Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
IPO Value
Cécile Carpentier and Jean-Marc Suret
In this paper, we exploit a particular Canadian setting where firms enter a main stock
exchange using two different paths. The first one is the classical IPO, and the second
one is the move from a new or junior stock exchange to the main board. This graduation
does not required the firm to provide a prospectus. Both groups of firms should be
relatively similar in terms of expectations for growth and liquidity.
We use this particular context to study in what extent the IPOs are fairly priced by the
investment bankers. After a propensity score matching, we compare the value of
comparable firms that list following each path. We show that the IPO provides a higher
value, consistent with the hypothesis that the prospectus and the process surrounding
the IPO have significant value in reducing the information asymmetry and the risk
perceived by the market. The difference in values is economically significant, and cannot
be explained by the expected differences in liquidity in the secondary market, by the
distribution of IPOs in hot and cold issue markets neither by the investor’s recognition
hypothesis.
Our findings have implications along several dimensions. For the entrepreneurs, this
indicates that the IPO process on the main board has value, despite the underpricing
generally observed on the market. For researchers, our results suggest that the price set
during the first days of trading could be irrational, because it is set higher than an issue
price that is itself higher than the value based on fundamentals. For regulators, at a time
of the debate surrounding proportional disclosure and the prospectus (Pritchard 2012),
we evidence that the IPO process, including the prospectus, seems to have significant
value effect.
1. Introduction
A large body of research is devoted to initial public offering (IPO) pricing and
underpricing (Boutron et al., 2007; Dissanaike and Amel-Zadeh, 2007; Ljungqvist, 2007;
Pukthuanthong-Le, 2008). However, the main question of the fairness of the valuation at
IPO time remains unsolved. Worldwide, the initial return is large, albeit a function of the
regulatory framework and of the market cycle. It is generally assumed that IPOs are
sold below their fair value, for several reasons associated with investment bankers who
undervalue the IPOs to create a positive abnormal return during the first transaction
____________
Prof. Cécile Carpentier and Prof. Jean-Marc Suret, Laval University, Québec, Canada,
CIRANO Fellows and associate members of the European Center for Corporate Control Studies.
Cécile Carpentier: Laval University, Faculty of Administrative Science, School of Accountancy, 6244
Pavilion Palasis-Prince, G1V0A6, Québec, Canada, Phone: (418) 656 2131 # 6385, Fax: (418) 656 7746.
Email: Cecile.carpentier@fsa.ulaval.ca, Jean-marc.suret@fsa.ulaval.ca,
__________
The authors gratefully acknowledge financial support from the Social Sciences and Humanities Research
Council of Canada (SSHRC).
1
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
days (Ljungqvist, 2007). Other studies conclude that IPOs are overvalued
(Purnanandam and Swaminathan, 2004) but Zheng (2007) contradicts this conclusion.
The overvaluation of IPOs could explain why, on average, the long-run performance
following IPOs is generally considered abnormally poor (Baker et al., 2006).
Determining the extent to which IPOs are fairly priced is important. If the pricing is fair,
then the abnormal returns generally observed during the first trading days on the
secondary market should be associated with some kind of irrational exuberance. If it is
not, then a credible explanation is needed for why the issuers left so much money on
the table. However, assessing the fairness of IPO valuation is a complicated challenge,
because it requires determining a firm’s intrinsic value in a particular context. At the IPO
time, firms enter a public market and their expected growth and liquidity are not easily
comparable to that of firms already listed on the market, or to that of private companies.
Finding a benchmark for valuation is thus very complicated (Derrien, 2005;
Pukthuanthong-Le, 2008).
In this paper, we exploit a particular setting where firms enter a main stock exchange
using two different paths. The first one is the classical IPO, and the second one is
graduation, i.e. the move from a new or junior stock exchange to the main board. Both
groups should be relatively similar in terms of expectations of growth and liquidity. The
importance of the prospectus and information therein is a timely research topic in the
current context: the equity crowdfunding phenomenon implies that investors should be
allowed to buy shares outside the protection of the IPO process; backdoor listings are
becoming more frequent; and the willingness of several countries to stimulate the
development of junior stock markets will increase the number of firms that list on main
boards using graduation.
We examine the Canadian market, where a junior stock exchange, the TSX Venture
Exchange (TSXV), has become the main provider of new listings for the main board, the
TSX Exchange (TSX). We construct a sample of IPOs and graduations, and control for
potential endogeneity problems using a propensity score matching method. Using the
valuation model suggested by Aggarwal et al. (2009), we study the difference in
valuation between IPOs and comparable graduate firms.
We show that IPOs are priced higher than similar graduate firms, controlling for
variables generally considered value relevant and using a propensity score matched
sample. The coefficient of the IPO dummy variable (0.60) indicates an economically
significant effect. This difference in values can be linked neither to the differences in
expected liquidity on the after-market, nor to a market timing effect. We do not observe
a significant influence of the amount raised at the listing time, as suggested by the
investor recognition hypothesis. Our results are consistent with the proposition that the
prospectus contains more relevant information than the financial statements, which
could decrease the risk perceived by investment bankers and investors. Our results
support the hypothesis that the growth opportunities associated with IPO issuers are
greater than those of graduates, and the hypothesis that investment bankers partially
2
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
consider the results of their marketing efforts in IPO pricing. Overall, our results indicate
that the IPO issue price is higher than the price of similar firms graduating to the same
exchange during the same period.
In Section 2, we review previous studies and outline institutional settings. The
conceptual framework and hypotheses are presented in Section 3. Empirical method
and data are then discussed, followed by the results. Section 6 concludes the paper.
2. Previous Studies and Institutional Settings
2.1 The conundrum of IPO value
A large part of the IPO literature is devoted to explaining underpricing (Ljungqvist,
2007). According to this perspective, IPOs are generally priced below their fair value
and underpricing (or initial return) is explained by the price change toward its intrinsic
value on the secondary market. Underpricing is often used as a measure of the value
effect of the involvement of intermediaries (Chen and Mohan, 2002; Chahine and
Filatotchev, 2011), regulatory framework (Hopp and Dreher, 2013; Shi et al., 2013) or
informational content of prospectus and accounting data (Boulton et al., 2011; Wyatt,
2013).1 Several explanations for underpricing have been proposed, including the
willingness of investment bankers to protect themselves against legal liability resulting
from false information in the registration statement against lawsuits, to create an interest
in the stock, or to keep uninformed investors involved in the IPO market. The
underpricing proposition is confirmed by the observation, based on interviews, that
underwriters consciously underprice IPOs, by applying a deliberate discount to
estimated free cash flows (Deloof et al., 2009).
The use of the initial return as a metric for a real departure from fair value rests on the
idea that a stock is fairly priced if it is priced at the same level as that of the first trading
day’s closing price (Daily et al., 2003 p.275). However, as underlined by Chemmanur
(2010 p.472), for “underpricing to be a meaningful measure (…) one has to make the
crucial (and rather strong) assumption that the closing price of a firm’s stock on the first
day of secondary market trading is equal to the intrinsic value of that stock.” There is
ample evidence that the long-run underperformance following IPOs is generally weak
(Jenkinson and Ljungqvist, 2001; Eckbo and Norli, 2005; Gregory et al., 2010). This
seems to contradict the hypothesis that the price observed on the secondary market
reflects the fair stock value. Price support actions by underwriters, window-dressing by
entrepreneurs, irrational factors, and restrictions on short selling in a context of large
heterogeneity of expectations can explain the high prices observed on the secondary
market (Jenkinson and Ljungqvist, 2001 p.149). According to Cook et al. (2006), the
presumption that early aftermarket prices are unbiased estimates of an IPO’s share
value is inconsistent with recent findings.
1
Daily et al. (2003) provide a meta-analysis of this stream of research.
3
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Miller (1977) suggests that the market value of equity reflects the valuation of the most
optimistic investors when investors subject to short-sale constraints have
heterogeneous prior beliefs. In this setting, stocks will be priced at a premium over their
fundamental value. Firms going public are characterized by greater heterogeneity in
investor beliefs and tighter short-sale constraints (Chemmanur and Krishnan, 2012).
This induces possible overpricing on the secondary market that decreases when new
information reduces heterogeneity (L'Her and Suret, 1996). We are left with two prices
that presumably reflect the intrinsic value of the firm. Indeed, Derrien (2005) suggests
that underwriters price IPOs at a range between the intrinsic value and the price noise
traders are ready to pay on the secondary market. IPO stocks are consequently
overpriced with respect to their intrinsic value.
2.2 IPO Valuation
To solve the controversy surrounding IPO pricing, a small number of researchers have
attempted to use valuation models to determine to what extent the price set by
investment bankers could be considered fair. However, IPO offer pricing remains
relatively unexplored (Daily et al., 2005). A review of this research field is proposed by
Pukthuanthong-Le (2008). The results are contradictory. The median IPO was
significantly overvalued at the offer price relative to valuations based on industry peer
price multiples, according to Purnanandam and Swaminathan (2004). However, Zheng
(2007) contradicts this conclusion after correcting two concerns of Purnanandam and
Swaminathan’s (2004) study. The first problem is related to the omission of expected
growth. The second refers to a scaling problem, associated with the fact that IPO firms
will rapidly increase in size. Employing the comparable firm approach and a regression
valuation model, Pukthuanthong-Le and Varaiya (2007) show that the median IPO offer
value is significantly greater than estimated intrinsic value. Using a sample of 1,655
IPOs, Aggarwal et al. (2009) observe that firms with more negative earnings have
higher valuations than firms with less negative earnings, and firms with more positive
earnings have higher valuations than firms with less positive earnings. They suggest
that negative earnings are a proxy for growth opportunities, which are a significant
component of IPO firm value. Daily et al. (2005) examine the relation between several
prospectus-based variables (including governance, profitability, CEO-retained equity,
age and venture capital backing) and the offer price and underpricing. They find no
evidence that these variables are related to either IPO offer price spread or IPO offer
price. However, Mousa and Reed (2013) observe a significant association between
slack resources, several pieces of prospectus information and high tech IPO value.
Previous research on fairness of IPO pricing and relevance of prospectus information
produced contradictory results, probably because “evaluating the pricing accuracy of
IPO stocks is a hard task because of the difficulty of finding satisfactory comparable
seasoned stocks” (Derrien, 2005 p.488). IPOs are likely to have more growth
opportunities than seasoned firms, but present particular risk factors. In this paper, we
exploit the particular situation that prevails in Canada, where firms can access the main
market via two different paths. This allows us to compare an IPO’s value with that of
4
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
similar firms entering the market with potentially similar growth opportunities and risk
factors.
2.3 Institutional settings
There are two main stock exchanges in Canada: The TSX and the TSXV. From an
international standpoint both markets apply low listing requirements. To list on Tier 2 of
the TSXV, a firm must meet the following conditions: stock price over CAN$0.15 and
post-IPO net tangible assets and market capitalization higher than CAN$500,000. The
TSXV has no requirements relative to issuer profitability; it simply stipulates sufficient
working capital for 12 months of operations. The minimum market capitalization
required for IPOs on the NASDAQ is US$45 million in 2012. In Australia, where listing
requirements can be considered permissive, the general admission criteria of the ASX,
according to the asset test, require at least AU$2 million in net tangible assets or AU$10
million in market capitalization. As a direct consequence of the low listing requirements,
more than 95% of Canadian IPOs from 1986 to 2006 could be considered micro caps
according to the SEC criteria. Feng and Yue (2013 p.1943) report that a newly TSXVlisted company is approximately 10 percent of the size of a US penny-stock IPO. Most
Canadian IPO issuers are not profitable, and a significant proportion of them report no
revenues (Carpentier et al., 2010). The ultimate goal of the TSXV is to graduate its best
performers to the main exchange, the TSX (Carpentier et al., 2010). In Canada, from
1992 to 2011, there were 951 graduations, and 562 IPOs on the TSX.
The graduation process is easy and its costs are modest. According to the exchange,
the issuer information that is on file with the TSXV can be provided directly to the TSX,
reduced listing fees apply, and the exchange supports a pre-file meeting. The firms
have to provide listing documents, which can be public continuous disclosure
documents or prospectuses, including audited financial statements, most recent
quarterly statements and the TSX listing application.2 Upon approval of the listing
application and documents by the TSX listing committee, trading begins on the main
board.3 These graduations provide a benchmark to study IPO valuation. Using
graduates as a benchmark for IPO valuation presents the following advantages: both
groups of firms list on the same market during the same period, and are likely to be at
the same stage of development. Moreover, as evidenced by Carpentier et al. (2010),
and unlike IPOs in several studies, graduates do not exhibit any abnormal long-run
returns. This indicates that they are on average fairly priced by the market. However, a
significant difference exists between the two listing modes. Firms that use an IPO issue
new shares to public investors and increase the number of their shareholders, their float
and market value significantly. In most cases, graduates do not issue new equity.
2
See: Graduating To Toronto Stock Exchange, available online at:
http://www.tmx.com/en/pdf/graduation_info.pdf
3
As an example, Amaya graduates on 1 October 2013. The only filing on the SEDAR electronic system
relevant to this operation is a Material Change Notice that indicates that the firm had received final
approval from the TSX to graduate from the TSXV and list its securities on the TSX.
5
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Approximately one-third of graduates close a private placement within one year of listing
on the main board. The median amount collected by this subsample of graduates is less
than half of the median IPO gross proceeds. These differences should be considered in
our model.
3. Conceptual Framework and Hypotheses
We consider that IPOs should be priced higher than comparable graduates for several
reasons, namely marketing effect, informative content of the IPO process and growth
opportunity effect. However, these positive effects on value could be mitigated by the
reduction of information asymmetry caused by the previous trading of the graduates’
stocks on the junior market before their listing on the main board. We first test the
general hypothesis that there is a difference in value. We then study the extent to which
the potential difference can be linked to the liquidity effect, timing effect or market
recognition hypothesis.
3.1 The positive value of the IPO process
Marketing effect
IPOs receive more media coverage than graduations. This is partly explained by the
fact that firms that graduate do not sell stock to the public, and by the regulatory IPO
setting. IPOs involve investment bankers, whereas graduations do not. Investment
bankers play a significant role in IPOs, attributed to a certification or market power
hypothesis. Chemmanur and Krishnan (2012, p.570) propose that underwriters are
“motivated to obtain high valuations for the equity of firms they take public by making
use of their long-term relationships with various participants in the IPO market. These
relationships enable them to attract greater participation by these market players (…)
leading to higher valuations for the equity of these firms both in the IPO and in the
secondary market.” Their empirical tests confirm this hypothesis for prestigious
investment bankers. Similarly, Cook et al. (2006) suggest that investment bankers have
an “incentive to promote an IPO to induce sentiment investors into the market for it.”
Their results show that the promotional efforts of investment bankers influence IPO
valuation. Investment bankers can include the potential effect of their marketing efforts
in the issue price. Because the investment bankers are not involved in graduations, their
market power can explain why the offer prices of IPOs are higher than the prices of
graduates.
The information content of prospectuses
A second perspective states that the prospectus provides a unique set of information
not available in financial statements. Wyatt (2013) provides evidence of the valuation
relevance of the “use of proceeds” disclosure in the IPO prospectus. Using a sample
from 34 countries, Shi et al. (2013) find a significant negative association between IPO
underpricing and disclosure regulation, and conclude that more extensive disclosure
requirements reduce information asymmetry in IPO markets. Using content analysis,
6
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Hanley and Hoberg (2009) show that the greater the informative content in the
prospectus, the better the pricing accuracy. Carpentier et al. (2012) compare IPOs and
a backdoor listing method that implies smoother oversight by securities commissions
and a shorter process based on private placements. They find that the choice of the
listing method and regulation strictness significantly influences the value of new listings.
The set of information available in the prospectus is larger than that provided in financial
statements. Moreover, it is partly related to expected growth and future cash flows,
whereas the information collected on the junior market is mainly related to past results.
Accordingly, we consider that the prospectus and the regulatory process surrounding
the IPO, which includes the prospectus visa by securities commissions, is likely to give
higher value to IPO firms than to similar firms entering the market by graduation.
Signal for expected growth
By making an IPO, a firm signals that it has growth opportunities to finance. Conversely,
graduation does not involve a similar increase in equity, even if private placements can
occur around the listing time. Indeed, Carpentier et al. (2010) observe that firms listed
on the TSXV graduate after a strong increase in stock value, which could reflect the
exploitation of growth opportunities. During the three-year pre-graduation period,
Canadian graduate firms realized a significant equally weighted abnormal return
(BHAR) of 206% (p.415). However, Carpentier et al. (2010) do not observe abnormal
positive returns following graduation. This indicates that most of the growth of graduate
firms occurs before their listing on the main board. If the growth of the graduates is in
the past while the growth of the IPO is in the future, then higher values should be
observed for IPOs.
An opposite perspective: the reduction in information asymmetry
When a firm is already listed, uncertainty should be lower because their shares have
already been traded for a few years, which implies that their managers’ behavior is
known by the market. According to Derrien and Kecskes (2007 p.447), “To reduce
valuation uncertainty, a natural solution for firms wishing to raise equity is to proceed in
two stages, listing and letting develop a public market in the firm’s existing shares in the
first stage, and selling new shares to the public in the second stage. The more active
the market that develops in the firm’s existing shares, the greater the reduction of
valuation uncertainty, and, in turn, the less the underpricing required when the firm sells
new shares.” Following this reasoning, one can expect that graduates will be valued
higher than IPOs, because the information asymmetry has been reduced by trades,
prices and disclosure on the junior market. However, as suggested by Derrien and
Kecskes, trades occurring before the IPO are likely to reduce underpricing and not to
provide higher valuation. Derrien and Kecskes show that underpricing is 10% to 30%
lower for firms using this two-step process in the UK. Accordingly, we consider that the
effect of marketing, information and expected growth on the issue price will dominate
that of reduction of information asymmetry. Hence the following hypothesis:
H1: With all things being equal, the value of an IPO firm should be higher than the value
of a firm that graduates from the junior market to the main board.
7
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
3.2 Liquidity effect
An IPO implies selling stock to a large number of investors. Such an operation might
create a liquid market, which positively influences underpricing and survival, as
evidenced by Ellul and Pagano (2006, p. 381). This is not the case for graduation.
When the graduate issues new stocks after listing on the main board, it uses private
placements that cannot increase liquidity. Vismara et al. (2012) discuss the reasons
why many of the European second markets have failed. They show that firms in these
markets raise only a few million euros and rarely develop liquid trading. Investment
bankers can incorporate the expected positive effect of the liquidity in the issue price.
This can explain why Ellul and Pagano observe a negative relation between expected
liquidity and underpricing. Thus we expect that liquidity on the aftermarket positively
influences issue prices, and explains the difference between IPO and graduation
values. However, as underlined by Ellul and Pagano (2006), investors do not know
precisely how liquid the aftermarket will be, and so we should take expected liquidity
into account, as follows:
H2: With all things being equal, the value of an IPO firm should be higher than the value
of a firm that graduates from the junior market to the main board, when expected
liquidity is accounted for.
Timing effect
It is well known that cycles in the IPO market influence the type of issues, the volume of
issues, underpricing and the fate of IPOs (He, 2007). Hot and cold issue periods are
likely to influence the issue price. Helwege and Liang (2004) evidence that IPOs in hot
periods raise more money than IPOs in other periods, and that IPOs in hot periods have
higher market-to-book ratios. He (2007) shows that IPOs in hot periods result in higher
share prices. Managers can choose the IPO time to benefit from market sentiment and
get higher values. It is thus important to determine to what extent the hot-cold
dichotomy explains the differences in valuation.
H3: With all things being equal, the value of an IPO firm should be higher than the value
of a firm that graduates from the junior market to the main board, when market
sentiment is accounted for.
Investor recognition effect
The investor recognition hypothesis proposes that raising more financing leads to
greater investor recognition, i.e., greater investor awareness of the firm (Kecskes,
2008). Indeed, Kecskes observes that firms collecting larger amounts of money at IPO
are worth more than those collecting smaller amounts, and shows that raising more
financing leads to greater investor recognition and thereby increases IPO firm value.
Greater investor recognition also increases firm value for seasoned equity offerings
(Autore and Kovacs, 2014). Proxies for investor recognition are better underwriting
services, greater liquidity, and increase in analyst following. A difference in equity value
between IPO firms and graduates can be a consequence of greater investor recognition
8
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
of IPOs than of graduations. Coverage by financial analysts is a classical estimator of
investor recognition, but a very small proportion of IPOs and graduates are actually
followed by analysts, because of their small size. Following Kecskes (2008), who posits
that investor recognition is caused by the raising of more financing, we use issue size
as a proxy. Accordingly, we test the hypothesis that the differences between IPOs and
graduations can be explained by differences in the relative size of the issues
surrounding the listing.
H4: The difference in value between IPO firms and graduates is explained by the
differences in the amounts of financing raised around the listing time.
4. Empirical Method and Data
4.1 Empirical model
In this paper, we consider neither the market price for IPOs nor underpricing. We focus
on the price set by the investment banker, although we use the graduation’s market
price as a benchmark comparison for graduation.4 First, our main hypothesis is that IPO
provides higher value than graduation. Using issue prices that are on average lower
than market prices, we biased the results against our hypothesis. Second, we are
interested in the price and amount that the firm can obtain through an IPO. Third, we
consider that the effect of the demand for the stock is partially incorporated in the issue
price by the investment banker, as suggested by Derrien (2005).
Analyzing valuation at IPO or graduation is difficult because of the numerous firms
reporting no sales, negative earnings or negative shareholders’ equity. In these cases, it
is impossible to use Q ratios (King and Segal, 2009) or multiples (Purnanandam and
Swaminathan, 2004) to estimate value. In this study, we use the model proposed by
Aggarwal et al. (2009), where the dependent variable is the total offer value defined as
the offer price multiplied by the post-IPO shares outstanding. This empirical model
allows detection of cases of negative earnings, a situation that prevails in Canada, for
both IPOs and graduations. Following Hand (2003) and Aggarwal et al. (2009), we use
the Log transformation for each continuous variable as follows: L(W) = loge (1+W) when
W ≥ 0 in $ million; and L(W) = -loge (1-W) when W < 0 in $ million.
We consider that the value at the listing time on the main market is explained by the
three main valuation drivers: revenues, book value of equity and earnings. We use
earnings before extraordinary items following Aggarwal et al. (2009). Stock prices are
4
Analysis of the IPO market price and underpricing could enrich this paper by providing a path for
analyzing the sources and consequences of reduction in information asymmetry. However, this implies
consideration of another stream of conceptual models and introduction of a complementary set of
variables. Overall, the reduction of the heterogeneity provided by listing on the venture market is likely to
be commensurate with the length of the listing and with the trading volume. Moreover, underpricing
cannot be estimated for graduation. This dimension of the research has been left for further studies.
9
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
partially determined by growth opportunities; this is particularly true in the situation of new
ventures at the IPO stage. Classical indicators of growth opportunities like Q ratios or
Book-to-Market ratio cannot be introduced in a model explaining price. We follow
Aggarwal et al. (2009), who include a dummy high-tech as a proxy for growth
opportunities.
Prestigious auditors are associated with high market valuations (Firth and Liau-Tan,
1998; Aggarwal et al., 2009). In the IPO case, the choice of a prestigious investment
banker has generally been considered a positive signal (Demers and Joos, 2007),
characterized by lower underpricing and better long-run performance, associated with a
decrease in information asymmetry (Carter and Manaster, 1990). Chemmanur and
Krishnan (2012) evidence that market power explains the higher valuation observed for
prestigious investment banker-backed IPOs. However, similar to a venture capitalbacked dummy, this variable is not available for graduations and should be omitted from
the model. Because graduations do not involve changes in ownership, we do not
consider ownership retention by pre-IPO shareholders, as in Aggarwal et al. (2009). The
model takes the following form:
L(OV)i = α1+ α2 L(INC)i + α3 L(BV)i + α4 L(Sales)i + α5 DHTi + α6 DIPOi + α7PAUDITi + ei
(1)
where L(W) stands for the L transformation and OV means Overall Value and is
measured as follows: for IPOs, OV = Offer price x number of shares outstanding
immediately after the IPO (in $ million). This value is equivalent to market value based
on the issue price. For graduation, OV is the market capitalization at the date of listing
on the main market, because there is no real offering in this case. Private placements
that generally occur after the listing are not included in this value.5
Inc: Net Income before extraordinary items at fiscal year-end closed before IPO or
graduation
BV: book value of equity at fiscal year-end closed before IPO or graduation
Sales: Revenues reported at the fiscal year-end closed before IPO or graduation
DHT: dummy variable set to 1 if the industry of the issuer is a high-tech company, and
0 otherwise.
DIPO: dummy variable set to 1 if the company makes an IPO and 0 otherwise (if the
company graduates).
Paudit is a dummy variable set to 1 if the auditor before the IPO or graduation is
prestigious (‘‘Big 5’’ or ‘‘Big 4’’), and 0 otherwise.
5
For IPOs, the overall value is equivalent to the offer value defined by Aggarwal et al. (2009).
10
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Our main explanatory variable is DIPO. To test our second and third hypotheses, we
also include the following explanatory variables:
Age: Age of the company, in years, at the IPO or graduation
L(exp. liq.): Log of the expected rotation (trade amount/market value of a size-sector
matched IPO or graduation 12 months after the matched IPO)
Dhot: dummy variable that has a value of 1 if the corresponding month is in the upper
(lower) third of the moving average distribution of IPOs.
Dcold: dummy variable that has a value of 1 if the corresponding month is in the upper
(lower) third of the moving average distribution of IPOs.
GPTA: Ratio of gross proceeds to total assets.
4.2 Self-selection control
Firms that list through an IPO can differ from those that graduate from a junior market.
For example, firms backed by private equity investors or venture capital funds are less
likely to use the junior market to finance their development because they can afford the
IPO directly. Conversely, firms rejected by venture capitalists or whose managers are
more concerned by keeping control are more likely to use the junior market and then to
graduate. Large firms can access the main board directly, and should not initially list on
the venture exchange. This situation requires a control for this self-selection effect. The
limitations of the classical two-step procedure developed by Heckman (1979) and the
instrumental approach in general are now well established (Larcker and Rusticus, 2010;
Lawrence et al., 2011; Lennox et al., 2012; Peel and Makepeace, 2012). In the
particular case of the choice of listing mode, the exclusion condition required for the
Heckman correction cannot be easily satisfied, because this condition entails finding a
variable that influences the listing mode choice and has no influence on the value. We
consequently use a propensity score matching approach following Lawrence et al.
(2011) and Lennox et al. (2012). This method matches observations based on the
probability of making an IPO and generates two samples with similar characteristics.
Propensity scores are calculated using the following logistic model:
DIPO = α1+ α2 Lasset + α3ROAi + α4 agei + ei
(2)
where Lasset is the log transformation of pre-listing total assets.
ROA is the ratio of net income before extraordinary items to total assets, using prelisting amounts.
Age is the age of the company, in years, at the IPO or graduation.
4.3 Data source and variable measurement
We collected the lists of IPOs from FPInfomart.ca from 1997 to 2011. We excluded
privatization of state-owned companies, demutualizations, creation of income trusts and
11
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Capital Pool Company Program IPOs.6 Because it is difficult to model value for natural
resources, oil and gas, financial and real estate companies, we exclude companies
operating in these industries. We got a final sample of 186 IPOs. We obtained
prospectuses from SEDAR (the Canadian equivalent of EDGAR). IPOs’ accounting data
come from prospectuses.
The TSXV provided a list of 724 graduated companies from 1997 to 2011. We excluded
59 graduations that resulted from the acquisition of a TSXV company by a TSX
company. As for IPOs, we excluded natural resources, oil and gas, financial and real
estate companies. We got a final sample of 218 graduates.
Unlike an IPO, a company can graduate to the TSX without raising any gross proceeds,
but can issue stock privately after its graduation. We hand-collected the new
placements from FPinfomart.ca for the year following graduation. We summed the
equity issued during the first year after graduation to get an estimate of the gross
proceeds to compare with that of IPOs. We took the median Canadian issue price of
these issues following graduation to put the IPO issue price in perspective. Graduates’
accounting data come from Mergent on line, and we verified and supplemented these
data with SEDAR. Several companies make a private or public placement several
months or weeks before their graduation, but after the fiscal year-end. These new
placements were tracked in SEDAR or the FPinfomart.ca database of new issues, press
releases and financial statements following graduation. We added the gross proceeds
to the total assets and shareholders’ equity of the companies. Several companies (14)
graduated just after or shortly (within six months) after a merger or a reverse takeover.
For these companies we also hand-collected the accounting data of the entrant (not
public) companies by analyzing the management information circular sent to the
shareholders of the public companies before the reverse takeover. We then summed
the accounting data of the public company and the entrant company to figure out the
financial position of the merged entity before graduation.
Market data comes from Datastream. For graduation, OV is the market capitalization at
the graduation date, measured by the unadjusted price multiplied by the number of
shares outstanding. For IPOs, OV is the issue price (from FPinfomart.ca) multiplied by
the number of shares outstanding. We got the missing data and verified OV using the
financial statements after the IPO or graduations from SEDAR.
Based on SIC codes, we defined two dummy variables, associated with High Tech, and
Other (DHT, Dother), respectively. AGE is the number of years since the incorporation
of the firm (or since the founding date if the firm reincorporates prior to listing). Size is
the post-IPO or post-graduation shareholders’ equity. We characterized Hot and Cold
6
The Capital Pool Company (CPC) program has been implemented in Canada to ease the creation of
shells, ultimately used in reverse merger listings by operating companies (Carpentier and Suret, 2006).
Their IPOs result in the listing of a non-operating company; we consequently excluded CPC IPOs from
our sample.
12
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
issue market periods following Helwege and Liang (2004), by estimating the 3-month
centered moving average of the IPO number. DHOT (DCOLD) has a value of one if the
corresponding month is in the upper (lower) third of the moving average distribution.
We follow the methodology developed by Ellul (2006) in a similar context, to develop an
ex ante estimator of liquidity, based on a matched-firm approach. We assume that to
forecast an IPO’s (graduate’s) future liquidity, investors use the value observed for a
previous IPO (graduate) of comparable size, belonging to the same sector and
occurring shortly before the listing observed. We estimate the trading volume and the
rotation twelve months after this matched IPO (graduation) and use this estimation as a
proxy for the expected liquidity of our sample. We consider that the expected rotation is
an acceptable proxy for the real unobservable ex-post rotation.
5. Results
5.1 Characteristics of the sample
Table 1 presents the main characteristics of the 186 Canadian IPOs and 218
graduations from 1997 to 2011.7 Before listing, IPO firms are approximately 30% larger
than graduates, with median total assets of CAN$31.92 million and CAN$24.72 million
respectively. Revenues are twice as large for IPO firms than for graduates (CAN$22.70
vs CAN$10.02). Net earnings are very small, but higher for IPOs. As expected, larger
firms list directly on the main board, but both Canadian IPOs and graduates could be
considered small firms.8 In both groups, the proportion of firms reporting losses is
approximately 45%, and the proportion of firms reporting no revenues is about 9%. In
Canada, IPOs and graduations are mainly done by small firms, according to
international standards. The proportions of firms in the High Technology sectors are in
the same range: 60% for IPOs and 55% for graduates. IPO firms are slightly older than
graduates. An important difference is in the level of shareholders’ equity. The median
shareholders’ equity is CAN$9.75 million for IPOs versus CAN$16.65 million for
graduates. Graduates have already done an IPO on the venture exchange, and have
raised cash at that time. They also exhibited a steady increase in stock price during the
three years before their graduation, which has increased their capacity to raise more
money through private placements or seasoned equity offerings. This implies that
before the IPO, graduates were less leveraged than IPO firms.
7
Almost all distributions exhibit a large right skewness as indicated by the high value reported as a
maximum. For this reason, we discuss and test the median of the distributions.
8
According to the European Commission’s definition, the category of micro, small and medium-sized
enterprises consists of enterprises that have revenues lower than 50 million euros or an annual balance
sheet total not exceeding 43 million euros, about CAN$70 million (European Commission, 2005).
Statistics Canada defines small businesses as firms with fewer than 500 employees and less than CAN$50
million in annual revenues.
13
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Each IPO firm raised money; the median gross proceeds are CAN$42.16 million. Only
76 of the 218 graduates raised money within a year of listing on the main market. The
median amount of these private placements is CAN$14.90 million. On average,
graduates raised CAN$7.70 million after their listing on the main board. However, the
median expected liquidity is higher for graduates (0.32) than for IPOs (0.23). After
listing, IPO firms are larger than graduates. The median overall value reaches
CAN$138.45 million for IPOs but only CAN$66.43 for graduates. The median postlisting net assets is CAN$56.41 million for IPOs and CAN$21.81 million for graduates.
Such differences imply that we should use a control method for endogeneity.
Insert Table 1 here
5.2 Propensity Score matching
Propensity scores are calculated using the logistic model presented in equation 2. The
maximum caliper distance is set to 10%. According to the propensity score matching
method, the pairs of listing firms are formed based on firms whose propensity scores
differ by at most the caliper width. Reducing the caliper width increases the likelihood
that the distribution of observed baseline covariates will be the same in both groups, but
is detrimental to the number of observations. There are no clear rules to determine
which variables to include in the model, but only variables influencing the choice
decision and the outcome variable simultaneously should be included (Caliendo and
Kopeinig, 2008). We follow the recommendation of Heckman et al. (1998) to begin with
a parsimonious specification of the model, and iteratively add variables to the
specification. A new variable is kept if it is statistically significant at conventional levels.
We present the results obtained with the parsimonious model and with a larger caliper
to keep the largest possible number of observations in the sample. In Table 4, we
analyze the robustness of our results to the choice of caliper width. We also present the
results obtained with the complete propensity score matching model, which greatly
reduces the number of observations. The overall conclusion is that our results are
robust to caliper distance and specification of the propensity score matching model.
In Table 2, we present the statistical tests of the differences between IPO firms and
graduates for the whole and propensity score-matched samples. To test the differences
between medians of the distributions of continuous variables, we use the nonparametric Kruskal-Wallis test. For dummies, we use the Pearson chi-square test. In
this table, the caliper width is set to 10%. For the whole sample, significant differences
exist between the size of IPO firms and graduates. IPO firms have revenues and total
assets significantly higher than graduates, but graduates exhibit higher shareholders’
equity. The median ages also differ significantly between both groups. The propensity
score-matching reduces the difference in the size variable, but it remains significant. We
do not observe significant differences between the two groups regarding profitability,
proportion of firms without revenues or earnings, and sectoral distribution. Gross
proceeds differ significantly before and after the match. A similar proportion of
prestigious auditors are involved in both groups. The distribution of the two types of
14
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
listing across the hot and cold issue market period differs. The gross proceeds
difference and the hot and cold dichotomy will be specifically tested in the next steps of
the analysis.
IPOs firms are larger before the listing than the graduates and raise significantly higher
amounts of cash than the graduates do. Their post-listing size is consequently
significantly higher than that of the graduates. We can consider OV as an estimate of
the listing market value of the firms, and Size as an estimate of the book value of equity.
The market-to-book ratio based on the medians of the distributions is close to 3 for both
groups of firms, similar to that reported in the US just before the IPOs (Chahine et al.,
2012 p.185). Both IPO firms and graduates are valued as if they had significant growth
opportunities. From 1995 to 2005, the average market-to-book ratio of Canadian firms
fluctuates between 1 and 2 (King and Segal, 2008).
Insert Table 2 here
5.3 First hypothesis and robustness
Our first hypothesis states that with all things being equal, the value of an IPO firm
should be higher than that of a graduate. Table 3 presents the correlation matrix. Table
4 reports the results of Model 1, which is similar to the model proposed by Aggarwal et
al. (2009). The dependent variable is the log transformation of the overall value
(estimated using the issue price in the case of IPOs). Accounting variables are
measured before the issue or graduation. In column 1, we use the full sample. In
column 2, we apply the model to the propensity score matched sample, with a relatively
large caliper width of 10% and the parsimonious matching model. In columns 3 and 4,
we reduce the caliper distance (and the sample) to check the robustness of our results
to the matching process parameters. The rightmost column presents the results when
the complete matching model is used. This model greatly reduces the number of
observations.
The coefficient of the DIPO dummy variable is positive and significant, and the influence
of the propensity matching parameters is slight. The main result appears robust along
this dimension. The coefficient ranges from 0.52 to 0.78. A coefficient of 0.60 indicates
that the average value advantage for IPOs relative to graduation is 60% of the log of the
overall value (82% of the overall value), when income, book value, sales and the high
tech sector are considered in the model. This is economically significant and consistent
with the hypothesis that IPOs are, on average, overpriced based on the issue price. The
effect of the listing mode remains even if we use a complete propensity score matching
model, which reduces the total number of observations in the sample to 68 (Column 5).
Sales and shareholders’ equity are positively associated with overall value, as
expected. However, the sign of the LINC variable is negative. This is not a totally
unexpected result. Several studies summarized by Joos and Zhdanov (2008) report an
“anomalous” relation between negative earnings and equity value (Collins et al., 1999;
Core et al., 2003; Joos and Plesko, 2005). Jan and Ou (2011) report that the market, on
15
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
average, prices negative-book-value firms higher than positive-book-value firms.
Aggarwal et al. (2009) find that IPO firms with more negative earnings have higher
valuations than do firms with less negative earnings, and suggest that negative earnings
are a proxy for growth opportunities. This explanation is consistent with Jane and Ou’s
suggestion that R&D accumulated over time plays an important role in the market
valuation of firms reporting negative earnings and negative book value. Our sample is
composed mostly of high tech firms, and more than 45% of the sample report losses.
This probably explains the observed relation. As a robustness check, we omit LINC in
the first model reported in Table 5, but this change does not affect the main results of
the model.
Insert tables 3 and 4 here
5.4 Complementary hypotheses
Table 5 reports the tests of the three complementary hypotheses proposed to explore
possible explanations for the differences observed between the value of IPOs and
graduates.
Our second hypothesis states that with all things being equal, the value of an IPO firm
should be higher than that of a graduate, when expected liquidity is accounted for. We
introduce expected liquidity as a new explanatory variable in column 2 of Table 5. Note
that expected liquidity is higher for graduates than for IPO firms, although the difference
is non-significant. This can be traced to the fact that graduates have already developed
a pool of interested individual shareholders while the participation of institutional
investors in the largest IPOs reduces float and liquidity. As anticipated, expected
liquidity is positively associated with overall value. However, the size of the coefficient
and the significance level of the DIPO dummy are not affected by this modification of
the model. This indicates that Hypothesis 2 is valid; the value differential attributed to
IPOs cannot be explained by a liquidity effect.
Our third hypothesis states that the value of an IPO firm should be higher than that of a
graduate, when liquidity and market sentiment are accounted for. This hypothesis
deserves attention because the frequency of IPOs during hot issue markets is
significantly higher than that of graduations during the same period (Table 2). The
model incorporating the hot and cold dummy variables is presented in column 3.
Valuations are negatively associated with hot periods and positively linked with cold
periods. The coefficient of the dummy related to the listing mode (DIPO) is not changed.
The higher IPO value is not attributable to the exploitation of market sentiment. Note
that the effects of hot and cold markets on prices observed are not consistent with
previous evidence on IPO market cycles. However, the literature indicates that hot
markets are associated with high volumes of IPOs and large underpricing (Helwege and
Liang, 2004), but large underpricing is not inconsistent with lower issue prices. He
(2007) shows that IPOs in hot periods result in higher share prices on the secondary
market, and considers that this secondary market price does reflect the firm’s
16
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
fundamentals. Because underpricing is higher during hot issue markets, issue price is
likely to be lower. Indeed, He (2007) explains that in hot periods, the information
produced by investment bankers improves the quality of IPO firms; this allows ex ante
low quality firms to go public. Hence the lower issue price observed during hot issue
markets.
The fourth hypothesis states that the difference in value between IPO firms and
graduates is explained by the differences in the size of the financing raised at listing
time, according to the investor recognition hypothesis. We add the gross proceeds
expressed as a proportion of pre-listing total assets (GPTA) to the model (Table 5,
Column 4). As expected, the coefficient is positive: value is positively influenced by the
amount of money raised at the listing date, as suggested by Kecskes (2008). Investor
recognition is not the sole explanation for this result. Because their fees are based on a
proportion of the gross proceeds, investment bankers have a greater incentive to price
larger IPOs higher than smaller IPOs. Large issues can also be more attractive for
institutional investors, which can lead to higher value at the end of the book building
process. Nevertheless, the positive association between gross proceeds and value
does not change the level of significance of the DIPO variable. IPOs remain better
priced than comparable firms.
Insert table 5 here
6. Conclusion
In this paper, we contribute to the literature on IPO pricing by comparing the equity
value of a group of small IPO firms with graduates that list on the same market during
the same period. The benchmark firms share several characteristics likely to induce
relatively high value. First, they have been listed for several years on a junior exchange
and the prices and trades observed on this market should have reduced the information
asymmetry and the risk perceived by investors. Second, the graduates exhibit, on
average, a steady performance on the junior markets, allowing them to fulfill the listing
requirements of the main board. Third, they have already implemented substantial
changes in their organization, ownership structure and relations with the capital market
that characterize the IPO firms (Derrien, 2010). Our research design compares the
market prices of graduates with the issue price of IPOs, which biased our results
against our hypothesis.
Despite the previous elements, we observe that IPOs are priced higher by investment
bankers than comparable firms are. The result is robust to several specifications of the
propensity score matching models. The difference we observe is economically
significant, and cannot be explained by the expected differences in liquidity in the
aftermarket, the distribution of IPOs in hot and cold issue markets, or by the investor
recognition hypothesis. If graduates are fairly priced by the market, our results indicate
that investment bankers overvalue the IPO. This result is in line with some previous
17
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
conclusions (Purnanandam and Swaminathan, 2004; Derrien, 2005) and is not
inconsistent with the observation of underpricing. As proposed by Derrien (2005, 2010),
the underwriter sets the prices higher than the fundamental value per share but lower
than the price sentiment investors are willing to pay. This implies both overpricing
relative to fundamentals and abnormal initial returns.
Our findings have implications along several dimensions. For entrepreneurs, the results
indicate that the IPO process on the main board has value, despite the underpricing
generally observed on the market. For researchers, our results suggest that the price
set during the first days of trading could be irrational because it is set higher than an
issue price that is also higher than the value based on fundamentals. For regulators,
amidst the debate surrounding proportional disclosure and the prospectus (Pritchard,
2012), we evidence that the IPO process, including the prospectus, seems to have a
significant value effect.
References
Aggarwal RK, Bhagat S and Rangan SP (2009) The Impact of Fundamentals on IPO
Valuation. Financial Management 38(2): 253-284
Autore DM and Kovacs T (2014) Investor Recognition and Seasoned Equity Offers.
Journal of Corporate Finance 25(0): 216-233
Baker MP, Ruback RS and Wurgler JA (2006). Behavioral Corporate Finance: A
Survey. Handbook of Corporate Finance: Empirical Corporate Finance. B. Espen
Eckbo (ed.): Elsevier/North-Holland.
Boulton TJ, Smart SB and Zutter CJ (2011) Earnings Quality and International IPO
Underpricing. Accounting Review 86(2): 483-505
Boutron E, Gajewski J, Gresse C and Labégorre F (2007) Are IPOs Still a Puzzle? A
Survey of the Empirical Evidence from Europe. Finance 28(2): 5-41
Caliendo M and Kopeinig S (2008) Some Practical Guidance for the Implementation of
Propensity Score Matching Journal of Economic Surveys 22(1): 31-72
Carpentier C, Cumming DJ and Suret J-M (2012) The Value of Capital Market
Regulation and Certification: IPOs Versus Reverse Mergers. Journal of Empirical
Legal Studies 9(1): 56-91.
Carpentier C, L'Her J-F and Suret J-M (2010) Stock Exchange Markets for New
Ventures. Journal of Business Venturing 25 (4): 403-422
Carpentier C and Suret J-M (2006) Bypassing the Financial Growth Cycle: Evidence
from Capital Pool Companies. Journal of Business Venturing 21(1): 45-73
Carter R and Manaster S (1990) Initial Public Offerings and Underwriter Reputation.
The Journal of Finance 45(4): 1045-1067
Chahine S, Arthurs JD, Filatotchev I and Hoskisson RE (2012) The Effects of Venture
Capital Syndicate Diversity on Earnings Management and Performance of IPOs
in the US and UK: An Institutional Perspective. Journal of Corporate Finance
18(1): 179-192
18
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Chahine S and Filatotchev I (2011) The Effects of Corporate Governance and Audit and
Non-audit Fees on IPO Value. The British Accounting Review 43(3): 155-172
Chemmanur TJ (2010) Venture Capital, Private Equity, IPOs, and Banking: An
Introduction and Agenda for Future Research. Journal of Economics and
Business 62(6): 471-476
Chemmanur TJ and Krishnan K (2012) Heterogeneous Beliefs, IPO Valuation, and the
Economic Role of the Underwriter in IPOs. Financial Management 41(4): 769811
Chen CR and Mohan NJ (2002) Underwriter Spread, Underwriter Reputation, and IPO
Underpricing: A Simultaneous Equation Analysis. Journal of Business Finance &
Accounting 29(3-4): 521-540
Collins DW, Pincus M and Xie H (1999) Equity Valuation and Negative Earnings: The
Role of Book Value of Equity. The Accounting Review 74(1): 29-61
Cook D, Kieschnick R and Ness RV (2006) On the Marketing of IPOs. Journal of
Financial Economics 82(1): 35-61
Core JE, Guay WR and Buskirk AV (2003) Market valuations in the New Economy: an
investigation of what has changed. Journal of Accounting and Economics 34(13): 43-67
Daily CM, Certo ST and Dalton DR (2005) Investment Bankers and IPO Pricing: Does
Prospectus Information Matter? Journal of Business Venturing 20(1): 93-111
Daily CM, Certo ST, Dalton DR and Roengpitya R (2003) IPO Underpricing: A MetaAnalysis and Research Synthesis. Entrepreneurship Theory and Practice 27(3):
271-295
Deloof M, Maeseneire WD and Inghelbrecht K (2009) How Do Investment Banks Value
Initial Public Offerings (IPOs)? Journal of Business Finance & Accounting 36(12): 130-160
Demers EA and Joos P (2007) IPO Failure Risk. Journal of Accounting Research 45(2):
333-371
Derrien F (2005) IPO Pricing in Hot Market Conditions: Who Leaves Money on the
Table? The Journal of Finance 60(1): 487-521
Derrien F (2010). Initial Public Offerings. Behavioral Finance. H. Kent Baker and John
R. Nofsinger (eds): John Wiley & Sons, Inc.: 475-490.
Derrien F and Kecskes A (2007) The Initial Public Offerings of Listed Firms. The Journal
of Finance 62(1): 447-479
Dissanaike G and Amel-Zadeh A (2007) Discussion of Venture Capitalists, Business
Angels, and Performance of Entrepreneurial IPOs in the UK and France. Journal
of Business Finance & Accounting 34(3-4): 529-540
Eckbo BE and Norli O (2005) Liquidity Risk, Leverage and Long-run IPO returns.
Journal of Corporate Finance 11(1/2): 1-35
Ellul A and Pagano M (2006) IPO Underpricing and After-Market Liquidity. Review of
Financial Studies 19(2): 381-421
European Commission (2005). The New SME Definition: User Guide and Model
Declaration.
Enterprise
and
Industry
Publication,
Available
at
http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_
en.pdf
19
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Feng C and Yue L (2013) Voluntary Adoption of More Stringent Governance Policy on
Audit Committees: Theory and Empirical Evidence. Accounting Review 88(6):
1939-1969
Firth M and Liau-Tan CK (1998) Auditor Quality, Signalling and the Valuation of Initial
Public Offerings. Journal of Business Finance & Accounting 25(1/2): 145-165
Gregory A, Guermat C and Al-Shawawreh F (2010) UK IPOs: Long Run Returns,
Behavioural Timing and Pseudo Timing. Journal of Business Finance &
Accounting 37(5-6): 612-647
Hand JRM (2003). Profits, Losses and the Non-Linear Pricing of Internet Stocks.
Intangible Assets: Values, Measures and Risks. J.R.M.Hand and B. Lev Eds.
New York, NY: : Oxford University Press.
Hanley KW and Hoberg G (2009) The Information Content of IPO Prospectuses Review
of Financial Studies 23(7): 2821-2864
He P (2007) A Theory of IPO Waves. Review of Financial Studies 20(4): 983-1020
Heckman J, Ichimura H, Smith J and Todd P (1998). Characterizing Selection Bias
Using Experimental Data. NBER Working Paper No. 6699
Heckman JJ (1979) Sample Selection Bias as a Specification Error. Econometrica
47(1): 153-162
Helwege J and Liang N (2004) Initial Public Offerings in Hot and Cold Markets. Journal
of Financial and Quantitative Analysis 39(3): 541-569
Hopp C and Dreher A (2013) Do Differences in Institutional and Legal Environment
Explain Cross-country Variations in IPO Underpricing? Applied Economics 45(4):
435-454
Jan C-L and Ou JA (2011) Negative-Book-Value Firms and Their Valuation. Accounting
Horizons 26(1): 91-110
Jenkinson T and Ljungqvist A (2001). Going Public: The theory and Evidence on How
Companies Raise Equity Finance, Second edition. Oxford : Oxford University
Press.
Joos P and Plesko GA (2005) Valuing Loss Firms. The Accounting Review 80(3): 847870
Joos P and Zhdanov A (2008) Earnings and Equity Valuation in the Biotech Industry:
Theory and Evidence. Financial Management 37(3): 431-460
Kecskes A (2008). Why Are Firms That Raise More Financing Worth More? University
of Toronto, Available at :http://people.ucalgary.ca/~nfa99/2008/papers/50.pdf
King M and Segal D (2008) Market Segmentation and Equity Valuation: Comparing
Canada and the United States. Journal of International Financial Markets,
Institutions and Money 18(3): 245-258
King MR and Segal D (2009) The Long-Term Effects of Cross-Listing, Investor
Recognition, and Ownership Structure on Valuation. Review of Financial Studies
22(6): 2393-2421.
L'Her J-F and Suret J-M (1996) Consensus, Dispersion and Security prices.
Contemporary Accounting Research 13(1): 209-228
Larcker DF and Rusticus TO (2010) On the Use of Instrumental Variables in Accounting
Research. Journal of Accounting and Economics 49(3): 186-205
20
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Lawrence A, Minutti-Meza M and Ping Z (2011) Can Big 4 versus Non-Big 4 Differences
in Audit-Quality Proxies Be Attributed to Client Characteristics? The Accounting
Review 86(1): 259-286
Lennox CS, Francis JR and Wang Z (2012) Selection Models in Accounting Research.
The Accounting Review 87(2): 589-616
Ljungqvist A (2007). IPO Underpricing: A Survey. Handbook in Corporate Finance :
Empirical Corporate Finance, Volume 1. B. Espen Eckbo ed: North-Holland: 375422.
Miller EM (1977) Risk, Uncertainty, and Divergence of Opinions. The Journal of Finance
32(4): 1151-1168
Mousa F-T and Reed R (2013) The Impact of Slack Resources on High-Tech IPOs.
Entrepreneurship Theory and Practice 37(5): 1123-1147
Peel MJ and Makepeace GH (2012) Differential Audit Quality, Propensity Score
Matching and Rosenbaum Bounds for Confounding Variables. Journal of
Business Finance & Accounting 39(5-6): 606-648
Pritchard AC (2012) Facebook, the JOBS Act, and Abolishing IPOs. Regulation 35(3):
12-7
Pukthuanthong-Le K (2008). IPO Valuation. Handbook of Finance: John Wiley & Sons,
Inc.
Pukthuanthong-Le K and Varaiya N (2007) IPO Pricing, Block Sales, and Long-Term
Performance. Financial Review 42(3): 319-348
Purnanandam AK and Swaminathan B (2004) Are IPOs Really Underpriced? Review of
Financial Studies 17(3): 811-848
Shi C, Pukthuanthong K and Walker T (2013) Does Disclosure Regulation Work?
Evidence from International IPO Markets. Contemporary Accounting Research
30(1): 356-387
Vismara S, Paleari S and Ritter JR (2012) Europe's Second Markets for Small
Companies. European Financial Management 18(3): 352-388
Wyatt A (2013) Is There Useful Information in the ‘Use of Proceeds’ Disclosures in IPO
Prospectuses? Accounting and Finance Forthcoming (2013).
Zheng SX (2007) Are IPOs really overpriced? Journal of Empirical Finance 14(3): 287309
21
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Table 1 Descriptive statistics of TSX IPOs and graduation towards the TSX between 1997 and
2011.
n
IPO
Before listing
Total assets, in M$
Net earnings (NE), in M$
Sales, in M$
Shareholders' equity, in
M$
Age, in years
DHT
Listing
Gross proceeds, in M$
Issue price, in $
Exp. Liq.
Paudit
Dhot
Dcold
Post listing
OV, in M$
Size, in M$
Graduation
Before listing
Total assets, in M$
Net earnings (NE), in M$
Sales, in M$
Shareholders' equity, in
M$
Age, in years
DHT
Listing
Gross proceeds, in M$
Issue price, in $
Exp. Liq.
Paudit
Dhot
Dcold
Post listing
OV, in M$
Size, in M$
mean
median
std
min
max
186
186
186
143.99
0.002
138.02
31.92
0.18
22.70
292.42
0.42
13.89 -40.99
264.33
0.00
1417.51
40.13
1148.02
186
186
186
34.15
17.53
0.60
9.75
9.63
77.83 -35.10
21.12
0.69
390.13
100.88
186
186
186
186
186
186
64.47
10.02
0.63
0.76
0.53
0.12
42.16
9.50
0.23
66.02
5.99
1.06
2.48
0.70
0.02
348.00
26.00
5.28
186
186
239.05
102.54
138.45
56.41
314.28
153.34
15.00
1.68
1752.03
953.95
218
218
218
42.48
-1.12
20.33
24.72
0.08
10.02
48.11
4.85
5.20 -24.36
26.54
0.00
303.20
9.48
97.95
218
218
218
27.01
10.93
0.55
16.65
7.88
33.30
10.38
2.84
1.90
230.43
54.66
76
76
218
218
218
218
22.09
4.72
0.48
0.70
0.35
0.20
14.90
3.00
0.32
23.58
5.40
0.49
2.06
0.40
0.02
143.75
22.50
2.17
218
218
107.90
35.40
66.43
21.81
120.86
43.06
5.16
3.91
647.49
280.38
% NE<0
%
sales=0
45.16
8.60
46.33
9.17
The sample excludes natural resources, oil and gas, financial and real estate companies.
Accounting variables are measured before the issue or graduation. Net earnings (Sales) means
net income before extraordinary items (Revenues). Age is the age of the firm, in years, at the IPO
or graduation, High Tech is a dummy variable set to 1 if the industry of the issuer is High Tech.
Exp. Liq. is the expected turnover estimated by the trade amount/market value of an IPO
(graduation)-size-sector matched IPO (graduation) 12 months after the matched IPO (graduation).
Paudit is a dummy variable set to 1 if the auditor before the IPO or graduation is prestigious, and 0
22
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
otherwise. Dhot (Dcold) has a value of 1 if the corresponding month is in the upper (lower) third of
the moving average distribution of IPOs. OV means Offer Value. For IPOs, OV is the offer price
multiplied by the number of shares outstanding immediately after the IPO; for graduation, OV is
the market capitalization just after graduation on the main market. Size is the post-IPO or postgraduation net assets.
Table 2 Descriptive statistics and test of the difference in means between the IPO and graduation
groups, for the full sample and the propensity score matched sample
Full sample
Propensity score matched sample
All Obs.
IPO non IPO
Diff
All Obs.
IPO non IPO
Diff.
Median Median Median Median
Median Median Median Median
p value
p value
Before
listing
Totasset, M$
27.54 31.92
24.72
0.03 **
27.00
27.76
25.02
0.42
SE, M$
14.08
9.75
16.65
0.00 ***
13.45
7.58
17.77
0.00 ***
Sales, M$
15.96 22.70
10.02
0.00 ***
15.85
20.03
9.75
0.00 ***
Norev, mean
0.09
0.09
0.09
0.84
0.09
0.09
0.08
0.69
EPS<0,
mean
0.46
0.45
0.46
0.81
0.48
0.48
0.48
1.00
ROA
0.01
0.01
0.00
0.80
0.00
0.00
0.00
0.96
Age, years
8.47
9.63
7.88
0.00 ***
8.22
8.36
8.11
0.63
DHT, mean
0.57
0.60
0.55
0.29
0.64
0.67
0.62
0.35
Dother,
mean
0.43
0.40
0.45
0.29
0.36
0.33
0.38
0.35
Listing
GP, M$
31.67 42.16
14.90
0.00 ***
30.10
40.02
15.00
0.00 ***
Exp. liq.
0.30
0.23
0.32
0.33
0.31
0.23
0.34
0.24
Paudit, mean
0.73
0.76
0.70
0.21
0.73
0.75
0.72
0.53
Dhot, mean
0.44
0.53
0.35
0.00 ***
0.46
0.56
0.36
0.00 ***
Dcold, mean
0.16
0.12
0.20
0.02 **
0.15
0.10
0.19
0.02 **
Post listing
OV, M$
90.59 138.45
66.43
0.00 ***
93.84 136.78
67.32
0.00 ***
Size, M$
32.03 56.41
21.81
0.00 ***
32.03
52.18
22.95
0.00 ***
Number of
obs.
404
186
218
324
162
162
***, **, * indicates significance at the 0.01, 0.05 and 0.1 levels respectively. GP means gross proceeds.
Accounting variables are measured before the issue or graduation. Totasset (SE, sales) is total assets
(shareholders’ equity, revenues). Norev is a dummy variable equal to 1 if the firm has no revenues,
and 0 otherwise. EPS<0 is a dummy variable equal to 1 if the firm reported a net loss before
extraordinary items. ROA is the net income before extraordinary items divided by total assets. Age is
the age of the firm, in years, at the IPO or graduation. DHT (Dother) is a dummy variable set to 1 if the
industry of the issuer is High Tech (Other) and 0 otherwise. Exp. liq. is the expected turnover estimated
by the trade amount/market value of an IPO (graduation)-size-sector matched IPO (graduation) 12
months after the matched IPO (graduation). Paudit is a dummy variable set to 1 if the auditor before
23
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
the IPO or graduation is prestigious, and 0 otherwise. Size is the post-IPO or post-graduation net
asset. Dhot (Dcold) has a value of 1 if the corresponding month is in the upper (lower) third of the
moving average distribution of IPOs. Diff median p value means p value of non-parametric KruskalWallis test of difference between the IPO and non-IPO groups. For dummies, we report the mean
rather than the median, and diff median p value means p value of a Pearson chi-square test of
difference between the IPO and non-IPO group. OV means Offer Value. For IPOs, OV is the offer price
multiplied by the number of shares outstanding immediately after the IPO; for graduation, OV is the
market capitalization just after graduation on the main market. Size is the post-IPO or post-graduation
net assets.
Table 3 Pearson Correlation Coefficients, propensity score matched sample (324 observations)
LOV
LINC
LOV
1.00000
LINC
-0.02604 1.00000
LBV
Lsales
DHT
DIPO
Paudit
Lasset
age
DHOT
DCOLD
0.6405
LBV
Lsales
DHT
DIPO
paudit
Lasset
Age
DHOT
0.09485
0.27188
0.0883
<.0001
0.20973
0.50108
0.0001
<.0001
0.07731
1.00000
0.09090
0.1650
-0.30374 0.10942
-0.33548
0.1024
<.0001
<.0001
0.30776
0.02649
0.0491
0.34543
0.23170
0.05150
<.0001
0.6347
<.0001
0.3554
0.04379
<.0001
-0.08151 0.05987
-0.02861
0.04143
0.03482
0.4321
0.1432
0.2826
0.6079
0.4574
0.5323
0.46758
0.16327
0.37031
0.65061
-0.23382
0.06873
-0.05480
<.0001
0.0032
<.0001
<.0001
<.0001
0.2173
0.3255
0.07585
0.25172
0.00614
0.30158
-0.04031
0.11363
0.06686
0.19881
0.1732
<.0001
0.9123
0.01858
<.0001
0.4697
0.0410
0.2301
0.0003
0.02054
-0.02601
0.19827
-0.01761
-0.08222 0.16980 1.00000
0.7390
-0.01662 0.01278
0.7126
0.6409
0.0003
0.7522
0.1397
0.14498
-0.14941
-0.13146
-0.08661
0.14206
0.7657
0.0090
0.0071
0.0179
0.1197
0.0105
0.17966
0.8187
-0.07954 0.03370
-0.09206
0.08417
0.08356
-0.06111
0.0012
0.1532
0.0981
0.1306
0.1334
0.2727
-0.11452 0.13679
0.0394
DCOLD 0.12181
0.0284
Exp.
liq.
1.00000
0.0137
0.5455
1.00000
1.00000
1.00000
1.00000
1.00000
0.0022
0.07182 -0.37773 1.0000
0.03587
0.1973 <.0001
0.08373 0.00257
-0.0446
0.5200
0.1326
0.4230
0.9632
LOV is the log transformation of the offer value (in M$). Accounting variables are measured before the issue or
graduation. Linc is the log transformation of net earnings before extraordinary items (in M$). LBV (Lasset) is the
log transformation of shareholders’ equity (total assets) in M$. Lsales is the log transformation of revenues (in
24
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
M$). DHT is a dummy variable set to 1 if the industry of the company is High Tech and 0 otherwise. DIPO is a
dummy variable set to 1 if the company issues an IPO and 0 otherwise. Paudit is a dummy variable set to 1 if the
financial statements of the company are audited by a prestigious auditor and 0 otherwise. Age is the age of the
firm, in years, at the IPO or graduation. Dhot (Dcold) has a value of 1 if the corresponding month is in the upper
(lower) third of the moving average distribution of IPOs. Exp. liq. is the expected turnover estimated by the trade
amount/market value of an IPO (graduation)-size-sector matched IPO (graduation) 12 months after the matched
IPO (graduation).
25
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Table 4 Ordinary least square regression of the offer value on the fundamentals
Sample
Whole
Matched
Matched
Matched
Matched
Sample
sample
sample
sample
sample
Propensity score
model
model 1
model 1
model 1
model 2
maximum caliper
distance
10%
3%
0.05%
5%
Intercept
3.16322
3.24243
3.19696
3.16236
2.98599
student's t
20.39 ***
16.84 ***
15.70 ***
11.00 ***
7.80 ***
LINC
-0.11344
0.11500
0.12930
0.13814
0.10826
student's t
-3.53 ***
-3.10 ***
-3.25 ***
-2.64 ***
-1.19
LBV
0.16957
0.14317
0.15958
0.17562
0.19666
student's t
6.08 ***
4.61 ***
4.57 ***
3.84 ***
2.20 **
Lsales
0.12904
0.15283
0.12942
0.15879
0.14945
student's t
4.02 ***
4.04 ***
3.13 ***
2.90 ***
1.20
DHT
0.23452
0.27239
0.27988
0.28237
0.45414
student's t
2.34 **
2.33 **
2.19 **
1.66 *
1.78 *
DIPO
0.75381
0.69283
0.68410
0.52190
0.78436
student's t
7.34 ***
6.00 ***
5.47 ***
3.13 ***
3.25 ***
Paudit
0.19509
0.07905
0.14157
0.10667
0.13209
student's t
1.91 *
0.67
1.12
0.64
0.56
Number
404
324
264
134
68
Adjusted R2
0.2356 ***
0.1835 ***
0.1930 ***
0.1691 ***
0.2400 ***
Student’s t are significant for an accepted error risk of 10 percent *, 5 percent **, and 1 percent
***. The dependent variable is the log transformation of the offer value (in M$). Accounting
variables are measured before the issue or graduation. Linc is the log transformation of net
earnings before extraordinary items (in M$). LBV is the log transformation of shareholders’ equity
(in M$). Lsales is the log transformation of sales (in M$). DHT is a dummy variable set to 1 if the
industry of the company is High Tech and 0 otherwise. DIPO is a dummy variable set to 1 if the
company issues an IPO and 0 otherwise. Paudit is a dummy variable set to 1 if the financial
statements of the company are audited by a prestigious auditor and 0 otherwise. Propensity
scores are calculated using the following logistic models. Model1: DIPO=F(Lasset, ROA, Age),
where Lasset is the log transformation of total assets. Model2: DIPO=F(Lasset, ROA, Age,
Lsales), where Lasset (Lsales) is the log transformation of total assets (revenues).
26
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
Table 5 Ordinary least square regression of the offer value on the fundamentals – Robustness
check
Matched
Matched
Matched
Matched
Parameter
Sample
sample
sample
sample
Intercept
3.40656
3.11725
3.15026
3.04009
student's t
18.16 ***
16.11 ***
15.51 ***
14.84 ***
LINC
-0.11133
-0.08691
-0.10121
student's t
-3.04 ***
-2.39 **
-2.79 ***
LBV
0.11964
0.14111
0.14770
0.16731
student's t
3.92 ***
4.61 ***
4.92 ***
5.48 ***
Lsales
0.10244
0.16179
0.13417
0.16687
student's t
2.96 ***
4.33 ***
3.59 ***
4.30 ***
DHT
0.32591
0.25738
0.28161
0.29723
student's t
2.78 ***
2.23 **
2.47 **
2.63 ***
DIPO
0.68822
0.65451
0.76214
0.66615
student's t
5.88 ***
5.72 ***
6.61 ***
5.58 ***
Paudit
0.10129
0.10612
0.12813
0.09526
student's t
0.85
0.92
1.12
0.84
Expected liquidity
0.20838
0.20928
0.16596
student's t
3.27 ***
3.35 ***
2.60 ***
Dhot
-0.23900
-0.24158
student's t
-2.15 **
-2.20 **
Dcold
0.37324
0.34474
student's t
2.35 **
2.19 **
GPTA
0.04463
student's t
2.76 ***
Number
324
324
324
324
Adjusted R2
0.1614 ***
0.2077 ***
0.2407 ***
0.2565 ***
Student’s t are significant for an accepted error risk of 10 percent *, 5 percent **, and 1
percent ***. The models are estimated using a sample of 404 observations (whole
sample) and 324 observations (matched sample) of IPOs and graduations. The
dependent variable is the log transformation of the offer value (in M$). Accounting
variables are measured before the issue or graduation. Linc is the log transformation
of net earnings before extraordinary items (in M$). LBV is the log transformation of
shareholders’ equity (in M$). Lsales is the log transformation of sales (in M$). DHT is a
dummy variable set to 1 if the industry of the company is High Tech and 0 otherwise.
DIPO is a dummy variable set to 1 if the company issues an IPO and 0 otherwise.
Paudit is a dummy variable set to 1 if the financial statements of the company are
audited by a prestigious auditor and 0 otherwise. Dhot (Dcold) has a value of one if the
corresponding month is in the upper (lower) third of the moving average distribution of
IPOs. Expected liquidity is the expected turnover estimated by the trade
amount/market value of an ipo(graduation)-size-sector matched IPO (graduation) 12
months after the matched IPO (graduation). GPTA means gross proceeds divided by
total assets. Propensity scores are calculated using the following logistic model:
27
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-73-3
DIPO= F (Lasset, ROA, age), where Lasset is the log transformation of total assets.
The maximum caliper distance is set to 10%.
28