Limitation of this survey method includes three potentials limitation: 1. The CFO may not represent other insiders view. It is the belief that CFO is in the best position to understand the IPO process and is generally a high-ranking officer with stock or stock options. Surveying the CFO is consistent with the research intent and with accepted academic practice 2. Sample biases a possibility. Though, respondent-versus population test shows that based on the conditioning variables, the sample represents the population. 3. The three years 2000-2002 may not be representative of other time periods.
CFO perspectives might have been different, if the survey questions had been asked just few years earlier during the bubble years (ibid). The method and strategy of Shepherd and Zacharakis (2001), ‘Speed to Initial Public Offering of VC-Backed Companies’ is to be considered at this juncture. In the study, the use of ecosystem perspectives to investigate speed to Initial Public Offering was con ducted. The research data were derived from the National Venture Capital Association (NVCA), along with the company Venture Economics.
These created a database of it deals from 1984 to June 1999. The NVCA members, primarily senior managers or vice presidents of the VC firms, provided information on their portfolio companies and investment actively through a NVCA-endorsed survey. This constitutes the sample for the study. The dependents variable is seep to IPO and is operationalised by the number of days from the company’s founding to its IPO, while the independent variables are geography, industry group, and the macro-economic trend. In this research the portfolio company’s geographical location within the U. S. was categorized into four regions: the Northeast, the south, the Midwest, and the West.
Fro the trend in the IPO market the researcher operationalised by classifying the portfolio company’s date of IPO into one of two groups: before 1998 and 1998 to 2001). 1998 was c hosen because of the observed shift in IPO mindset around that time. Analysis of Variance (ANOVA) is the statistical technique used to explain variance in a portfolio company’s speed to IPO. Descriptive statistic and the pair-wise comparison of means for region, industry, and trend were conducted.
These results from the statistical analysis assisted in providing support for the research hypotheses. Some of the research hypotheses were not supported by this analysis, others were not. Others were supported by the result of the multivariate ANOVA. The hypotheses for the research include: H1: geographical location within the U. S. affects the speed to IPO of portfolio companies that have gone public H2: U. S. portfolio companies based in the West have greater speed to IPO than portfolio companies from the Northeast, South, and Midwest industry.
H3a: Industry sector affects the speed to IPO of portfolio companies that have gone public. H3b: Portfolio companies from the high-technology sectors have greater speed to IPO than those from non-high-technology sectors. H4a: The relative activity of the IPO market over time affects the speed to IPO. H4b: Portfolio companies that have gone public more recently have greater speed to IPO. The above research adopted both qualitative and quantitative approach in its data analysis.
Based on the support derived from the statistical analysis and qualitative analysis conclusion were reached for the research hypotheses. As earlier stated, most research works on IPO had concentrated mostly on issues that have to do with underpricing in IPO. Hence, majority of the available theories and models are structured around underpricing in IPO. Some theories of underpricing of IPO are based on asymmetric information. Here, “several theoretical models conclude that underpricing results from asymmetric information among groups of agents taking different roles in the IPO process.
Underpricing is then an incentive used to stimulate the uninformed group to act in the interest of the informed one” (Schindelei & Perotti, 2002). Some of these models based on asymmetric information include the following: Baron (1982), proposed the principal-agent model. This model looked at the asymmetric information which may exist between a firm and its investment banker. It considers the new issue underpricing based on this type of information asymmetry. The investment bank being an agent of the firm has superior information concerning its value.
Hence, his compensation is a function of the proceeds from issue and the post-floatation price. The price discount, therefore, serves to induce the investment banker to put enough effort in advising and selling the firm’ shares. This investment banker’s monopsony power hypothesis according to Ritter (1998), occurs when “investment bankers take advantage of their superior knowledge of the market conditions to underprice offerings, which permits them to expand les marketing effort and ingratiate themselves with buy-side clients.
While there is undoubtedly some truth to this, especially with less sophisticated issuers, when investment banking firm go public, they underprice themselves by as much as other IPOs of similar size’. But this model has being refuted. Muscarella & Vetsuypens (1989), cited in Scindelei & Perotti (2002), has it that underpricing proved to be significant at IPOs by investment banks as well, even though no asymmetric information existed since issuers acted as their own agents in the going public process.
Rock (1985) ‘Winners Curse model’ is another approach to underpricing. This model focuses on differential information of investor participating in the IPO market. It is based on information asymmetric between two groups of investors; the informed and the uninformed. The informed group knows well the prospects of firms and therefore is able to avoid buying low value IPO shares. While the uninformed people have no information on the firms’ value, which results in a bias in their purchases towards les profitable equity issues.
The uninformed investors face a winner’s curse, where they stand a better chance of being allocated shares in overpriced rather than underpriced issues. If the new-issues market is dependent on the participation of uninformed investors underwriters can only create a successful issues market by purposely underpricing new issues. “…Faced with this adverse selection problem, the less informed investor will only submit purchase orders if, on average, IPOs are underpriced sufficiently to compensate them for the bias in the allocation of new issues” (Ritter, 1998).