The Pricing and Performance of Supercharged IPOs

Abstract

This study examines a new form of initial public offerings, “supercharged” IPOs, where a firm-organized pre-IPO as a pass-through entity undergoes a series of transactions that steps-up the adjusted tax basis of the IPO firm's assets. This step-up imposes tax liabilities on pre-IPO owners, but also creates significant future tax benefits for the firm; the average anticipated deferred tax asset is $486 million ($13 per share) for our sample of supercharged IPO firms. Pursuant to tax receivable agreements, supercharged IPO firms pay a large portion of these tax benefits to pre-IPO owners as they are realized in the future. Future firm performance must be sufficiently strong for the IPO firm and the pre-IPO owners to realize the future tax benefits created by the supercharged transaction structure. We hypothesize and provide evidence of higher IPO offer prices and stronger future performance for supercharged IPO firms relative to traditional IPO firms. JEL Classifications: G14; G32; G34; H25.

The Relevance of Non‐Income Tax Relief*

“…Because the universe of firms that do not receive non‐income tax relief in GJF is large and diverse, we use entropy balancing to construct a comparable benchmark group when we examine determinants that impact the receipt of non‐income tax relief and whether the relief is associated with future firm performance. Entropy balancing is increasingly used in archival studies (e.g., Edwards et al 2019; Agarwal et al 2020). It ensures covariate balance between treatment and control groups by reweighting control observations so that mean and variance for the groups are virtually equivalent 12 .…”

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

“…Ayers et al () examine the goodwill amortization deduction enacted in 1993 by analyzing a sample of taxable corporate acquisitions and report that the enactment of a goodwill deduction contributed to an increase in acquisition premiums. In a recent study, Edwards et al () examine IPOs structured to generate a step‐up in the acquired assets. They report that the tax benefits from the step‐up in these transactions are shared between the seller (pre‐IPO owners) and the acquirers via a tax receivable agreement (a contingent payment based on the realization of the tax benefits).…”

Financial Reporting Consequences of Sovereign Wealth Fund Investment*

“…16 16 Entropy balancing to address covariate balance concerns is an empirical tactic employed extensively in the accounting literature (see, e.g., Bonsall and Miller 2017; Chapman et al 2019; Cohen and Li 2020; Edwards et al 2019; McMullin et al 2019). …”