Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2007. / Includes bibliographical references. Also available in electronic version.

Universiẗat, Diss., 2006--Witten, Herdecke.

No description available.

The thesis investigates the link between internal and external funds in financing new investment when asymmetric information is important. In both chapter, the entrepreneur has private information about the value of a project and, if the quality of the project is high, she tries to signal this to outside investors. The first chapter explores the tradeoff between using internal funds and raising external funds by issuing shares or bonds to finance a project. The entrepreneur can delay the project to accumulate internal funds over time from existing operations. This allows an entrepreneur with a high quality project to reduce her reliance on expensive underpriced bond or share issues. However, accumulating funds is also costly because of discounting and the risk that the project disappears. The more valuable the good project, the less the entrepreneur will delay the project, risking its loss, and so the more she relies on external financing. When external financing is sought, the entrepreneur decides to issue bonds or shares. The greater the value of the good project, the more underpriced shares are relative to bonds. Thus an entrepreneur with a highly valuable good project chooses equity and one with a less valuable project chooses debt. Combining the two results shows that for a highly valuable good project, debt is used, and for a less valuable project, internal funds are used. External equity gets squeezed out. Aggregate data for the U.S. confirm that corporate bond issues are a more important source of funds than new share issued. Furthermore, most small firms rely on internal funds and debt, rather than external equity to finance their projects. The second chapter provides a new theory for the underpricing of initial public offerings (IPOs). As in the first chapter, underpricing is used as a signal of quality. However, the entrepreneur is risk averse and only underprices when she cannot sell enough primary (new) shares to raise sufficient proceeds from the IPO to cover the cost of the project without diluting her position below that needed to signal a high project value. Underpricing allows the entrepreneur to maintain a high stake in the firm and still make a credible signal of quality. This allows more primary shares to be sold resulting in a net increase in proceeds. The model predicts that underpricing should be greatest among firms that don't sell secondary shares (shares held by insiders) at the IPO and that there should be a positive relationship between the firm's capital requirement and the initial return among this group of firms only. A switching regression framework is used. The probit model is first estimated where the probability of no secondary shares is explained by proxies for a firm's capital requirements. The initial return is then regressed on the same proxies, conditioning on whether the firm sells secondary shares or not and accounting for possible correlation between errors in the selection and regression equations. Strong support is found for the positive relationship between initial return and capital requirements for only firms without secondary share sales, as predicted. / Arts, Faculty of / Vancouver School of Economics / Graduate

Prior literature suggests two competing theories regarding the role of venture capitalists (VCs) in their portfolio companies. The VC monitoring hypothesis argues that VCs effectively resolve the managerial agency problem through close monitoring and restraining managers' earnings management behavior. The VC moral hazard hypothesis argues that VCs aggravate the private benefits agency problem by exerting influence over managers to artificially inflate exit stock price through earnings management. Using a sample of IPO firms between 1987 and 2002, after controlling for the magnitude of accruals manipulation (AM), I compare the magnitude of real activities manipulation (RM) between venture-backed and non-venture-backed companies. I find that relative to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. The finding supports the VC monitoring hypothesis that VCs restrain managers' RM behavior. Furthermore, I document that venture-backed companies exhibit a significant difference from non-venture-backed companies only in the first post-IPO fiscal year. The difference between the two groups in either the IPO year or the second post-IPO fiscal year is not significant, or at best, is weak. This finding is consistent with the argument that VCs tighten their control during the lockup expiration period when insiders such as managers or founders have strong incentives to inflate earnings. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies' RM decreases dramatically which makes the difference between the two groups less significant. In addition, using a sample of venture-backed IPOs from 1987 to 2002, I find that companies backed by high-reputation VCs show significantly less RM than those backed by low-reputation VCs in the first post-IPO fiscal year. The results are robust to alternative VC reputation proxies. This finding is consistent with the argument that high-reputation VCs have more incentives to preserve reputation and better ability to monitor managers than low-reputation VCs.

This paper explores the stock market as a source of funding for innovation by looking at the ability of the stock market to attract, identify and channel funds to innovative firms. We analysed 541 IPOs on the Swedish stock market between the years 2000-2015, using patent applications as a proxy for innovation. Results from an event study and regressions using two control groups show that firms find the stock market an attractive source of funding for innovation and that going public helps firms overcome liquidity restraints. By looking at the long- and short-term performance, measured by stock prices, of innovative firms by conducting OLS regressions, our results suggest; one, that there is an initial demand for innovative companies undergoing an IPO in comparison to non-innovative firms. And two, that investors are able to predict future innovativeness to some extent, but that they have some difficulties in anticipating future performance of innovative firms.

This paper investigates the effects of going public on firm innovation by comparing the innovation activities of firms that go public with firms that choose to not undergo an initial public offering (IPO) and remain privately held. Going public here is a transformation of a privately held firm into a public firm, i.e. the first time for the firm to publicly trade in stock markets. The combination of a propensity score matching (PSM) and a difference-in-difference (DiD) methods are adopted to measure the innovation trends in terms of patent applications. Using the patent-based metric, firm innovation increases following IPOs. Comparing to the innovation activities of privately held peers, going public can boost the patent growth rate of firms and delay the downward trend of patent growth in the two years following IPOs.

<p>IPO underpricing is a phenomenon found in all markets worldwide. Investors are always looking for a good opportunity of short-term abnormal positive returns, and the IPOs first-day trading returns have been a good investment strategy for both institutional and private investors in all markets of the world.</p><p>This study consists at an investor’s perspective analysis of the first-day returns of 59 IPOs listed on the Brazilian Stock Exchange Market from January 2004 to April 2007, where I have found a significantly mean positive underpricing of 6,60%.</p><p>I have found also some evidences of a sprouting “hot-market” period in Brazil, since the number of the IPOs in Brazil has been growing almost in an exponential speed, taking advantage of the constant growing cash inflow and liquidity of the Brazilian market, followed by the high evaluation of the Ibovespa Index, with return of 140% on the study time frame.</p><p>When categorizing the study by year, by underwriter (investment bank) and by market segment, I always have found positive adjusted initial returns, which corroborates the fact that underpricing is a constant phenomenon in the Brazilian market.</p><p>Other important facts that were identified in this study is that the average returns of the IPOs are decreasing along the years and that companies that depend to a large extent on their human capital and are in the business areas that are staff intensive have a high level of underpricing while companies that have a high level of fixed assets have a low level of underpricing.</p><p>Finally, after performing a multivariate linear regression analysis with the chosen independent variables on the full sample and some categorized samples, the results did not have enough statistical significance and consistence that could make them useful to create a statistical model to explain the underpricing level of Brazilian IPOs between January 2004 and April 2007.</p>

IPO underpricing is a phenomenon found in all markets worldwide. Investors are always looking for a good opportunity of short-term abnormal positive returns, and the IPOs first-day trading returns have been a good investment strategy for both institutional and private investors in all markets of the world. This study consists at an investor’s perspective analysis of the first-day returns of 59 IPOs listed on the Brazilian Stock Exchange Market from January 2004 to April 2007, where I have found a significantly mean positive underpricing of 6,60%. I have found also some evidences of a sprouting “hot-market” period in Brazil, since the number of the IPOs in Brazil has been growing almost in an exponential speed, taking advantage of the constant growing cash inflow and liquidity of the Brazilian market, followed by the high evaluation of the Ibovespa Index, with return of 140% on the study time frame. When categorizing the study by year, by underwriter (investment bank) and by market segment, I always have found positive adjusted initial returns, which corroborates the fact that underpricing is a constant phenomenon in the Brazilian market. Other important facts that were identified in this study is that the average returns of the IPOs are decreasing along the years and that companies that depend to a large extent on their human capital and are in the business areas that are staff intensive have a high level of underpricing while companies that have a high level of fixed assets have a low level of underpricing. Finally, after performing a multivariate linear regression analysis with the chosen independent variables on the full sample and some categorized samples, the results did not have enough statistical significance and consistence that could make them useful to create a statistical model to explain the underpricing level of Brazilian IPOs between January 2004 and April 2007.

For the past half a century, there has been progressive development in corporate finance theories, and among these, corporate financial decisions have been attracting the attention of outsiders. As the outsiders¡¦ learning process of the firm¡¦s private information determines the firm¡¦s value, managers who are concerned with outsiders¡¦ perceptions of their firms try to enhance their firms¡¦ short-term reputation through their financial decisions. However, up to this date, few reputation models have been applied to predict these financial decisions. Three corporate finance issues are involved to identify the reputation effects on corporate finance: (1) convertible bond call policies, (2) IPO decisions and activities, and (3) corporate financing policies. As for the first issue, this study constructs a two-period reputation model of a convertible bond call policy. This model concludes that in equilibrium, a firm with bad management quality and a bad reputation chooses to call, while a firm with good management quality or of a good reputation builds up it reputation by not calling the convertible bonds. This is consistent with the signaling theory proposed by Harris and Raviv (1985). However, the reputation model here identifies the call policy as a reputation-building mechanism rather than being only a signaling role, and suggests that the reputation rents resolve the discrepancies of the stock¡¦s post-call price performance. As for the IPO decisions and activities, this study performs another reputation model to analyze a firm¡¦s reputation effects on IPO activities, especially on the decision to go public. The results yield that a firm¡¦s reputation does affect its decision to go public. By listing equities publicly, firms with good management quality and a solid past would anticipate enhancing their reputations, and those with a poor past would anticipate building up good names. Furthermore, good reputation firms with bad management quality would anticipate maintaining their reputations by going public. On the other hand, it is found that good firms over-invest in building up their reputations and bad firms take advantage of their reputations to go public. Both result in firms¡¦ over-going public and IPO mispricing. This constitutes an alternative interpretation on IPOs¡¦ long-run underperformance and the sharp decline of the survival rate. As for the corporate financing policies, the other reputation model is constructed by taking both determinants, the costs of financial distress as well as the firm¡¦s reputation into consideration. The results show that good management quality firms with good reputations enjoy their financial flexibility between debt and equity. Bad management quality firms take advantage of their good names to issue equities, which leads to over investment. Good management firms lose their financial accesses due to bad reputations, which lead to under investment. Reputations would screen the bad management quality firms with bad reputations off the market. This dissertation concludes that reputations indeed affect the three selected corporate financial decisions and suggests further plow on more corporate finance issues.