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5 years ago

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

[Figure 2] INSTITUTIONAL

[Figure 2] INSTITUTIONAL COMPLEXITY HYPOTHESES Income investors view companies as streams of cash and accordingly focus on cash considerations when making investments. Just as they view companies as streams of cash, they view IPO transactions as simply streams of cash. Given such a perception, their strategic imperative in dealing with underwriters is to maximize the cash received from the IPO. Therefore, we would expect firms controlled by Income investors to more successfully and persistently refute the IPO discount relative to other logics. H1 Issuers controlled by private equity firms espousing a Income institutional logic experience lower pricing above the range relative to other issuers. Many private equity and venture capital firms, however, view companies as collaboration to generate increasing sales and accordingly focus on business growth rather than short-term income considerations. As a senior partner at a leading growth capital private equity firm remarked on the difference between the two logics: “[for LBO investors] there is much more of a focus on optimizing the profitability and cashflow of companies . . . there is a bias of making decisions that optimize nearer-term profitability over longer-term growth . . . we focus on the top-line growth and value over time of working with the management team and others, rather than fixating on near-term cash and profit.” Again, this preference for long-term growth over near-term income is not related to investment holding period, but instead centered on the belief that long-term growth prospects improve near-term DPV valuations more than near-term income. Just as they view their companies as growth vehicles, Growth investors view IPO transactions as 20

vehicles to generate long-term share-price growth that will also be reflected in increased near- term prices. Consequently, Growth investors are more willing to work with underwriters, acquiescing to the IPO discount presumably in the hopes of improving the prospects for near- term share price appreciation by appeasing initial public market investors in the stock with strong first-day gains. H2 Issuers controlled by venture capital and private equity firms espousing a Growth institutional logic experience higher pricing above the range relative to other issuers. I will elaborate in the “Discussion” section following the presentation of the findings how econometric studies of the relation between first-day and longer-term returns, differences in holding and lock-up periods, industry sector specialization, and other strategic considerations do not account for these predictions. DATA AND METHODS I analyze Thomson Reuters’s Securities Data Company (SDC) database on the 813 operating company IPOs over the past ten years (January 1, 2001 to April 30, 2010) to examine empirical support for the institutional complexity hypotheses on IPO pricing. For the first-stage return outcome, I conduct standard logistic regression of pricing above the range on institutional logic and controls for alternative hypotheses. We can parameterize first-stage returns as a continuous variable by calculating the percentage increase from the midpoint of the price range. I conduct standard ordinary least squares (OLS) and two-limit Tobit regressions of these “offer-price returns” to corroborate the logistic analysis of pricing above the range. I then conduct OLS regression of first-day returns on pricing above the range, institutional logic, and controls for 21

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