Academic journal article Academy of Accounting and Financial Studies Journal

IPO Firm Characteristics Pre-And Post-Financial Crisis

Academic journal article Academy of Accounting and Financial Studies Journal

IPO Firm Characteristics Pre-And Post-Financial Crisis

Article excerpt

INTRODUCTION AND MOTIVATION

It is widely accepted that the level of initial public offering activity varies dramatically across time periods. At certain times, it seems, market conditions are perceived as being more conducive to the issuance of new securities, and firms tend to time their IPOs to coincide with these periods. Researchers refer to this phenomenon as the existence of "hot" and "cold" IPO markets, and numerous studies have defined, documented, and sought to explain their existence. (For example, see Ibbotson and Jaffe 1975, Ritter 1984, and Loughran, Ritter, and Rydqvist 1994.) In short, hot IPO market periods are associated with stock market peaks, and offerings made during such periods are characterized by greater underpricing and more frequent oversubscription. Naturally, the converse is true during cold periods.

It is not surprising, then, that the global financial crisis of 2008-2009 and the accompanying stock market decline would correspond with a cold period in the IPO marketplace, and as this paper will document, that is in fact the case. In January 2008, the U.S. IPO market entered a cold spell that would not break until late 2009. During the "coldest" months from mid-August 2008 through March 2009, only two new issues came to market in the U.S., a slump in offerings that is unprecedented in recent history.

The IPO market has regained some of its momentum in the months and years subsequent to the 2008-2009 drought, and in fact several hot-market periods have occurred since then. However, there has been some sentiment expressed in the business press that the financial crisis and the accompanying changes in regulation and investor attitudes have in some way altered the nature of the IPO market. For example:

"In the current landscape, aspiring IPO companies need to plan for the possibility of an extended IPO process with an uncertain outcome. This means, for example, being prepared for the challenges of living with a lengthy period of management distraction and quiet period restrictions, and having enough available cash to fund operations in the meantime." - D. Westenberg, IPO Vital Signs (2010a)

"In recent years, disclosure, corporate governance and control requirements have mushroomed, market expectations for IPO companies have increased, and directors of public companies have become subject to greater personal risk." - D. Westenberg, Boardmember.com (2010b)

According to this view, there has been an increase in the level of scrutiny of new issues by both investors and regulators, and consequently the IPO process has become more difficult for issuers. Alternatively, though, other pundits have characterized the post- crisis IPO market as nothing short of frenzied, with pent-up demand for IPO shares fueling ever- larger deals (Slater 2010).

In this study, we seek to investigate whether the post-crisis period is associated with a detectable change in the characteristics of firms that successfully navigate the IPO process. Prior work in this particular area of research is sparse; Fauzi, Wellalage, and Locke (2012) perform an event-study analysis of the short-term stock market returns to a sample of 23 New Zealand IPOs occurring from 2006 to 2010. That study tests the hypothesis that market performance of IPO stocks was affected by the global financial crisis, and present evidence that in fact the short-term return to IPO stocks was less favorable in 2008 and 2009 relative to other years.

Perhaps the prior work most similar to the present study is that of Helwege and Liang (2004), who investigate differences between firms entering "hot" and "cold" IPO markets. While they observe a number of differences between hot- and cold- market IPO firms in terms of operating measures and financial performance, their ultimate conclusion is that hot markets are driven by investor sentiment, rather than the pace of technological innovation. As a side note the Helwege and Liang find that earnings are typically lower for hot issues but will likely provide an improved future outlook as suggested by Wagner (2006). …

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