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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 ...

alternative hypotheses.

alternative hypotheses. Additionally, I control for the fixed effects of offering year while also controlling for industry sector variation in IPO return outcomes by clustering issuers within four- digit Standard Industrial Classification (SIC) codes utilizing restricted maximum likelihood estimation (REML). The sample under study is the universe of IPOs over the past ten years with offer prices greater than $5.00 and offering sizes greater than US$30 million, excluding American Depositary Receipts of foreign issuers (ADRs), unit offers, closed-end funds, Real Estate Investment Trusts (REITs), non-operating partnerships, banks, savings and loans (S&Ls), and acquisition companies. Most economists study a similar sample of IPOs. Industry veterans in investment banking and private equity believe that offering sizes below US$30 million represent a distinctively separate population exhibiting different dynamics from most operating company IPOs. Response Variables Pricing above the range is a dichotomous variable coded one for offer prices exceeding the high-end of the price range and zero otherwise. The price range is almost universally quoted as $2 per share around a midpoint share price. The median midpoint in the sample is $15 per share with a corresponding high-end of $16 and a low-end of $14. Offer-price returns are defined as the percentage point increase in share price from the midpoint of the price range to the final offer price to institutional investors. First-day returns are defined as the percentage point increase in share price from the offer to the first-day close. Explanatory Variables 22

The explanatory variables are institutional logics: Income and Growth. Based on information from prospectuses obtained from SEC Edgar online on shareholding, board membership, and senior management backgrounds, I code issuer institutional logic for every IPO in the sample. Issuers controlled by founders or senior managers (control defined by the shareholding group owning the largest block of voting shares) are the reference group. Issuers controlled by venture capital and private equity firms are coded as either Growth or Income. Given institutional pluralism, we must look not only at private equity control when operationalizing the Income logic, but also the tangible actions flowing from such an institutional logic: a history of LBOs, leveraged recapitalizations, or high debt-to-capitalization levels immediately prior to going public. High debt-to-capitalization ratios are particularly relevant since LBOs and leveraged recapitalizations necessarily increase debt levels. Furthermore, Income investors often force their companies to undertake new leveraged recapitalizations prior to IPOs if the company has already paid down its previous debt. By borrowing money against the IPO, these private equity firms can pay out the proceeds to themselves pre-IPO without impacting the share price performance as debt ratios do not affect IPO pricing whereas dividends post-IPO do depress share prices (please refer to “Findings” section for analysis of the effect of debt on IPO pricing). 17 Investors who view companies as streams of cash prefer extracting the IPO proceeds through the circuitous method of borrowing against the offering prior to the IPO, while those who view companies as growth vehicles would prefer investing the IPO proceeds to grow the issuer’s business. 18 All venture capital controlled issuers are coded as Growth logic. I code private equity controlled issuers as Income logic if they have debt-to-capitalization ratios greater than 59 percent. All other private equity controlled issuers are coded as Growth logic. I select 59 percent as the threshold based on the minimum debt-to-capitalization level carried by issuers controlled 23

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