Going Public (Securities)

This dissertation examines the effect of variables specific to different industries on initial public offerings (IPOs). It has been widely accepted that IPOs perform well in the immediate aftermarket and perform poorly in the subsequent months. The uncertainty surrounding IPOs has been a frequently cited reason for the initial underpricing. The size of the offering, underwriter prestige, the number of uses of gross proceeds, and the level of inside ownership are a few of the variables that have been found to measure the uncertainty of IPOs across industries. The uncertainty of IPOs in different industries may also be affected by variables that are unique to that industry. The level of interest rates and the amount of regulation may affect the performance of existing financial service firms. The uncertainty of IPOs in the financial services industry may also be affected by these variables. This study finds that some financial service firm IPOs are affected by the level of interest rates. Some regulatory changes increase the uncertainty, and therefore the initial returns, of IPOs of financial service firms. The type of ownership structure affects the management of a firm due to differing agency costs. A mutual holding company (MHC) is a mutual company that issues a minority stake to the public. The MHC structure has been common among savings banks and is growing in popularity in the life insurance industry. The lack of takeover possibilities and stockholder control diminishes the risk taking behavior of MHCs in the thrift industry. Savings banks that choose the MHC structure experience lower initial returns without significant long run differences than savings banks that choose to convert to a completely stockholder owned bank. The operating characteristics may also affect the uncertainty of the firm. The internet allows firms to enter into an industry while having completely different operating structure than many of the other competitors. This study finds that firms that have an internet focus have higher initial returns than a matching set of IPOs. The changing environment, due to technology and low barriers to entry, increases the uncertainty of internet firms.

The purpose of this study is to empirically test a number of hypotheses related to unit initial public offerings. Specifically, the following areas are examined: (1) the underpricing unit IPOs relative to a subset of NASDAQ straight-equity IPOs; (2) the impact of the size and value of the overallotment option on the degree of underpricing and the underwriter percentage spread; (3) the impact of the size and value of the underwriter warrants on the degree of underpricing and the underwriter; (4) certification effects of auditor type and bank and bridge loans; (5) the distribution function of the underwriter; (6) the levels of financing packaged in the unit as a signal of firm quality, as well as, factors affecting the probability of packaging multiple levels of financing; (7) factors influencing the probability that the units offered will be detached into their component securities and (8) factors influencing unit bid-ask spreads. In general, the results indicate that unit IPOs are more underpriced than a similar subset of NASDAQ straight-equity IPOs. The excessive underpricing is reflective of the high degree of uncertainty surrounding these offerings. Also, the findings indicate that the degree of underpricing associated with unit offerings is influenced by the size of the offering, higher prestige unit underwriters and lower aftermarket volatility. Additionally, the value and size of the explicit options (the overallotment option and the underwriter warrants) granted in these offerings do not significantly impact the degree of unit underpricing. Furthermore, the evidence indicates the existence of certification benefits for those unit firms using big six/eight auditors and bank loans. In addition, the results imply that the underpricing of unit issues increases as the distribution effort of the underwriter decreases. Also, those unit firms packaging two levels of financing at the IPO (A and B warrants) seem to have a greater degree of uncertainty in comparison to those firms packaging only a single level of financing (A warrants only). For these firms, the probability of packaging multiple levels of financing is higher if the firm is underwritten on a best efforts basis and insiders retain a larger percentage of voting control. Similarly, the probability of a unit offering being detached into its component securities is greater with higher expected market making costs and a greater perception of firm value by the marketplace. Lastly, adverse information risk is greatest for the warrant component of detachable units. Furthermore, the findings indicate that underwriter stabilization and flipping seem to be infrequent events for the unit component.

This dissertation examines the stock price behavior of newly public firms following two separate events, acquisition announcements and a large single day price change. For the first essay on overreaction, the changes in both liquidity and information are considered in studying the stock price reaction to a trigger of +/-15%. Over 2,600 events are evaluated for these newly public firms from 1992--2001 with events classified as occurring during either the quiet, lockup or post lockup period. For positive trigger events during the quiet period, a large one-day price change results in a significant underreaction. Positive triggers during the lockup period result in no significant abnormal returns, while a statistically significant overreaction occurs during the post lockup period. For negative triggers, while there are no significant abnormal returns for the reactions in any period, there is nevertheless a statistically significant difference between the reactions during the quiet and the post lockup periods. In addition, the degree of market reaction is found to be significantly different for events with information versus events without information. The second essay examines the stock price reaction when newly public firms make acquisition announcements. The belief is that these firms may experience a more positive reaction due to the firms' smaller size, need for immediate expansion, and increased corporate governance. On the other hand, these firms may lack the expertise to successfully integrate the acquisition targets. The results show that these newly public firms experience significant announcement returns of 2.63%. In general, higher announcement returns are found the smaller the acquirer, the smaller the relative size of the acquisition, and if the target is privately held. While the presence of venture capitalists and top tier underwriters result in lower announcement returns, returns are higher if the acquisition advisor is the same as the original underwriter. The buy and hold abnormal returns calculated using a matched sample are not significant. However, acquisitions with economies of scale for the motive have returns of 15% following one year, while those for economies of scope have -15% and the difference is significant.

I examine the presence of earnings management at pre-IPO and lockup periods. Motivated by significant post-lockup insider sales documented in prior research, I investigate whether insiders (managers and venture capitalists) inflate earnings around the lockup period in order to increase share price and maximize personal wealth from selling shares at lockup expiration. I also compare levels of earnings management in the pre-IPO and lockup periods with those in the post-lockup period. Prior research also documents that auditor quality mitigates earnings management behavior. I explore the impact of auditor quality in the unique setting of IPO lockups. ... Cross-sectional analysis reveals that my sample IPO firms also utilize real-activities manipulation, but only in the early pre-IPO period. The results are robust with respect to alternative abnormal accruals and real-activities measures. I also find that IPO firms that hire prestigious auditors experience less earnings management in the lockup period than firms with lower-quality auditors, after controlling for the monitoring role of venture capitalist and underwriter reputation.