Michelle Lowry

Litigation Risk and IPO Underpricing

We examine the relation between litigation risk and IPO underpricing and test two aspects of the litigation-risk hypothesis: (1) firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance (insurance effect) and (2) higher underpricing lowers expected litigation costs (deterrence effect). To adjust for the endogeneity bias in previous studies, we use a simultaneous equation framework. Evidence provides support for both aspects of the litigation-risk hypothesis.

Is the IPO pricing process efficient

This paper investigates underwriters’ treatment of public information throughout the IPO pricing process. Two key findings emerge. First, public information is not fully incorporated into the initial price range. While the economic magnitude of the bias is small, it is puzzling because it is not clear who benefits from it. Further, it indicates that the filing range midpoint is not an unbiased predictor of the offer price, as prior literature has assumed. Second, while public information is similarly not fully incorporated into the final offer price, the small economic significance of this relation indicates that the IPO pricing process is almost efficient.

Are Busy Boards Detrimental

Busy directors have been widely criticized as being ineffective. However, we hypothesize that busy directors offer advantages for many firms. While busy directors may be less effective monitors, their experience and contacts arguably make them excellent advisors. Among IPO firms, which have minimal experience with public markets and likely rely heavily on their directors for advising, we find busy boards to be common and to contribute positively to firm value. Moreover, these positive effects of busy boards extend to all but the most established firms. Benefits are lowest among Forbes 500 firms, which likely require more monitoring than advising.

Venturing Beyond the IPO: Financing of Newly Public Firms by Pre-IPO Investors

Contrary to generally-held notions regarding the private firm focus of venture capital firms, we find that many VCs take an active investing role in firms after the IPO. Over one-quarter of VC-backed firms receive VC financing within the first five years after the IPO, in many cases from a VC that also funded the firm prior to the IPO. VCs concentrate their investments in firms that are most likely to find it prohibitively costly to raise public equity. Consistent with the added capital enabling the firm to undertake positive NPV projects, these post-IPO investments are associated with positive abnormal returns. Moreover, results indicate that the option to raise capital from a VC firm has positive value: the tendency of a firm’s pre-IPO VC to back firms after the IPO is positively related to post-IPO returns and to firm survival.

Contrasts in Governance: Newly Public Firms versus Mature Firms

While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of firms going public with these structures has doubled over the same period. By examining voting patterns, changes in firm types going public, and governance changes over time, we test whether IPO firms implement these structures optimally or whether they are utilized to allow insiders to protect their private benefits of control. Evidence suggests that the Optimal Governance hypothesis best explains IPO firms’ use of classified boards, but the Agency hypothesis has more power to explain their use of dual class shares.

Initial Public Offerings: A Synthesis of the Literature and Directions for Future Research

The purpose of this chapter is to provide an overview of the IPO literature since 2000. The fewer numbers of companies going public in recent years has raised many questions regarding the IPO process, in both academic and regulatory circles. As we all strive to understand these changes in the market, it is especially important to understand the dynamics underlying the IPO process. If the process of going public is too costly or the IPO mechanism is plagued by too many conflicts of interest among the various intermediaries, then private companies may rationally choose other methods of raising capital. In a related vein, it is imperative that new regulations not be based on research focusing solely on large, more mature firms. Newly public firms have unique characteristics, and an increased understanding of such issues will contribute positively to well-functioning public markets and further growth of the entrepreneurial sector.

The Information Advantage of Underwriters in IPOs

Using a unique dataset of dealer-level trading data on recent IPOs, we find strong evidence that lead underwriter trades are significantly related to subsequent IPO abnormal returns among bookbuilding IPOs. This relation is concentrated among issues with the highest information asymmetry and underwriters with the most industry experience. In contrast, we find no similar relation for trades by other syndicate members. We also find no relation among a sample of auction IPOs. Our results are consistent with the joint hypothesis that underwriters of bookbuilding IPOs gain unique insight on the values of these client firms, and that they trade on this information advantage.

Informed Trading by Adviser Banks: Evidence from Options Holdings

Strong conflicts of interest exist within investment banks: the investment banking division possesses substantial private information and the asset management division seeks such information. This raises the question of whether the asset management division benefits from an information advantage on client firms. While prior examinations of advisor bank trading in client firms have focused on stocks and found mixed results, we argue that the options market represents a more attractive venue for such trading. Indeed, we find significant evidence of advisor banks trading in client firm options ahead of merger announcements, but no evidence of similar trading in client firm stock.

Are Corporate Jets Pure Managerial Excess

While shareholders have strong incentives to limit value-destroying perquisite consumption, it is challenging to identify such perquisites. Many corporate assets that enable forms of perquisite consumption also provide operational benefits. Corporate jets represent a potent example. We find business-related flights increase firm performance. Our results also highlight the channels through which jet use can either enhance or destroy firm value. Consistent with the benefits of information gathering and monitoring, firms with soft and complex information that is difficult to transmit remotely are more likely to fly to company subsidiaries and plants, and these flights positively affect firm value. In contrast, among firms with weak governance structures where flights are more likely motivated by agency factors, jet use is more likely to be value-decreasing. The ability to differentiate has important implications in today’s activism environment.

Mutual Fund Investments in Private Firms

Abstract Historically, a key advantage of being a public firm was broader access to capital, from a disperse group of shareholders. In recent years, such capital has increasingly become available to private firms as well. We document a dramatic increase over the past twenty years in the number of mutual funds participating in private markets and in the dollar value of these private firm investments. We evaluate several factors that potentially contribute to this trend: firms seeking extra capital to postpone public listing, mutual funds seeking higher risk-adjusted returns and initial public offering (IPO) allocations, and venture capitalists (VCs) seeking new investors to substantiate higher valuations. Results indicate that the first two factors play a significant role.