Academic journal article Journal of Commercial Banking and Finance

Operating Performance of the U.S. Commercial Banks after IPOS: An Empirical Investigation

Academic journal article Journal of Commercial Banking and Finance

Operating Performance of the U.S. Commercial Banks after IPOS: An Empirical Investigation

Article excerpt


This study examines the effects of ownership structure on operating performance within the financial institutions industry by examining 216 bank initial public offerings between 1992 and 1998.

Various financial ratios are utilized to measure bank-operating performance surrounding an initial public offering (IPO). Four possible theories are examined: the windows-of-opportunity theory, the agency cost theory, the window-dressing theory, and the loan-growth-fixation theory. Contrary to the windows-of-opportunity theory, results indicate that the operating performance for the IPO banks at first declines prior to the IPO and then improves in the years following. Banks appear to go public for reasons other than timing the offering to peak performance periods. The results also show that banks going public actually report a smaller loan loss provision relative to net loans following an IPO. In addition, smaller banks report a higher quality loan portfolio which leads to a slightly better net interest margin in the IPO year and the three following years. Finally, the results show that banks going public do not use their newly raised capital to over-emphasize loan growth. While the IPO banks grow their net loans at a rate that exceeds the overall banking industry, they issue riskier loans at the expense of poorer operating performance.


Financial services are perhaps the most significant economic sector in modern societies. In the more advanced service economies, the financial sector is a major source of employment. Given the important role of financial institutions in the economy, any research that helps explain what drives their performance would be beneficial. During the 1990s, due to the stellar performance in the banking industry, most banks had no difficulty in meeting their capital requirements (Bomfim and English, 1999). From 1992 to 1998, the share of the banking industry assets at "well-capitalized" banks rose from around 70% to more than 95%. During this period banks grow their net loan at a rate that exceeds the overall banking industry and actually benefited from using their offering proceeds to enlarge their loan portfolio. During this period, what drives the overall improvements is the focus of our research. The focus attention in this research would be on the banking institutions that went public during this time and try to bring some plausible explanations for the overall improved subsequent performance of these institutions.

The research focuses on the post-IPO performance of depository institutions within an agency framework and also on the ownership-performance issue surrounding the IPO. Four theories are evaluated to shed light on the post-IPO operating performance of depository institutions: agency cost theory, windows-of-opportunity theory, window-dressing theory, and loan-growth-fixation theory. Each of the four IPO performance theories--the agency cost theory, the windows of opportunity theory, the window-dressing theory, and the loan-growth-fixation theory--results from the inherent conflict of interest between the original owners and the new shareholders. This conflict is exacerbated by asymmetric information. Given that current evidence is inconclusive as to which theory can best explain post-IPO performance, the purpose of this paper is to determine how relevant each of these explanations are in explaining the post-issue performance within the banking industry.

The first research question examines whether banks choose to go public during a period of peak operating performance. Gibson, Safieddine, and Sonti (2004) document that institutions increase their investment in SEO firms significantly more than in a matched sample of non issuers and seasoned equity issuers who experience greatest increase in institutional investors around the offer date outperform their benchmark portfolios in the year following the issue. To address this first question, five operating ratios are calculated for the year prior to going public (year -1), the year of the IPO (year 0), and for the three years following (years +1, +2, +3). …

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