The Waiting Period Of Initial Public Offerings
Aston Business School
Amedeo De Cesari
University of Manchester – Manchester Business School – Finance & Accounting Group
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Shantaram P. Hegde
University of Connecticut
March 22, 2016
The length of time it takes an IPO firm to go public (called “waiting period”) reflects multiple layers of scrutiny from underwriters, auditors, venture capitalists, institutional investors, and regulators. Accordingly, we show that the waiting period is a good barometer of ex ante uncertainty about future cash flows and that it has predictive power after the firm goes public. We find that firms marked by short waiting periods experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket. We also report that lower capitalization firms are taking longer to go public after Sarbanes-Oxley, thus providing justification for the 2012 JOBS Act.
The Waiting Period Of Initial Public Offerings – Introduction
Why do some firms take 226 days to clear the registration process and go public whereas others manage to do so in just 36 days?1 In this paper, we examine the determinants of the waiting period, defined as the number of days spent in registration from the date of the initial prospectus to the final offering of new shares to public investors. Our basic intuition is that IPO firms that are able to pass multiple rounds of scrutiny by large institutional investors, regulators, underwriters, auditors, listing exchanges, and venture capitalists within a short waiting period should have less uncertainty and information asymmetry about future cash flows, and be associated with better performance. Accordingly, we hypothesize that going-public firms marked by short registration periods would experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket.
A short waiting period is important for a new firm since its business model, product, and services become very visible after the initial filing of the prospectus. Significant delays in going public would increase the likelihood that competitors would siphon away the capital that the firm would like to access, which could result in a withdrawal/postponement of the IPO – undesirable since only 10% of withdrawn issuers successfully go public a second time (Dunbar and Foerster 2008). Taking a firm public quickly is in the underwriter’s interest too as it signals that the underwriter is able to convince institutional investors to come on board fairly quickly, thus protecting and enhancing underwriter reputation. It also frees up underwriter resources more quickly to focus on other equity/debt offerings. Further, market conditions can worsen overnight as evidenced by the crash of the internet bubble in 2000. Our data shows that of the 6588 firms to file for an IPO in the United States (U.S.) during 1986-2011, 4947 firms ended up going public (a two-thirds success rate). However, of the 28 firms to file in August 2000 (the final month of the internet bubble, according to Lowry, Officer, and Schwert (2010)), only 14 firms proceeded to go public (a success rate of half).
Based on a large sample of 4763 completed initial public offerings (IPOs) in the U.S. over 1986-2011, we find that ex ante uncertainty, legislation/regulatory issues, competition, efficiency, and industry/market conditions influence the waiting period. Specifically, higher underwriter/auditor reputation and greater institutional demand as reflected in the price update reduce ex ante uncertainty which results in lower waiting periods. However, greater ex ante uncertainty as reflected in large price updates (those exceeding 20% in either direction), the number of amendments, and volatility of industry returns results in longer waiting periods. Further, the dispassionate evaluation of regulatory agencies serves to mitigate conflicts of interest, strengthen investor protection, and improve disclosure practices of going-public firms. In this connection, we find that the passage of Sarbanes-Oxley Act (SOX) Act in 2002 in the wake of a sharp increase in financial scandals has significantly increased the length of the waiting period, especially for smaller firms, which somewhat justifies the passing of the Jumpstart Our Business Startups (JOBS) Act in April 2012, designed to make the registration process easier for IPO firms below certain market capitalization and sales thresholds.
Our results also show that hiring a large number of co-managers results in fast-moving IPOs, but when underwriters are busy taking several firms public at the same time, the waiting period for a given firm increases suggesting that inefficiencies may creep in. A firm tends to go public more quickly if it is a pioneer, a technology firm, and during favorable industry/market conditions. Our analysis extends Bouis (2009) who finds that the instantaneous probability of going public on NASDAQ over the next week (the IPO hazard rate) increases with the level of the aggregate market valuation, and decreases with the time-varying weekly market index return and the volatility of the weekly market index returns.
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