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1、Please cite this article as: Michala, D., Are private equity backed initial public offerings any different? Timing, information asymmetry and post-IPO survival, J. Corp. Finance (2016), http:/dx.doi.org/10.1016/j.jcorpn.2016.10.005 Journal of Corporate Finance xxx (2016) xxxxxx Are private equity ba
2、cked initial public offerings any different? Timing, information asymmetry and post-IPO survival Dimitra Michala Luxembourg School of Finance, University of Luxembourg, 2b rue Albert Borschette, L-1246, Luxembourg a r t i c l e i n f o a b s t r a c t Article history: Received 13 December 2015 Recei
3、ved in revised form 4 October 2016 Accepted 8 October 2016 Available online xxxx JEL classication: G23 G24 G32 G33 Keywords: Private equity Buyout Venture capital IPO The IPO market provides an interesting setting for examining the behavior of private equity (PE) sponsors due to the higher informati
4、on asymmetries it involves compared to other exit strategies. Contrary to the hypothesis that PE sponsors are more professional than other insiders in using the IPO market to expropriate investors, I do not nd signicant differences between PE-backed IPOs and comparable IPOs of stand-alone companies.
5、 PE sponsors do not target their IPOs in “hot” periods any more than would managers of stand-alone companies, nor are they more prone to rush their companies into premature IPOs. They also do not inate valuations and are not more like- ly to seek to sell rms with poor prospects (“unload lemons”) ont
6、o the market. Studying the post- IPO period, I nd that IPOs that take place in hot periods are signicantly more likely to delist due to default, but this result is not any stronger for PE-backed IPOs. Throughout paper, I make a distinction between buyout-backed and venture-backed IPOs, uncovering so
7、me interesting differences but also similarities of the two. The paper provides evidence to contradict media criticism of PE sponsors. It can also have important policy implications regarding the PE regulatory framework. Finally, this work comes as a timely contribution given the increasing importan
8、ce of PE in the IPO market. 2016 Elsevier B.V. All rights reserved. “I am not against Private Equity in general, but when it comes to IPOs they are in the business to get the highest price for their investors. This means there is a tendency to atter the books to make the investment look a lot better
9、 than it is.” (James Laing, Aberdeen Asset Management, in the Financial Times, 18 February 2014). In this study with the term Private Equity (PE) I refer to both buyouts (BOs) and venture capital (VC) transactions, which are the largest and most important subclasses of PE. The main differences betwe
10、en the two are the companies they invest in and the methods they use to create value. VC targets early stage companies with high growth potential (often start-ups based on new technology or other innovation) and uses minority equity investment. BOs target larger and more mature companies (typically
11、with above average prot margins, tangible assets and stable cash ows) and often use leverage to nance acquisitions (Metrick and Yasuda, 2011). Usually studies focus on either BOs or VC, but here I examine both, differentiating between the two. I focus on the period during and after exit of PE sponso
12、rs and examine only exits via IPOs. There are three ways that a PE sponsor can successfully exit a portfolio company: (i) a sale to another nancial buyer (e.g. another PE fund this is a secondary sale), (ii) a sale to a strategic buyer (this is a trade sale/acquisition), and (iii) an IPO.1 I E-mail
13、address: . 1 Write-offs as an exit outcome are not discussed since they are not considered successful exits for the PE sponsor and are therefore beyond the scope of this study. http:/dx.doi.org/10.1016/j.jcorpn.2016.10.005 0929-1199/ 2016 Elsevier B.V. All rights reserved. CORFIN-01102; No of Pages
14、17 Contents lists available at ScienceDirect Journal of Corporate Finance jour nal homepage: www.el sevier. com/ locate/ jcorpfin Please cite this article as: Michala, D., Are private equity backed initial public offerings any different? Timing, information asymmetry and post-IPO survival, J. Corp.
15、Finance (2016), http:/dx.doi.org/10.1016/j.jcorpn.2016.10.005 2 D. Michala / Journal of Corporate Finance xxx (2016) xxxxxx study this latter IPO exit because the literature argues that it can potentially involve more information asymmetry than other exit strategies. Bayar and Chemmanur (2011) build
16、 a theoretical model that predicts that, in high IPO valuation periods, companies that are harder to value by public investors are more likely to go public than be acquired.2 In another theoretical paper, Chemmanur and Fulghieri (1999) show that public investors produce less information than nancial
17、 buyers due to the free- rider problem.3 These two studies suggest that strategic and nancial buyers respectively (i.e. both acquirers and PE funds) can value rms more accurately than public investors. This is because nancial buyers perform sophisticated analyses and strategic buyers thoroughly inve
18、stigate potential synergies before investing. The role of PE sponsors, as professional insiders, in such a setting is interesting. On the one hand, they may be more able to “exploit” the IPO market than insiders of stand-alone companies. On the other, every effort to “fool” public investors may be d
19、et- rimental for their reputation and, as a consequence, their liquidity. It is possible also that BO and VC sponsors behave differently from each other. Academic literature as well as practitioners suggest that they may have different motives when taking portfolio companies public. BO sponsors pref
20、er to exit quickly as these deals are very large and involve high potential losses. Thus, they may rush companies into premature IPOs. In accordance with this argument, Cao (2011) nds that BO deals that are exited quick- ly default more often post-IPO. VC sponsors, instead, undertake more risk than
21、BO sponsors as only a small percentage of their companies make it to an IPO (the “stars”). It is a real opportunity for VC sponsors to establish their reputation from these trans- actions and, as a consequence, they are unlikely to “fool” the IPO market. In accordance with this intuition, Neus and W
22、alz (2005) show that VC sponsors have incentives to report the true quality of their portfolio companies during the IPO process. In my study, I focus on IPO market timing, information asymmetry and post-IPO survival and ask whether PE sponsors time their IPOs better, whether they inate valuations mo
23、re and whether they seek to sell rms with poor prospects (“unload lemons”) compared to insiders of similar stand-alone companies. In my analysis I differentiate between BO and VC-backed IPOs in order to uncover their potentially differences and/or similarities. I formulate my research questions base
24、d on predictions from the ndings of the literature strands on IPO market timing, information asymmetry, window dressing, default risk in PE transactions and post- IPO performance. With regard to IPO market timing, Ritter and Welch (2002) argue that market conditions are the most important factor in
25、a companys decision to go public. Schultz (2003) characterizes this phenomenon as “pseudo” market timing because companies do not predict market peaks but simply follow their peers and go public at high valuation periods. Similarly, Alti (2005) shows the- oretically that high offer price realization
26、s have spillover effects that attract subsequent IPOs. Pastor and Veronezi (2005) develop similar predictions and conrm them empirically. There are several papers that study IPO market timing for PE-backed IPOs in particular. For LBO sponsors, Cao (2011) studies the duration of LBO backing pre-IPO a
27、nd documents a negative relationship with high valuation periods. For VC sponsors, Lerner (1994) shows that these sponsors are particularly procient at taking their portfolio companies public near market peaks. Similar are the ndings of Ball et al. (2011) who argue in support of “pseudo” market timi
28、ng. These studies suggest that PE sponsors time their IPOs for when overall market conditions are favorable but do not examine whether these sponsors are more likely than insiders of stand-alone companies to do so (since comparisons with other rms are not included). In my analysis, I address this sp
29、ecic question in a regression framework and nd that neither BO nor VC- backed IPOs are more common than stand-alone IPOs in hot periods. Moreover, although I nd that, on average, companies enter at a younger age when the IPO market is hot, both BO and VC-backed IPOs that take place in hot market per
30、iods are older at the time of the IPO compared to other rms. The above suggest that PE sponsors do not target their IPOs in hot market periods and do not rush their companies into IPOs when market conditions are favorable more than managers of stand-alone companies do. If anything, they seem to rush
31、 them less. With reference to the literature on information asymmetry, existing studies use short-run underpricing (rst-day returns) as a measure of information asymmetry and nd higher underpricing for VC-backed IPOs and lower for BO-backed IPOs compared to other IPOs.4 Gompers (1996) argues that yo
32、unger VC sponsors need to establish reputation in order to successfully raise capital for new funds (grandstanding hypothesis) and they use underpricing as a device to achieve this. For example, they might pur- posely leave money on the table to signal quality. Lee and Wahal (2004) report similar re
33、sults with Gompers (1996) and nd greater underpricing for VC-backed IPOs compared to other matched IPOs. On the contrary, Hogan et al. (2001) nd that underpricing of RLBOs is lower from other IPOs. In my analysis, I test the information asymmetry hypothesis in a matching frame- work and, similarly t
34、o past studies, I use underpricing (rst-day returns) to measure information asymmetry. Consistent with the literature, I nd more underpricing for VC-backed IPOs than matched stand-alone IPOs. I do not nd signicant differences in underpricing between BO-backed and matched stand-alone IPOs. My ndings
35、are in line with the intuition that VC-backed IPOs are harder to value, since these companies are young and public investors may at rst be uncertain on their potential, while BO-backed IPOs have more predictable cash ows due to their long history and market presence. Therefore, more information asym
36、metry leads to lower price realizations for VC-backed IPOs since public investors value these rms more conservatively at rst but later the market corrects for such information gaps, leading to higher rst-day returns of these companies. This does not hold for BO-backed IPOs, which have similar rst-da
37、y returns with their peers. 2 In a following paper, Bayar and Chemmanur (2012) empirically conrm these ndings. 3 Whereas the information production cost is incurred only by a small group of public investors, the benets are shared among all, reducing the incentive of any single public investor to eng
38、age in information production. 4 An exception is Megginson and Weiss (1991) who examine an early small sample of VC-backed IPOs and nd that they are less underpriced than matched IPOs (certication role of VC). Barry et al. (1990) nd lower underpricing for VC-backed IPOs with better monitors (monitor
39、ing role of VC). Please cite this article as: Michala, D., Are private equity backed initial public offerings any different? Timing, information asymmetry and post-IPO survival, J. Corp. Finance (2016), http:/dx.doi.org/10.1016/j.jcorpn.2016.10.005 D. Michala / Journal of Corporate Finance xxx (2016
40、) xxxxxx 3 A behavior which may be linked to information asymmetry is the so-called window dressing, i.e. the tendency to atter the IPO prospectus nancial statements through the use of accrual management in order to make the investment look better than it is. In such a case, information asymmetry is
41、 expressed through higher instead of lower initial valuations. The argument here is that, assuming that public investors are not aware of the presence and/or extent of window dressing, they may end up paying more for a window-dressed company. In line with this, Teoh et al. (1998) nd that reported ea
42、rnings in the IPO prospectus have a signicant impact on public investors enthusiasm towards the offer. Literature suggests that VC and BO sponsors may behave dif- ferently towards window dressing; On the one hand, Teoh et al. (1998) do not nd VC sponsors to be particularly prone to win- dow dressing
43、 and Morseld and Tan (2006) nd that VC sponsors can actually mitigate this practice. On the other hand, Chou et al. (2006) nd that BO-backed IPOs are more window-dressed than others. In my analysis, I test whether PE sponsors use window dressing more extensively than managers of stand-alone companie
44、s in order to inate valuations. To do so, I apply a matching framework and compare the IPO proceeds from the sale of primary and secondary shares of BO and VC-backed IPOs with these of matched stand-alone IPOs, controlling for the oat percentage. In the case of VC sponsors, my previous ndings on hig
45、her underpricing and past literature (Gompers, 1996; Lee and Wahal, 2004; Neus and Walz, 2005) suggest that they do not issue overvalued equity. However, the behavior of BO sponsors is less clear. As expected, I do not observe signicant differences in IPO proceeds between VC-backed and matched stand
46、-alone IPOs. Interestingly, I nd that BO-backed IPOs have lower IPO pro- ceeds compared to matched stand-alone IPOs. These results suggest that BO sponsors not only do not inate valuations, but on the contrary, public investors price BO-backed IPOs more conservatively maybe because they suspect that
47、 BO-backed companies are more window-dressed (or simply because they perceive them as riskier due to their high leverage). Thus my results contra- dict the criticism that BO sponsors have the tendency to inate valuations. Moving to default risk in PE transactions, most studies track companies only d
48、uring the period that they are PE-backed, thus they examine default as an exit outcome.5 There are only a few studies that examine default risk post-exit. On the BO side, Hotchkiss et al. (2014) nd that BO-exited companies have lower default rates than others. This suggests that BO sponsors leave th
49、eir portfolio companies in good nancial condition. However, they do not study IPO exits in particular. Harford and Kolasinski (2014) study acquisitions and nd that having been owned previously by a BO fund has no impact on whether the company will eventually undergo distressed restructuring. On the VC side, Jain and Kini (2000) study a small sample of 877 IPOs that took place in the period 19771990 and nd that VC backing increases the survival likeliho