After the Dust Settles with Regulatory Mandates:Three Essays on IPO Performance Open Access
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In the aftermath of recent market bubbles and subsequent corporate scandals, the Securities and Exchange Commission (SEC) has enacted regulations to promote frequent disclosure; broaden dissemination and accessibility of information; expand the availability of electronic IPO "road shows" to unrestricted audiences; and require CEO and CFO certification of financial reports. These actions are intended to restore investor confidence and level the playing field among heterogeneous investors.This study comprises three essays which explore the impact of recent regulatory actions on IPO performance. For essay 1, the premise is asymmetric information contributes to IPO underpricing. Therefore, greater information disclosure and reporting transparency will reduce information asymmetries that contribute to IPO underpricing. When investors do not have to compete with more informed investors less IPO underpricing is observed (Michaely and Shaw, 1994). Essay 1 explores whether during periods of greater information disclosure are investors better informed as determined by less IPO underpricing and reduced pricing uncertainty.Similar to initial underpricing, long-run underperformance of IPOs is equally puzzling. An IPO has a high degree of uncertainty about its fundamentals (Beatty and Ritter, 1986). For the individual investor, an IPO is a risky investment; it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. It is the lack of broadly disseminated information and insight into these private firms that contribute to uncertainty about aftermarket performance. Essay 2 explores a premise that IPO long run performance improves with greater information disclosure and transparency. Likewise, many investment decisions of firms are hampered with uncertainty, especially decisions involving equity issuance and merger and acquisition (M&A;) activity. For initial public offerings (IPOs), the uncertainty is about valuation of shares; for M&As;, the uncertainty is about synergistic gains. The underlying cause of this uncertainty is asymmetric information problems among insiders and potential investors. Lyandres (2008) proposes a merger-driven theory of IPOs in which a 2-stage process is used to eliminate valuation uncertainty. The first-stage IPO reveals information; so, the subsequent merger yields better benefits. Essay 3 provides an empirical study of IPO firms involved in acquisition as targets before and after the implementation of recent SEC regulatory mandates.