Jarrod Johnston

The Pricing of IPOs Post-Sarbanes-Oxley

The Sarbanes-Oxley Act (SOX) imposes new requirements for firms going public. Many provisions of SOX should improve the transparency of U.S. firms going public and therefore reduce the uncertainty surrounding their valuation. We find that initial returns of initial public offerings (IPOs) in the United States have declined since SOX. Furthermore, the aftermarket performance of IPOs since SOX is significantly higher. While the expense of public reporting has increased in the United States because of SOX, the valuations of newly public firms at the time of the IPO are subject to less uncertainty and smaller aftermarket corrections.

What factors drive IPO aftermarket risk

The prospectus of every initial public offering (IPO) provides a lengthy list of factors that exposes investors to risk when investing in an IPO. However, this list is not useful for distinguishing among IPOs for investors who plan to hold IPO shares in the aftermarket. We attempt to identify observable factors that determine the level of aftermarket risk following IPOs. We find that aftermarket risk is higher for firms that experienced a higher level of underpricing (an ex ante measure of risk) at the time of the IPO. Thus, underpricing not only reflects the uncertainty at the time of the offering, but also is a useful indicator of aftermarket risk. We also find that firms using more reputable investment bank underwriters exhibit a higher level of aftermarket risk, which is contrary to the results found by some studies that used underpricing at the time of the offering as a measure of risk. In addition, we find that aftermarket risk is higher for firms backed by venture capital. We attribute our unique findings to our focus on aftermarket risk rather than the perceived uncertainty at the time of the IPO. We also find that aftermarket risk is higher for firms that are listed on the NASDAQ exchange, are in the technology sector, have lower levels of debt and go public during periods of high market volatility.

Impact of managerial control on IPO performance: the case of mutual holding companies

Variation in IPO performance may be partially explained by differences in managerial control. In general, this characteristic has been ignored, perhaps because of the difficulty in testing its influence. The IPOs by mutual thrifts offer a laboratory in which the influence of managerial control can be assessed. Mutual thrifts can either issue all of their stock to investors (stockholder ownership) or can have the majority of the stock distributed to their respective mutual holding company (MHC). The MHC approach places the majority of shares with depositors, which essentially transfers voting power to the managers. Thus, managerial control is more pronounced because governance is limited. The average initial return of stockholder owned thrifts is substantially higher than the initial return of MHCs. This difference remains even after controlling for other factors. The significantly lower initial returns of MHCs are attributed to less uncertainty for MHCs, which allows for a lower degree of underpricing. The long-run performance of MHCs is not statistically different from that of stockholder owned thrifts, which could either suggest that MHCs attempt to maximize value, or that governance of the stockholder owned thrifts is ineffective.

The incremental value relevance of firm‐specific risk measures in pricing junk IPOs

Purpose – The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the pricing of initial public offerings (IPOs). Design/methodology/approach – The study abandons the notion of a homogenous market for IPOs and focuses instead on the differential demand for information across identifiable segments of the IPO market in the pre-market offering period leading to the first day trading closing prices. Ordinary least square (OLS) regressions were used to test the two hypotheses developed in the paper. Findings – It was found that firm-specific risk measures are associated with the initial trading day returns of IPOs managed by low reputation underwriters, but not those by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub-sample of high-risk junk IPOs that were marked down in price by the underwriter prior to the offering in order to make them more attractive to investors. Research limitations – As with all empirical studies the tests are joint tests of the hypotheses stipulated and econometric assumptions underlying OLS. The findings of the study may not be generalized to an unrelated domain. Practical implications – The findings suggest that ex ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading return on those IPOs. Originality/value – This is the first study to look at junk IPOs in a systematic manner using a quasi-experimental design.

Consolidation in the financial services industry: Are there industry gains for acquisitions of security firms?

We examine the revaluation of target security firms, their respective acquirers, both banks and non-banks, and their corresponding rivals before and after the major consolidation wave of 1994 to 1997. We find that target security firms as well as their respective acquirers are favorably revalued at the time of their acquisitions. The valuation effects are more favorable for non-bank acquirers and for acquirers with more growth potential and a lower degree of financial leverage. This suggests that investors expect greater synergies for mergers by better capitalized, faster growing, non-bank acquirers. In contrast to previous merger studies that generally find negative wealth effects for acquiring firms, cumulative abnormal returns (CARs) are on average positive for acquirers, targets, and portfolios of competing security firms, with the highest positive CARs for targets.

Partial Adjustment of Shares Issued and IPO Underpricing

Existing research finds that changes to expected offer prices of IPOs are correlated to initial returns. This study finds that shares issued are also partially adjusted while increases in shares outstanding are associated with lower initial returns. The effect of the shares issued adjustment is greater when it is negative, contrary to the price adjustment. An adjustment to shares issued may enhance or diminish the effect of a price adjustment on initial returns. This study also finds that public information if more fully included into the original shares issued and shares outstanding amounts than it is for price.