Ioannis V. Floros

Redacting Proprietary Information at the Initial Public Offering

Nearly 40% of IPO firms redact information from their SEC registration filings. These firms exhibit characteristics consistent with the need to shield proprietary information from potential rivals. They experience greater underpricing, but pre-IPO insiders reduce underpricing-related wealth transfers by selling proportionately less of the firms shares at the IPO, raising more equity financing in later seasoned equity offerings, and selling their own holdings at a relatively slow pace. The information environment of redacting firms reflects proportionately more private information than that of non-redacting firms post-IPO, but this difference abates by the fourth year. Consistent with the view that redacted proprietary information provides competitive advantages, redacting firms exhibit superior financial performance post-IPO. The results illustrate tradeoffs in balancing a firms needs to protect proprietary information with its capital needs, investor needs for information to price securities, and pre-IPO owner liquidity needs.

A Comparison of Penny Stock Initial Public Offerings and Reverse Mergers as Alternative Mechanisms to Going Public

We compare firms that go public using penny stock initial public offerings (PSIPOs) to those using reverse mergers (RMs). Firms using RMs tend to be highly information asymmetric in contrast with the existing going public theory. Firms tend to opt for the RM path with the intent to acquire a greater market share using stock as a medium of payment. When compared to PSIPOs, RMs are small, have low profitability, are in the development stage with limited operating history, and plan high research and development expenditures. RM firms hoard cash, which they get through Private Investments in Public Equity (PIPEs) that are consummated concurrently with the RM. PIPE investors and insiders maintain a high ownership stake following a RM. Managers of firms engaging in PSIPOs are more likely to cash out.

The Influence of Investor Identity and Contract Terms on Firm Value: Evidence from PIPEs

Theory suggests that financial relationships can alleviate the adverse effects of asymmetric information and agency costs on outside stakeholders. We examine how two key features of financial relationships, contract terms and investor identity, interact to convey the nature of a financial relationship to the market. Using detailed data on equity private placements, we examine financial relationships involving strategic investors and arms-length investors with a wide array of contract terms. While the inferences made by the market at announcement differ by investor type, we find that contract terms convey significant information conditional on investor identity. Contract terms that convey the arms-length investor will take a more active governance role associates with wealth effects similar to those of a strategic investor, while contract terms that insulate strategic investors from future potential losses elicit effects similar to arms-length relationships. We conclude that investor identity and contractual mechanisms complement as well as substitute for one another in conveying the nature of the financial relationship to the market.Financial relationships can alleviate the adverse effects of asymmetric information and agency costs on outside stakeholders. We examine announcement returns to PIPE transactions, conditional on the contract terms and identity of the investor. We find that the influence of contract terms on announcement returns depends on investor identity. For PIPEs with hedge fund investors, the inclusion of control terms associates with much larger announcement returns. In contrast, announcement returns for PIPEs, involving strategic investors, are less dependent on the existence of control terms. We find the opposite for liquidity terms. Namely, announcement returns are dramatically different for strategic investors with and without liquidity terms, while inclusion of liquidity terms is less influential when PIPEs involve hedge funds. Our findings suggest that investor identity and contract terms jointly influence market reactions to PIPEs.

Walking the Line between Reducing Information Asymmetry and Protecting Proprietary Information: Management Forecasts by Newly Public Firms

Firms that redact proprietary information in their IPO filings bear significant costs to shield that information, and yet we find that the majority choose voluntary disclosure via management forecasts. They modify the characteristics of their forecasts in ways that plausibly attempt to reduce information asymmetry while still protecting their proprietary information. Specifically, they forecast fewer items, avoid quarterly forecasts, and avoid forecasting expenses when they have redacted information in supplier contracts. We also find rapid changes in forecasting strategy for redacting firms, going from being significantly less likely to forecast in their first two quarters as public firms to being no less likely to forecast than non-redacting firms by the eighth quarter. Our results shed light on how firms shield proprietary information while also attempting to reduce information asymmetry, and how firms manage their disclosure strategy dynamically as external and internal factors that affect their proprietary costs and information asymmetry concerns evolve.

Reducing Uncertainty Through a Two-Stage IPO

We examine the effects on IPO uncertainty of an alternative going-public mechanism – the two-stage IPO, where a firm first gets quoted on the OTC market, and then upgrades to a national exchange where it first issues public equity. We find that a two-stage IPO firm experiences lower underpricing and return volatility than does a similar traditional IPO firm. We also find that uncertainty decreases significantly between the times of first OTC market quotation and upgrade. We show suggestive evidence that two-stage IPOs with greater disclosure during the first stage experience greater reduction in uncertainty. Our results are robust to controls for the potentially endogenous choice of a two-stage IPO.

The Certification Role of Insider Participation in PIPEs

In this paper we provide new insights into the motives underlying insider participation in Private Investments in Public Equity (PIPEs) by considering the association among insider participation, pricing and contractual terms. We find that board seats and weak pre-PIPE performance are important determinants of insider participation. We also find evidence supporting the certification motive for insider participation, which manifests itself in lower discounts to PIPE investors and improved future firm operating performance only when insiders participate. Announcement wealth effects are significantly higher when insiders participate than when they are absent both for single and repeated PIPE transactions.