Non-financial US companies

Researches in IPO are carried out with different adopted strategies and the sequence of how the study is done. But, sometimes there exist similarities in some aspect. Looking at the research work of Delbor and Sullivan (2005), titled ‘The Initial Public Offerings of Restaurant Firms: The Case of Industry-Specific Micromarket Capitalization Offerings’ in this research work, the ex post facto experimental (descriptive) design is conducted; data for the study are secondary data from the operations of listed restaurants firms that stood as the sample for the research.

“The sample used in this study provides the opportunity to investigate the pricing of IPOs for extremely small corporate enterprises” 9 Delbor & Sullivan, 2005). The sample of the research is 59 firms listed in different stock markets in the restaurants industry. 1 firm is listed in the New York Stock Exchange (NYSE); 43 firms listed in National Association of Security Dealers Automated Quotation (NASDAQ) and 15 traded through conventional Over-the-Counter (OTC). The sample used composed of high number of offering firms that use some of the lowest quality underwriters.

Unlike previous research on this field, the utilization of lowest quality underwriters is adopted here. “Because most previous studies do not include the smallest offers in their sample, they effectively eliminate many issues that use the lowest quality underwriters”. Hypotheses predicting relationship were drawn for the study. These include: H1: IPO underpricing is inversely related to underwriter quality H2: IPO underpricing is inversely related to the presence of venture capital backing H3: IPO underpricing is inversely related to firm age H4: IPO underpricing is inversely related to offer size

H5: IPO underpricing is greater for offer that trade through conventional OTC markets H6: IPO underpricing is directly related to the first day’s trading volume H7: IPO underpricing is directly related to financial distress. Data description Various variables are categorized and analyzed: descriptive statistics for sample according to firm age, first-day trading volume, underwriter quality, venture capital backing, listing location, and subsequent financial position. Also categorizing sample according to firm listing, categorizing sample according to whether the offering firm is venture capital-backed.

To investigate how the initial returns for the sample of restaurant IPOs may vary by factors such as listing, underwriters, venture capital backing, and financial position, the samples were separated by these variables, and a tabulated analysis carried out. In this instance, initial returns for the 15 OTC firms average 10. 9%, compared with 20. 6% for the 44 NASDAQ and NYSE listed firms. To investigate how IPO underpricing might vary by the perceived reputation of the issues’ underwriter, the sample were divided into groups; defined as high and low quality underwriters.

For this, it is discovered that underpricing for IPOs underwritten by high-quality underwriters to average approximately 30 percent, which is significantly higher than the underpricing of 8. 7 percent for issues underwritten by low quality underwriters. To investigate whether a restaurant firm’s financial position subsequent to the IPO is accurately anticipated by investors, the researchers looked on how IPO underpricing is related to this financial position.

And it  was found out that firms that suffer subsequent financial distress have underpricing of 21. 8 percent, which is not statistically different than the 15.7 percent for the non-distress group. Regression results were adopted in uncovering which of the variables have a significant effect on IPO underpricing. Here multiple regression analysis was utilized. Before the use of regression analysis the test for the correlation among the independent variables were carried out in order  to check if there are any multicollinearity  problem that may distort these regressions. The analysis shows high degrees of correlation between any sets of variables and thus, increases the confident that multicollinearity is not a problem and the result represented statistically significant relationships.

The research was able to find-out that consistent results demonstrating that underpricing of sampled restaurant IPOs is significantly affected by underwriter reputation and subsequent financial distress. Also, it is found that IPO underpricing is directly related to whether the firm has subsequent financial distress problems. The research did not find out if IPO underpricing significantly varies according to size, age listing, or venture capital backing. This is related to “the nature of sample with small firms in an industry that does not require large sums of money for start ups” (ibid).

Since this research in restaurants firms IPO is a  unique, with little previous research in this field, it tend to bring with it the difficulty on how to conduct the research, the sample to be drawn, the availability of adequate data to conduct the research. Another research work on IPO to be looked up is the work of Brau, et al (2005), on ‘Initial Public offerings: An Analysis Theory and Practice. This study adopted a survey design which followed Dillman’s (1978) Total Design method. In this case, the method maximizes the response rate of the respondents through a series of mailings.

Accordingly, the initials survey instrument was developed based on an extensive review of the extant IPO literature. In this study, the researchers extend the IPO literature by analyzing unique data from surveys of Chief Financial officers (CFOs) to compare CFO perspectives to prevailing academy theory. The circulated survey was conducted in beat surveys. At each step, feed-back was used to improve the survey. Finally, slight modifications were made to customize the survey to the three targeted sub-samples.

For the distribution of questionnaires, mailing lists were constructed as follows: for Security data Company’s New Issue database (SDC), 340 valid addresses were identified for non-financial US companies that had successfully completed an IPO or attempted and subsequently withdrew an IPO (179 valid addresses) between January 2000 and December 2002. Through the use of EDGAR at www. sec. gov, offering prospectus of each filling firms were obtain for CFO name, and the confirmation of mailing address obtained from SDC.

Three sets of mailing were conducted on May 5, 2003, June 11, 2003 and September 12, 2003. With this a cover letter, a personalized envelop (no labels), a postage-paid reply envelop, and a glossary of IPO terms were sent. To increase the response rate, a promise to enter respondents business cards into a $1000 cash drawing and also to provide respondents with an early copy of the results. Overall, 336 CFOs provided usable surveys for a response rate of 18. 8%.

The sub-samples responses are: 212 not-tried (16. 7% response), 87 successfully completed (25. 6% response), and 37 withdrawn (20. 7% response) firms. For publicly available data on the successful IPO sample, prospectus data for an SDC were downloaded and the original prospectuses from EDGAR were checked to ensure that the SDC data is correct and making corrections were necessary. In summarizing statistics of respondent firms, the first conditioning variable in size based on total revenues; firms with revenues over $100 million are classified as large, the average (median) firm had $99 million in revenues. The second control variable is firm age.

Firms with founding year of 1987 (the median) or earlier are considered old. The third variable is on High-Tech; which indicator equals one when the firm is a high-technology firm and zero otherwise. Here, the sample shows a nearly 19% of high-tech firms. The conditioning variables size, age, and high-tech were available for all three IPO status sub-samples. To control for possible certification effects in IPOs (i. e. prestigious underwriters and venture capitalists) the researchers relied on an underwriter’s prestige metric and a VC indicator variable.

For the prestige metric, the rankings provided on Jay Ritter’s website was utilized and defined high-prestige underwriters as having a score of 8. 1 or greater. The average underwriter rating is 7. 96 (median= 8. 76). Fifty-eight percent of the withdrawn and successful firm had VC backing. The final four conditioning variables- Ownership Decrease, Overhang, IPO Demand, and Initial Return- are made available only for the successful IPO sample. Ownership Decrease represents the total decrease in insider (manager) into large and small based on the median-a 23% decrease.

Overhang measures the size of the public float and is defined as the quantity of shares outstanding prior to the offer minus the number a secondary shares all divided by the total shares offered in the IPO. The Initial returns were computed as the percentage return from the offer price to the first closing price on University of Chicago center for Research in securities Prices (CRSP). IPO Demand is defines as high if the  final offer price is above or equal to the original mid-filing price and low otherwise.

Univariate analyses based on each conditioning variables were carried out as well as IPO status, several of the conditioning variables recorded a significantly correlated result. Hence, further performance of multivariate logistical regressions on each survey question, using each of the conditioning variables as independent variables were carried out. Using this method, with some modifications on slightly detected error from CFO responses, the researchers were able to confirm which conditioning variables actually influence the survey results. And conclusions were robust enough from the multivariate specifications.