INITIAL PUBLIC EQUITY OFFERINGS

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INITIAL PUBLIC EQUITY OFFERINGS
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OFFERINGS CONSIST OF

• PRIMARY OFFERING - new funds
• SECONDARY OFFERING -selling of ownership by
• Venture capitalists
• Company founders

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IPOS -WHERE IN FINANCING CYCLE?

• PAGE 171 - WHERE IN THE SEQUENCING OF FINANCING
  DO WE SEE IPOS?
• First, raise capital from private sources as
  evidenced by following sequence
• Owners contribute their own funds
• Friends and relatives
• Angels
• Venture capital

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ADVANTAGES OF IPO

• New capital beyond private sources
• Sets stage for future financing
• Cashes out venture capitalists/owners

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ADVANTAGES CONT.

• Improves employee commitment
• Alters image of the company
• Now public information to acquirers
• Improves perception of success among the various
  stakeholders

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DISADVANTAGES OF IPO

• Dilution of gains potential of existing
  stockholders
• Loss of information control
• Costly reporting requirements

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Disadv.s continued

• Loss of managerial control
• Expensive form of capital
• Dilution of existing ownership control
• Underwriting costs

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UNDERPRICING

• EVIDENCE OF UNDERPRICING
• LARGE INITIAL RETURNS
• RETURNS VARY BY COUNTRY (P. 159)
• MY RESEARCH - BANK CERTIFICATION EFFECT ON
  RESOLVING UNDEPRICING

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WHY UNDERPRICING?

• WINNERS CURSE HYPOTHESIS
• MARKET FEEDBACK HYPOTHESIS
• BANDWAGON HYPOTHESIS

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Why? continued

• INVESTMENT BANKER MONOPSONY POWER HYPOTHESIS
• LAWSUIT AVOIDANCE HYPOTHEIS
• SIGNALLING HYPOTHESIS
• OWNERSHIP DISPERSION HYPOTHESIS

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LONG RUN PERFORMANCE

• EVIDENCE - POOR STOCK PRICE PERFORMANCE (Figure
  4, p. 168)
• SMALL FIRMS GENERALLY HAVE RELATIVELY LOW RETURNS
• UNDERPERFORMING FIRMS WENT PUBLIC IN HIGH VOLUME
  YEARS AND WERE YOUNGER

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THEORIES FOR LONG TERM POOR PERFORMANCE

• DIVERGENCE OF OPINION
• IMPRESARIO HYPOTHESIS
• WINDOW OF OPPORTUNITY

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THEORIES cont.

• GOOD TIMING OF ISSUE BY FIRM MANAGERS
• MANAGERS LEGALLY MANIPULATE EARNINGS TO MAKE
  COMPANY ATTRACTIVE

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HOW CAN MANAGERS DISTINGUISH

• LOCK-UP PERIOD - MANAGERS AGREE NOT TO SELL THEIR
  HOLDINGS FOR A PERIOD OF TIME
• COMPENSATION CONTRACTS AND GOVERNANCE

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FIRM DIFFERENTIATION cont.

• REDUCE UNCERTAINTY ABOUT IPO FIRM
• REPUTATION OF UNDERWRITER
• BANK CERTIFICATION
• RESEARCH PAPERS

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Pricing of Initial Public Offers
Multiple Banks
Holdup Problem1
Agency Costs2
Cash Flow Constraint3
Figure 1. Schematic of Potential Effects of
Multiple Bank Relationships on the Pricing of
Initial Public Offers (IPOs). The figure
illustrates the possible direct and indirect
effects of multiple banking relationships and
their impact on the pricing of IPOs. The top line
indicates a direct effect. This may be enhanced
liquidity from multiple bank relationships. The
first indirect effect is the holdup problem that
may be mitigated by multiple banking
relationships (Houston and James, 1996) . The
second indirect effect is a reduction in agency
costs. Ang, Cole and Lin (2000) find limited
evidence that agency costs, in terms of operating
expenses, diminish with the number of bank
relationships. The last indirect effect is the
cash flow constraint. Houston and James (2001)
show that the presence of multiple bank
relationships reduces the sensitivity of
investment to the firms cash flows.
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Takeover Risk/Institutional Investors X1
Corporate Governance X2
Managerial Entrenchment X3
Financial Leverage X4
Firm Performance
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UNDERWRITING PROCEDURES

• FIRM COMMITMENT VS. BEST EFFORTS
• BOOKBUILDING
• OVERALLOTMENT OPTIONS
• STABILIZATION