actual dating of an IPO may all need to be considered. In short, the existing measures suggested for IPO underpricing do not allow managers/owners in IPO firms or investors in IPO stocks to assess, unequivocally, the respective costs and returns from underpricing in such issues.

This chapter examines the interactions of initial public offerings (IPOs) and mergers and acquisitions (M&As), in contrast with the common approach of studying them in isolation. Of the many motivations to conduct an IPO (e.g., fundraising, access to capital, increased liquidity, publicity), several of them clearly relate to takeover activities. This chapter analyzes three key forms of interaction: (1) IPO and M&A markets interact when entrepreneurs and early investors from private firms decide to liquidate and cash out their investments. They can exit through an IPO, or they might seek an acquisition by another firm (e.g., sellout to a strategic acquirer, private equity fund, or another financial investor); (2) after a being listed, some firms become takeover targets, and some IPO firms also participate actively in the M&A market as acquirers; (3) between the IPO and M&A markets, one can be used to exert pressure on the other.

Research on the governance of risky ventures, like the initial public offerings (IPOs) of high‐technology firms, has focused primarily on the relationship between governance mechanisms and firm performance. While such an emphasis is clearly important, it does little to shed light on potential relationships between governance and the strategies pursued by risky firms, nor does it take into account the complementary role of key stakeholders in affecting those strategies. To partially remedy this deficit we integrate agency and behavioral perspectives to develop a theory of ‘reasoned risk‐taking,’ whereby the nature of risks undertaken is a consequence of the interaction of governance mechanisms and stakeholder characteristics. We demonstrate our theory by predicting when corporate governance should be associated with strategic risk‐seeking beyond a firm's technical core—as seen in the degree to which it has expanded internationally. Surprisingly, even though venture capitalists (VC) are risk specialists, we find that technology‐based IPO firms are less likely (i.e., a negative relationship) to have extensive global sales when they are backed by a VC. In support of our reasoned risk‐taking theoretical framework, we find that VCs are indeed risk‐seeking when VC backing is complemented by the international experience of their board appointees, top management team (TMT) members, or both. IPO firms with significant insider ownership are similarly global risk‐seekers, and those effects are strongest with an internationally seasoned board and TMT at the helm. Copyright © 2003 John Wiley & Sons, Ltd.

We use the presence of a Wikipedia article for initial public offering (IPO) firms to test theories of information asymmetry and investor awareness. Although we find limited support for the former, our results provide strong support for theories of investor awareness. Specifically, IPO firms with a Wikipedia article exhibit significantly higher underpricing and offer price revisions than do IPO firms without a Wikipedia article. Investor awareness has positive long‐term effects, including greater analyst following and institutional ownership for up to 3 years after the offering. The effect is robust to firm‐specific Google search volume, news coverage, retail trading intensity, social media activity, propensity score matching, and an instrumental variable approach.

We examine opportunistic behavior of initial public offering (IPO) firms in Taiwan where they are required to disclose their own earnings forecasts and are unrestricted in releasing news around the offerings. We find that prior to the offerings, IPO firms tend to report higher earnings, disclose inflated earnings forecasts, and manage more good news. News management, however, emerges as the most predominant factor in aftermarket stock prices. In particular, IPO firms have a strong preference for releasing good news related to strategy/policy that may simply provide a vision of a firm's future. Furthermore, the news releases are often forward‐looking when they are positive about the firms but tend to be realized when they are negative. IPO firms also tend to engage in more window dressing activities before a larger sale of IPO shares from existing shareholders or a larger decline in insiders' holdings. Our analysis shows that managerial optimism cannot fully account for their behavior.

This paper examines acquisitions of firms after they have undergone initial public offerings (IPOs). Combining insights from information economics with recent research on geographic distance in various market settings, the analysis investigates whether the presence or absence of different signals on IPO firms has an impact on the geographic proximity of acquirers. The central proposition we develop and test is that specific characteristics of IPOs—venture capitalist backing, investment bank reputation, and underpricing of issued shares—convey signals on these firms, which can facilitate acquisitions by more remote acquirers who are more likely to face the risk of adverse selection. Copyright © 2011 John Wiley & Sons, Ltd.

The Post-Issue Performance of Initial Public Offering Firms in the People’s Republic of China