We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conf lict explanations. We describe some promising such alternatives. From 1980 to 2001, the number of companies going public in the United States exceeded one per business day. The number of initial public offerings ~IPOs! has varied from year to year, however, with some years seeing fewer than 100 IPOs, and others seeing more than 400. These IPOs raised $488 billion ~in 2001 dollars! in gross proceeds, an average of $78 million per deal. At the end of the first day of trading, their shares traded on average at 18.8 percent above the price at which the company sold them. For an investor buying shares at the first-day closing price and holding them for three years, IPOs returned 22.6 percent. Still, over three years, the average IPO underperformed the CRSP value-weighted market index by 23.4 percent and underperformed seasoned companies with the same market capitalization and book-to-market ratio by 5.1 percent. In a nutshell, these numbers summarize the patterns in issuing activity, underpricing, and long-run underperformance, which have been the focus of a large theoretical and empirical literature. We survey this literature, focusing on recent papers. Space constraints force us to take a U.S.-centric point of view and to omit a description of the institutional aspects of going public. The interested reader can consult Ellis, Michaely, and O’Hara ~2000!,

/pdf/a-review-of-ipo-activity-pricing-and-allocations-1a6z3hq7ug.pdf

A Review of IPO Activity, Pricing, and Allocations

We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective on the literature is three-fold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from non-rational and agency conflict explanations. We describe some promising such alternatives.

/pdf/a-review-of-ipo-activity-pricing-and-allocations-2mevvmaldb.pdf

A Review of IPO Activity, Pricing and Allocations

Auditor choice and the cost of debt capital for newly public firms

We survey 336 CFOs to compare practice to theory in the areas of IPO motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is for acquisition purposes. CFOs base IPO timing on overall market conditions, are well-informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm-specific characteristics. Finally, we find the main reason for remaining private is to preserve decision-making control and ownership.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID601204_code231260.pdf?abstractid=530924&rulid=72206&mirid=1

Initial Public Offerings: An Analysis of Theory and Practice

We address the question: At what stage in its life should a firm go public rather than undertake its projects using private equity financing? In our model a firm may raise external financing either by placing shares privately with a risk-averse venture capitalist or by selling shares in an IPO to numerous small investors. The entrepreneur has private information about his firm’s value, but outsiders can reduce this informational disadvantage by evaluating the firm at a cost. The equilibrium timing of the going-public decision is determined by the firm’s tradeoff between minimizing the duplication in information production by outsiders (unavoidable in the IPO market, but mitigated by a publicly observable share price) and avoiding the risk-premium demanded by venture capitalists. Testable implications are developed for the cross-sectional variations in the age of goingpublic across industries and countries. This article develops a model of the going-public decision of a firm and addresses the question, At what stage in its life should a firm go public rather than financing its projects through a private placement of equity (e.g., with a venture capitalist)? Beyond the fact that most firms start out as small private companies and at some point in their growth go public, we know relatively little about the trade-offs underlying a firm’s choice between remaining private or going public. Indeed, beyond a general idea that going public allows the firm’s shares to become more liquid, discussions of the goingpublic decision usually do not include a precise notion of the economic advantages or disadvantages of financing a firm’s projects by going public

/pdf/a-theory-of-the-going-public-decision-4a8acmaxuj.pdf

A Theory of the Going-Public Decision

This article shows how both technological and competitive risks affect the timing of private and initial public offerings in an emerging industry. Early private financing occurs in industries that are perceived to be risky, with high development costs and low probability of being displaced by technologically superior rivals. Early public financing occurs in industries perceived to be viable, with low development costs and low probability of displacement. Due to feedback effects between financial and product markets, the value of investors' proprietary information is greater in private than in initial public offerings. This has implications for underpricing. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Technological Innovation and Initial Public Offerings

We relate the organizational form of investment banking syndicates to moral hazard in team production. Although syndicates are dissolved upon deal completion, membership stability across deals represents a barrier to entry that enables the capture of quasi-rents. This improves incentives for individual bankers to cultivate investor relationships that translate into greater expected proceeds. Reputational concerns of lead bankers amplify the effect. We derive conditions under which restricted entry and designation of a lead banker strictly Pareto dominate, in which case it is also strictly Pareto dominant for the syndicate's fee to be greater than members' cost of participation. Copyright The American Finance Association 2001.

https://gates.comm.virginia.edu/wjw9a/Papers/syndicate1.pdf

A Theory of the Syndicate: Form Follows Function

We study IPO pricing in Germany in order to determine whether when-issued trading provides information that is useful for setting IPO offer prices, and whether such trading supplants bookbuilding as a source of information. We find that when-issued trading reveals relevant information for pricing IPOs, and that, once when-issued trading has begun, bookbuilding is not a source of costly information for pricing. But, bookbuilding does not appear to be fully supplanted as a source of pricing information. We find evidence consistent with bookbuilding being used to gather information prior to the onset of when-issued trading.

/pdf/ipo-pricing-with-bookbuilding-and-a-when-issued-market-11lr87qvou.pdf

IPO Pricing with Bookbuilding and a When-issued Market

We study IPO pricing in Germany to determine whether when-issued trading provides information that is useful for setting IPO offer prices, and whether such trading supplants bookbuilding as a source of information. We find that when-issued trading reveals relevant information for pricing IPOs, and that, once when-issued trading has begun, bookbuilding is not a source of costly information for pricing. But bookbuilding does not appear to be fully supplanted as a source of pricing information. We find evidence consistent with bookbuilding being used to gather information prior to the onset of when-issued trading.

/pdf/ipo-pricing-with-bookbuilding-and-a-when-issued-market-2kwik6y5zi.pdf

IPO Pricing with Bookbuilding and a When-Issued Market

Targets of hedge fund activism frequently employ defenses traditionally designed as takeover defenses. This resistance seems motivated by takeover concerns and to inhibit activists from coordinating with other shareholders. Hedge funds frequently counter-resist with a proxy fight or lawsuit. Without counter-resistance, positive outcomes of activism are muted: resisting targets are less likely to accede to hedge fund demands, be acquired, or show long-term operating improvements. Resisting firms frequently offer board representation to hedge funds, but with restrictive settlement agreements. When activists counter-resist, target firm outcomes do not differ relative to non-resisting targets of the same hedge funds.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2836627_code130850.pdf?abstractid=2805493&mirid=1

Pegaret Pichler

Papers

Technological Innovation and Initial Public Offerings

A Theory of the Syndicate: Form Follows Function

IPO Pricing with Bookbuilding and a When-issued Market

IPO Pricing with Bookbuilding and a When-Issued Market

Hostile Resistance to Hedge Fund Activism