Three essays on initial public offerings
This dissertation consists of three essays. In the first essay, we attempt to answer the following three questions about the new capital raised in IPOs: Why do some IPO companies raise a lot of new capital while some others don’t? Where do the IPO companies use the new capital they raise in IPOs? How does the use of new capital affect the operating performance of IPO companies? We find that companies with higher R&D spending, higher capital expenditure, lower working capital and more long term debt tend to raise more capital in IPOs. These firms also spend more on R&D and capital expenditure. The more new capital firms raise in IPOs, the lower sales growth rate they have. However, firms spending a higher proportion of new capital on R&D seem to have higher sales growth rate. In the second essay, we examine the relation between IPO valuation and offering size. Using a sample of 3,885 IPOs from the US, we find that IPO firms with larger offering size have lower valuation. Both primary share offering and secondary share offering are negatively related to IPO firm valuation. The valuation measures are positively related to the levels of capital expenditure and R&D before IPO, lending support to explanations based on Jensen (1986)’s free cash flow hypothesis. We also find evidence consistent with negative signals from larger secondary share offering size. Results of tests about long run IPO stock performance do not support the hypothesis that IPO stock demand curve is downward sloping. In the third essay, we examine how analysts react to IPO offering size. We find that analysts predict lower long-term growth rates for IPOs with larger offering size. The sizes of both primary and secondary offering are negatively related to long-term growth rate forecasts. We find evidence that the free cash flow effect may be related to the negative relation between primary offering size and growth forecast.
IPO, operating performance, offering size, analyst forecast, valuations, new capital