The long-run performance of US firms pursuing IPOs in foreign markets

Abstract

Purpose The purpose of this paper is to investigate the long-run performance of a unique set of US domiciled firms that have bypassed the US capital markets in pursuit of their initial public offering (IPO) overseas. Additionally, this paper then tests the popular underwriter prestige impact and the window of opportunity hypothesis on this unique subset of IPOs. Design/methodology/approach Using a sample of foreign and purely domestic IPOs made by US firms from 2000 to 2011, this study investigates the long-term performance, one-, two- and three-year by using two measures (buy-and-hold return and cumulative abnormal returns) to test the long-run returns of newly listed companies. Finally, the research incorporates both the traditional matching methodology (issue year and size) along with propensity score matching methodology. Findings FIPOs of US companies underperform DIPOs and their matched DIPOs; furthermore, FIPOs underperform the index of the two listing countries they use the most (UK and Canada). Although the choice of a reputable underwriter mitigates underperformance, the choice of listing in a foreign country only may be a result of possible high valuations accorded by foreign investors who buy US-listed companies on the domestic exchange possibly for reducing exchange rate risk and gaining US diversification without incurring additional costs. It is, thus, possible that US companies that undertake Foreign IPOs not only escape potentially higher Security and Exchange Commission regulations and disclosure but also benefit from higher valuations in the foreign markets. Originality/value To the best of the authors’ knowledge, this is the first study to investigate the long-term performance of US firms bypassing the US capital markets in pursuit of their initial equity offering elsewhere. Caglio et al. (2016) investigated why firms decide to pursue such equity raising activity but fail to investigate the firms’ actual performance after issuing equity. This research fills such a gap in the literature and is important for both academics and practitioners. Practitioners can use this information in assessing the quality of such investments in the long-run, and firms can use such information when determining the different options of issuing equity. Further, regulators should be aware of the implications that increased regulations have on capital raising activities in their domestic market.

Explanatory Theories of Stock Returns in the Long Run after IPO – Literature Review

“…Goergen, Khurshed and Mudambi (2007) did not find any statistically significant relation between the age of the issuing company and its performance in the long run. The same results were obtained by Killins and Egly (2018). Que and Zhang (2019) obtained mixed results when calculating the relation between age and underperformance as depending on the method used to calculate rates of return, their results showed either an insignificant or positive and statistically significant relation.…”

“…Belghitar and Dixon (2012) showed that VC-backed and unbacked IPOs underperform benchmark portfolio, but their findings are statistically insignificant. Killins and Egly (2018), as well as Goergen et al (2007), found that issuers backed by VCs experience poorer returns in the long run.…”

An empirical analysis of the performance of sponsored vs non-sponsored IPOs

“…Extensive research tests the short-run and long-run performance of IPOs (Loughran and Ritter, 1995;Jenkinson and Jones, 2009;Ang and Boyer, 2009;Lewellyn and Bao, 2014). Previous research in the US markets (Brav et al, 2000), UK (Levis, 1993;Goergen et al, 2007) and other international markets (Lee et al, 1996;Kooli and Suret, 2004;Killins and Egly, 2018) find similar findings of IPO underperformance. Evidence of underperformance is prevalent in the emerging economies as well (Kiymaz, 2000;Hensler et al, 2000;Smith and Chun, 2003;Naifar, 2011;Otchere and Vong, 2016).…”