Peter Roosenboom

Earnings management and initial public offerings: Evidence from the Netherlands

This paper presents one of the first studies of earnings management by initial public offering (IPO) firms in a European country. Using a sample of 64 Dutch IPOs, we investigate the pattern of discretionary current accruals (DCA) over time. We find that managers manage their companys earnings in the first year as a public company but not in the years before the IPO. We also examine the impact of earnings management on the long-run stock price performance of IPOs. We find a negative relation between the size of the DCA in the first year as a public company and long-run stock price performance over the next 3 years. A number of additional tests support these findings.

The price of power: Valuing the controlling position of owner-managers in French IPO firms

Abstract Going public often creates an agency conflict between the owner–manager and minority shareholders. This problem is especially severe in countries with poor legal investor protection, such as France. We examine the controlling position of owner–managers in French initial public offering (IPO) firms. We find that investors anticipate the increased agency conflict associated with a lock on control and lower firm value when the owner–manager is more powerful. Shareholder agreements in which the owner–manager agrees to share control with other pre-IPO owners enhance firm value. We also report that higher cash flow ownership by the owner–manager is positively related to firm value when he is not in full control. Finally, we document that the large (non-pecuniary) private benefits of control in France may motivate owner–managers to retain control after the IPO.

Venture capital and patented innovation: evidence from Europe

We provide the first cross‐country evidence of the effect of venture capital investment on patented inventions. Using a panel of 21 European countries and 10 manufacturing industries covering the period 1991–2005, we study the effect of venture capital (VC), relative to R&D, on the number of granted patents. We address concerns about causality by exploiting variations across countries and over time in private equity fundraising and in the structure of private equity funds. We find that the effect of VC is significant only in the subsample of high‐VC countries, where the ratio VC/R&D has averaged around 3.9% between 1991 and 2005 and VC has accounted for 10.2% of industrial innovation during that period. We also find that VC is relatively more successful in fostering innovation in countries with lower barriers to entrepreneurship, with a tax and regulatory environment that welcomes venture capital investment, and with lower taxes on capital gains.

The Impact of Government Intervention in Banks on Corporate Borrowers’ Stock Returns

Moving into and out of a financial and banking crisis is likely to be associated with spillover effects from the banking sector to the corporate sector. We investigate whether and how government interventions in the U.S. banking sector influence the stock market performance of corporate borrowers during the financial crisis of 2007-2009. We measure firms’ exposures to government interventions with an intervention score that is based on combined information on the firms’ structure of bank relationships and their banks’ participation in government capital support programs. We find that government capital infusions in banks have a significantly positive impact on borrowing firms’ stock returns. The effect is more pronounced for riskier and bank-dependent firms and those that borrow from banks that are less capitalized and smaller. Our study highlights positive effects from government interventions during the crisis, documenting that an alleviation of financial shocks to banks has led to significantly positive valuation effects in the corporate sector.

PRICING INITIAL PUBLIC OFFERINGS ON EUROPE’S NEW STOCK MARKETS

In this chapter we investigate whether the pricing of IPOs on Europe’s new stock market differs from that of IPOs on main market segments. We report a 22.3 percentage point difference in the average first-day return of new market IPOs (34.3%) and the average first-day return of main market IPOs (12%). We show that reduced incentives to control wealth losses and different firm and offer characteristics partially explain the higher average first-day return on new market segments. We also find that the bundling of IPO deals has been more important to control underpricing costs on new market than on main market segments.

On the Road to Success in Equity Crowdfunding

This paper extends the role of signaling and certification to the context of equity crowdfunding by looking into the determinants of funding success on the worlds largest equity crowdfunding platform Crowdcube. We identify and empirically test four potential (third party) signals of quality using a sample of 541 campaigns launched between January 2012 and March 2015. Our results suggest that companies that are backed by a business angel, win grants and protect their intellectual property have significantly increased chances of success in equity crowdfunding. Retaining equity does not influence funding success.

Why Do Firms Go Public? The Role of the Product Market

This paper investigates the effect of product market characteristics on the decision to go public. When firms decide to go public or remain private, they trade off product market related costs and benefits. Costs arise from the loss of confidential information to competitors, e.g., in the IPO prospectus and subsequent mandated public disclosures, while benefits emerge from raising capital allowing the firm to strengthen its position in the product market. Our results show that UK firms are more likely to go public when they operate in a more profitable industry and in an industry with lower barriers to entry. These firms are more likely to go public in order to improve their position in the product market and to deter new entrants into the industry. However, firms from more competitive industries and firms with smaller market share are less likely to go public. For these firms the loss of confidential information to rivals outweighs the benefits of going public.

On the Real Effects of Private Equity Investment: Evidence from New Business Creation

Using a comprehensive database of European firms, we study how private equity affects the rate of firm entry. We find that private equity investment benefits new business incorporation, especially in industries with naturally higher entry rates and R&D intensity. A two standard deviation increase in private equity investment explains as much as 5.5% of the variation in entry between high-entry and low-entry industries. We address endogeneity by exploiting data on laws that regulate private equity investments by pension funds. Our results hold when we correct for barriers to entry, general access to credit, protection of intellectual property, and labour regulations. JEL Classification: G24, L26, M13

THE LONG-TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS ON EUROPE’S NEW STOCK MARKETS

In this chapter we examine the determinants of the long-run stock price performance of Initial Public Offerings (IPOs) on Europe’s new stock markets. We report that the average company that went public on these markets has been a very poor long-term investment. We find that the stock price performance during a three-year window is inversely related to first-day returns. We also find that the long-term underperformance of IPO firms begins after the lock-up agreement has expired and insiders start trading in the firm’s shares. These findings are consistent with the divergence of opinion hypothesis of Miller (1977).

VENTURE CAPITAL AND NEW STOCK MARKETS IN EUROPE

In this chapter we describe the development of venture capital and new stock markets in Europe. We argue that markets for high-growth stocks offer venture capitalists a valuable exit opportunity for their investments. This allows them to re-invest their money in other start-up companies and may spur the rate of new business creation and technological innovation. The private equity market in Europe today is as large as it was just before the advent of new stock markets in 1997–1999. As such, the need for stock markets that allow private equity investors to divest their equity stakes in growth companies did not disappear.