Susanne Espenlaub

Re‐assessing the long‐term underperformance of UK Initial Public Offerings

Previous work has identified that IPOs underperform a market index, and the purpose of this paper is to examine the robustness of this finding. We re-examine the evidence on the long-term returns of IPOs in the UK using a new data set of firms over the period 1985-92, in which we compare abnormal performance based on a number of alternative methods including a calendar-time approach. We find that, using an event-time approach, there are substantial negative abnormal returns to an IPO after the first three years irrespective of the benchmark used. However, over the five years after an IPO, abnormal returns exhibit less dramatic underperformance, and the conclusion on negative abnormal returns depends on the benchmark applied. Further if these returns are measured in calendar time, we find that the (statistical) significance of underperformance is even less marked.

IPO Survival in a Reputational Market

We examine IPO survival in a ?reputational? market, the Alternative Investment Market (AIM), where principle-based regulation pivots on the role of a regulatory agent, the nominated advisor (Nomad) to the IPO company. We find that Nomad reputation has a significant impact on IPO survival. IPOs backed by reputable Nomads survive longer (by about two years) than those backed by other Nomads. We also find that survival rates of AIM IPOs are broadly comparable to those of North American IPOs. While these results are of obvious interest to various stakeholders of AIM firms, they also provide important lessons for market places modeled on AIM including the upper-tier of the U.S. over-the-counter market (OTCQX), Italy?s AIM Italia, and Japan?s Tokyo AIM.

IPO Lock-in Agreements in the UK

When a company offers shares in an initial public offering (IPO), existing owners often enter into lock-in agreements prohibiting them from selling shares for a specified period after the IPO. There is some recent US evidence of predictable share-price movements at the time of expiry of these lock-in agreements. Using a sample of 188 firms, 83 classified as high-tech and 105 others, that went public on the London Stock Exchange (LSE) during 1992-1998, we focus on the characteristics of lock-in agreements in the UK and on the behaviour of stocks returns around the lock-in expiry date. We find that the lock-in contracts of LSE-listed firms are much more complex, varied and diverse than US contracts, which usually standardise the lock-in period at 180 days after the IPO. We also find evidence of negative abnormal stock returns at and around lock-in expiry of similar magnitude to those reported in US studies. However, these abnormal returns are typically not statistically significant. While the deterioration in stock returns immediately around the expiry date appears to be particularly much more pronounced for high-tech stocks than for others, the differences in performance are not statistically significant. Copyright Blackwell Publishers Ltd 2001.

Post-IPO Directors' Sales and Reissuing Activity: An Empirical Test of IPO Signalling Models

Signalling models of IPO underpricing argue that owners of high-quality firms signal firm quality by underpricing shares sold at the IPO and retaining a large equity stake because they benefit from IPO signalling by selling further shares in the aftermarket at a higher share price. This hypothesis is tested by examining whether the probabilities and volumes of subsequent share issues or insider sales are related to the proposed IPO signals. There is evidence that post-IPO share issuance is related to initial returns, but the same is not true for insider selling. Moreover, little evidence is found to support the view that the proportion of equity retained by initial owners is an IPO signal. Therefore, the signalling hypothesis is rejected. Copyright Blackwell Publishers Ltd 1998.

Conflicts of Interest and the Performance of Venture Capital-backed IPOs: a preliminary look at the UK

We document the incidence of initial public offerings (IPOs) issued by UK companies with existing venture capital investors and sponsored (and underwritten) by issuing houses that are parents or affiliates of the venture capital backers. The effects on the performance of the stock offering of the resulting conflicts of interest between the venture capitalist-affiliated sponsors and the investors taking up the stock is examined. Contrary to the conflicts-of interest hypothesis, IPOs underwritten by VC affiliates perform better in the long-term than other IPOs. We also examine the role of the reputation of the financial firms involved in the IPO. The long-term performance of UK IPOs is found to be positively related to the reputation of the venture capital backers. In the short-term, IPO returns appear to be related to the prestige of the sponsor rather than the venture capitalist in that top fifteen underwriters are associated with lower short-returns. Although there is evidence of higher initial returns in IPOs where the sponsor and venture capitalist are affiliated, this is offset by an approximately equal reduction in initial returns if the venture capitalist is associated with an issuing house which may or may not act as the actual IPO sponsor. Thus, the net effect is that backing by venture capitalists with links to issuing houses reduces initial returns but only if those affiliates are in fact not employed as the actual sponsors to the offerings.

Earnings management around UK open offers

We examine the long run operating and stock price performance of UK open offer firms in the context of the earnings management hypothesis. We find that in the pre-offer period offer firms report significant improvements in their operating performance unrelated to cash flow performance. Results on return performance show that offer firms outperform various benchmarks in the pre-offer year but underperform up to four years after the offer. Regression results show that pre-offer discretionary current accruals predict the long-run post-offer return underperformance but do not predict the short-run reaction to SEO announcements. Our findings are more consistent with the earnings management hypothesis than with either the timing hypothesis or the managerial response hypothesis and suggest that investors do not take full account of the information available at the time of open offers.

Datastream Returns and UK Open Offers

We report a fundamental error in Datastream equity data for share prices and return indices relating to a failure to make any capital adjustments for UK open offers before February 2002. We re-examine the findings of Iqbal, Espenlaub, and Strong (2008), correcting for this error. We find that the short-run market reaction to open offers is now significantly positive. However, we confirm that long-run post-offer returns continue to be significantly negative up to a four-year horizon and, most importantly, that pre-issue discretionary current accruals predict the long-run underperformance, in support of the earnings management hypothesis. We continue to find no support for the timing hypothesis or the managerial response hypothesis.

Leverage Dynamics, the Endogeneity of Corporate Tax Status and Financial Distress Costs, and Capital Structure

This paper empirically examines capital structure decisions in the presence of leverage dynamics and when corporate tax status and financial distress costs are allowed to be endogenous. We deal with the endogeneity of corporate tax by using a before-financing measure of the marginal corporate tax rate as a proxy for the effective corporate tax rate. We find strong evidence of a positive relation between leverage and taxes, irrespective of whether leverage dynamics are allowed for. Using the estimated probability of financial distress as a proxy for financial distress costs, we find that the role of leverage dynamics is crucial to the effect of financial distress on leverage. We find that when leverage dynamics are excluded, the estimated probability of financial distress is positively associated with leverage, that is, an increasing probability of financial distress leads to an increase in leverage. This seems counter-intuitive. When leverage dynamics are included in the model, the probability of financial distress is negatively related to leverage. Our results show that capital structure dynamics are important and that firms trade-off the tax benefit that arises from increasing debt with the increase in possible financial distress that arises from increasing debt.

Cross-border venture capital investments: The impact of foreignness on returns

Against the background of the growing internationalization of venture capital (VC) investing, this is the first global comparison of the returns generated by individual domestic and cross-border deals. We examine investments worldwide during 1971–2009 and find that cross-border investments significantly underperform compared with equivalent domestic investments. Returns are negatively affected by geographic distances, cultural disparities, and institutional differences between the home and host countries. Returns on cross-border and domestic deals also decline after the late 1990s. International portfolio diversification and the saturation of domestic markets may explain why VC investors make cross-border investments despite poor expected returns.RésuméDans le contexte de l’internationalisation croissante de l’investissement en capital risque (CR), c’est la première comparaison globale des rendements générés par les opérations individuelles domestiques et transfrontalières. Nous examinons les investissements dans le monde entre 1971 et 2009 et nous constatons que les investissements transfrontaliers sont moins performants que les investissements domestiques équivalents. Les rendements sont négativement affectés par les distances géographiques, les disparités culturelles et les différences institutionnelles entre les pays d’origine et les pays d’accueil. Les rendements sur les opérations transfrontalières et domestiques diminuent aussi après la fin des années 1990. La diversification internationale des portefeuilles et la saturation des marchés domestiques peuvent expliquer pourquoi les investisseurs en CR effectuent des investissements transfrontaliers malgré les faibles rendements attendus.ResumenEn el contexto del aumento de la internacionalización de la inversión en capital de riesgo (VC), esta es la primera comparación global de los rendimientos generados por acuerdos individuales domésticos y transfronterizos. Examinamos los acuerdos en todo el mundo entre 1971 y 2009 y encontramos que las inversiones transfronterizas tuvieron un rendimiento pobre comparado con el equivalente a las inversiones nacionales. Los retornos son negativamente afectados por las distancias geográficas, las disparidades culturales y las diferencias institucionales entre los países de origen y los anfitriones. Los retornos de los acuerdos transfronterizos y los acuerdos domésticos también disminuyen después de finales de los años noventa. La diversificación del portafolio internacional y la saturación de los mercados domésticos pueden explicar por qué los inversionistas de capital de riesgo realizan inversiones transfronterizas a pesar de los pobres resultados esperados.ResumoNo contexto da crescente internacionalização do investimento em capital de risco (VC), esta é a primeira comparação global dos retornos gerados por negócios domésticos e transfronteiriços individuais. Examinamos investimentos em todo o mundo de 1971 a 2009 e descobrimos que os investimentos transfronteiriços são significativamente inferiores em comparação com investimentos domésticos equivalentes. Os retornos são negativamente afetados pelas distâncias geográficas, disparidades culturais e diferenças institucionais entre os países de origem e de acolhimento. Os retornos em negócios transfronteiriços e domésticos também diminuem após o final da década de 1990. A diversificação de carteira internacional e a saturação dos mercados domésticos podem explicar por que os investidores da VC fazem investimentos transfronteiriços apesar dos retornos esperados ruins.摘要在风险投资(VC)国际化增加的背景下,这是国内和跨境交易个体收益的首次全球比较。我们研究了1971年至2009年间的全球投资情况,发现跨境投资显著落后于同等的国内投资。收益受到地理距离、文化差距以及家庭与东道国之间的制度差异的负面影响。自20世纪90年代后期以来,跨境和国内交易的收益也在下降。国际投资组合的多元化和国内市场的饱和可能解释了为什么风险投资者进行跨境投资,尽管预期收益不佳。

The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions

We analyze detailed monthly data on U.S. open market stock repurchases (OMRs) that recently became available following stricter disclosure requirements. We find evidence that OMRs are timed to benefit non-selling shareholders. We present evidence that the profits to companies from timing repurchases are significantly related to ownership structure. Institutional ownership reduces companies’ opportunities to repurchase stock at bargain prices. At low levels, insider ownership increases timing profits and at high levels it reduces them. Stock liquidity increases profits from timing OMRs.