Andrea Signori

Economies of Scope and IPO Activity in Europe

Initial public offering (IPO) activity in Europe has recently come to a near-halt and, similarly to the US, this decline has been more pronounced among small firm IPOs. Three alternative explanations have been proposed: the economies of scope hypothesis states that getting big fast has become more important, resulting in small firms being acquired; the regulatory overreach hypothesis, which states that small firms are remaining private due to an increase in the regulatory costs borne by publicly traded firms; and the market conditions hypothesis, which states that poor stock market levels have resulted in low IPO volume. Although Europe is characterized by more fragmented regulation and by the existence of second markets with lower compliance costs, we argue that the decline in the number of IPOs is partly attributable to the economies of scope explanation. The Panic of 2008 and the Eurozone crisis of 2011 have also temporarily depressed IPO volume, consistent with the market conditions hypothesis. We present evidence of an increased difficulty for small firms to remain profitable, their underperformance, and their higher propensity to be acquired soon after the IPO, relative to large firms. We document that these patterns persist even among second market IPOs, where the regulatory overreach hypothesis does not apply. Controlling for the impact of market valuations, we investigate IPO activity in a time-series setting and unveil a downward trend in European IPOs over time.

Short covering and price stabilization of IPOs

Underwriters underprice Initial Public Offerings (IPOs) and often, immediately after, repurchase shares in an attempt to stabilize the price. This ancillary service is not mandatory and can be provided by underwriters in the first month of trading. Using a sample of Italian IPOs, we investigate whether the price stabilization activity is carried out when actually needed. We document that only half of the IPOs that require this service are actually stabilized after going public. The fees charged by underwriters are not informative about the provision of this ancillary activity. Rather, the underwriters reputation is negatively associated with the stabilization activity. Negative price revisions and negative (or low) underpricing also drive the provision of price stabilization.

How innovation shapes a firm’s survival profile: takeovers, regulatory and voluntary delistings

Innovation is a key driver of a firm’s ability to survive in the financial market. Previous studies typically consider a firm dead once its shares are delisted from the stock exchange. Despite its negative connotation, delisting may be a strategic decision and therefore be a positive outcome for the company. We study how a firm’s innovative activity, in terms of R&D investments and number of patents, shapes its survival profile, taking into account the heterogeneous nature of delistings. Using a sample of high-tech small and medium enterprises (SMEs) going public in Europe during 1998–2003, we find that more innovative firms, both in terms of patents and R&D investments, have a higher probability to be taken over. However, while firms with a rich portfolio of patents are less likely to voluntarily delist, higher R&D investments increase a firm’s likelihood of being delisted due to compliance failure.

Are IPO Underwriters Paid for the Services They Provide

More reputable underwriters are paid more for taking companies public, because they are expected to provide a better service. However, independently from their reputation, underwriters provide different optional services to the firms they take public. We question whether the services provided are related to the gross spreads. Based on declarations in the prospectuses of Italian IPOs, we find that asking underwriters to stabilize the price does increase the spread. Issuers can therefore pay lower fees by facing the risk of no aftermarket support for their stocks. Conversely, liquidity support does not drive the spread. We further investigate whether the underwriters’ declarations are actually pursued, and find that in general, they do seem to act according to the issuers’ interests. Nevertheless, the fees charged are not informative about the provision of these services. Rather, other factors such as negative price revisions and negative (or low) underpricing drive the provision of these services.

The Exit Choices of Private Firms: A Dynamic Empirical Analysis

A private firm’s exit decision has been modeled in the existing empirical literature as a dichotomous choice between IPO and acquisition. In this paper, we take a dynamic approach and analyze how explicitly accounting for dynamic considerations, such as the benefits arising from being acquired after going public at higher valuations relative to a direct acquisition, or the costs arising from being delisted at lower valuations, alters the initial IPO vs. acquisition trade-off. We find that firms that are more viable against product market competition, characterized by larger private benefits of control and lower information asymmetry, are more likely to choose an IPO over a direct acquisition as initial exit mechanism. Then, firms that are more viable in the product market and are able to reduce information asymmetry to a greater extent by going public are more likely to be acquired post-IPO, while firms characterized by lower product market viability and higher information asymmetry are more likely to be delisted. We document that two-stage acquisitions are a valuable exit route for firms, that are acquired at a 44.7% premium, on average, compared to the valuation they could have obtained in a direct acquisition. This premium is higher for firms with more viable business models and affected by lower information asymmetry. On the other hand, firms that are delisted post-IPO suffer from a 31.9% valuation discount relative to a direct acquisition. Our evidence indicates that explicitly accounting for the benefits and costs arising from post-IPO considerations will tend to push private firms with higher product market viability and lower information asymmetry more towards choosing an IPO rather than an acquisition as initial exit mechanism.Using a dataset of European private firms, we undertake a dynamic empirical analysis of a private firm’s exit decision, previously modeled in the literature as a dichotomous, one-time choice between IPOs and acquisitions. We study how post-IPO considerations, such as the benefits arising from a potential post-IPO acquisition at a higher valuation, and the costs arising from a potential post-IPO delisting at a lower valuation, alter the initial exit trade-off between IPOs and acquisitions. Using a sequential logit model, we show that firms that are more viable against product market competition, characterized by larger private benefits of control, or lower information asymmetry, are more likely to choose an IPO over a direct acquisition as their initial exit mechanism. Post-IPO, firms that are more viable in the product market and are able to reduce information asymmetry to a greater extent using the IPO process are more likely to be acquired, while firms characterized by lower product market viability and higher residual information asymmetry are more likely to be delisted. We also quantify the valuation benefits and costs accruing to firms under alternative post-IPO scenarios. Overall, the results of our empirical analysis show how private firms may be able to incorporate the benefits and costs arising from post-IPO considerations into their initial exit decisions, and suggests how such incorporation may alter their initial exit choices.

Signaling Through Innovation in IPOs

This study addresses the signaling power of corporate innovation indicators in the IPO market. Innovation measures can convey considerably different signals to public investors, depending on whether they quantify the firm’s commitment in innovative inputs, as in the case of R&D investments, or achieved outputs, as in the case of patents. This study aims at disentangling such effects. Using a sample of 382 high-tech entrepreneurial firms going public in Europe during 1998–2003, this paper studies the impact of a firm’s R&D intensity and number of patents on stock liquidity. Results reveal that IPO firms with larger R&D investments benefit from greater liquidity in the aftermarket, while the size of the patent portfolio does not exert any significant effect. This suggests that investors tend to participate more in IPOs by firms embedding greater innovation potential, as suggested by their level of R&D investments, while the number of patents does not drive their behavior.

Rate of substitution between economic and socioemotional wealth in family firm IPO underpricing

This study investigates differences in IPO underpricing between family and nonfamily firms. Using a sample of 1,743 IPOs occurring in seven European countries from 1995 to 2011, we show that the relationship between family firm status and IPO underpricing is contingent on the degree of share retention.