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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 ...

interest: first-stage

interest: first-stage returns (pricing above the range, or its parameterization as offer-price returns). Table 8 summarizes the key findings for the alternative hypotheses tested in the final models for first-stage return outcomes (models 6 and 7 in Tables 3 and 4, and all models from Tables 6 and 7). As discussed earlier, pricing above the range isolates issuer-side factors, with return outcomes purged of neoclassical and non-Bayesian investor explanatory factors. Thus, it is not surprising that sentiment indicators do not influence first-stage return outcomes as predicted. Secondary selling weakly supports non-SEU issuer hypotheses based on prospect theory. Power, agency, litigation-risk, and information asymmetry hypotheses all find no support in the data. Generic rational risk-aversion hypotheses for market conditions and issuer fundamentals are supported. The findings strongly support the institutional logics hypotheses. [Table 8] DISCUSSION Calculative rationality cannot explain these findings. Shareholders always gain from lower first-day returns. Whether issuers borrow against the offering to pay their shareholders or invest the offering to grow their companies does not change the strategic motivation to avoid pricing their shares lower than necessary to first-stage investors. Obviously, Growth investors have as much to gain from lower first and second-stage returns as do Income investors, as the extra proceeds could be invested in growing the issuer’s business, generating stronger future organic growth and (near-term) share price performance. We could question whether strategic constraints account for the pricing differences between Income and Growth logic investors. For instance, if Growth investors hold onto investments 32

longer post-IPO than Income investors, they may care less about short-term returns. However, the opposite is actually true, with venture capital firms selling shares post-IPO faster than any other institutional shareholding group (Field and Hanka 2001). Furthermore, Growth investors actually do not gain from higher first-day returns with regard to longer-term share price growth. Econometric studies show that first-day returns are negatively correlated with longer-term returns (Ritter 1991; Krigman, Shaw and Womack 1999): acquiescing to the IPO discount is detrimental both in the immediate and longer-term for issuers and their backers. Also, lock-up expiration provisions cannot account for differences between the two sets of investors. The regulations encouraging the industry practice of lock-up provisions for large pre-IPO institutional investors apply equally to both Income and Growth logic investors, with lock-up provisions becoming increasingly standardized over time (Bradley et al. 2001; Brav and Gompers 2003; Cao, Field and Hanka 2004). 24 Hence, differences in selling shortly after the IPO cannot explain the divergence in outcomes. Power and agency theories tested in the models share a close affinity with strategic explanations for variation in IPO pricing, but also fail to explain the dramatic differences between Income and Growth logic investors, whether ties to underwriters or negotiating power due to the size of funds under management. We have also controlled for offering year fixed effects, so differences in the timing of IPOs by year of offering and all annualized proxies cannot account for the divergence. Finally, we have controlled for the issuer’s industry classification, whether fine-grained at the four-digit SIC level or aggregated at the Dow Jones industry sector level, ruling out strategic differences due to choice of industry specialization by private equity and venture capital firms. If case-to-case strategic constraints drive behavior rather than the perceived constraints embodied in institutional logics, venture capital firms should behave differently when they 33

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