Financial Management

Cover image for Vol. 46 Issue 1

Edited By: Utpal Bhattacharya (Executive Editor) - HKUST, Bing Han (Editor) - University of Toronto, and Rajkamal Iyer (Editor) - Imperial College

Impact Factor: 0.774

ISI Journal Citation Reports © Ranking: 2015: 59/94 (Business Finance)

Online ISSN: 1755-053X

Virtual Issue: Initial Public Offerings

Initial Public Offerings

During 2008-2012, Financial Management has published 29 articles focusing on initial public offerings (IPOs), not including other related articles focusing on venture capital, seasoned equity offers, and security issuance in general. FM published 195 articles in total during this time period, and the other topics with big market shares include M&A activity and capital structure.

In this electronic special issue, I have gathered some of the most important articles that FM has published on IPOs in the last five years. I would have liked to cover articles from a longer period so that I could discuss my own 2004 FM paper with Tim Loughran, “Why Has IPO Underpricing Changed Over Time?”, but the editors asked me to not emphasize my own work. But I snuck this sentence in anyway. The selected papers provide insights on three important aspects of IPOs: reasons for going public, underpricing, and long-run performance.

Most of the literature has focused on the IPO as a step in its life-cycle for a successful firm to take as it finances internal growth. This framework, however, is increasingly at odds with actual practice. Two recent FM articles, “Moving from Private to Public Ownership: Selling Out to Public Firms versus Initial Public Offerings” (2008) by Annette Poulsen and Mike Stegemoller, and “Merger-Motivated IPOs” (2010) by Armen Hovakimian and Irena Hutton, respectively document the determinants of the choice of selling out rather than going public, or merging with other firms after going public. Both activities allow a firm to get big fast rather than relying on internal growth. The articles also show that the importance of mergers, either as a target or an acquirer, has increased over time.

For at least four decades, the underpricing of IPOs has attracted attention. The single biggest predictor of whether a given deal will have a high or low first-day return is whether the offer price has been increased or decreased from the range that was disseminated a few weeks prior to the offer date. That is, when the offer price is revised upwards, the market price is likely be at an even higher premium, a pattern known in the literature as the partial adjustment phenomenon. Whether this pattern is due to optimal contracting or due to agency problems between underwriters and issuers continues to be debated in the literature. The causal effects of investment bankers in underpricing are addressed in “Does IPO Pricing Reflect Public Information? New Insights from Equity Carve-Outs” (2012) by Chinmoy Ghosh, Milena Petrova, Zhilan Feng, and Maneechit Pattanapanchai. The authors find that public information is not fully incorporated into offer prices, suggesting that some underpricing is intentional and predictable, supporting the agency view.

For more than two decades, there has been a large literature on the long-run performance of IPOs. “The IPO Derby: Are There Consistent Losers and Winners on This Track?” (2008) by Konan Chan, John W. Cooney, Jr., Joonghyuk Kim, and Ajai K. Singh, integrates a number of papers that have documented one or another cross-sectional determinants of long-run abnormal performance. The authors find that there are independent effects associated with discretionary accruals, venture capital-backing, and high quality underwriters in U.S. data. They also report that predictability is enhanced when more than one characteristic is taken into consideration. Another recent paper that documents predictable long-run returns is “Why Do Insiders Sell Shares Following IPO Lockups?” (2012) by Hsuan-Chi Chen, Sheng-Syan Chen, and Chia-Wei Huang. The authors report that insider selling by senior executives can be used to forecast low subsequent returns. Insider selling by other insiders, on the other hand, appears to be motivated exclusively by a desire to diversify.

An increasing fraction of papers published in FM use non-U.S. data. “The Performance of Private Equity-backed IPOs” (2011) by Mario Levis reports that British venture capital-backed IPOs do not outperform in the long-run, although buyout-backed IPOs do. Some of the difference between the US and UK results may be due to the superior performance of technology companies in the U.S. compared to Europe, since other studies have documented that the returns to venture capital investing have been much higher in the U.S. than in Europe.