Performance and distress indicators of new public companies
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Nancy Beneda is an associate professor of Finance and the Vaaler Insurance Fellow at University of North Dakota. Her teaching and research interests include commercial lending, risk management, corporate valuation, and valuation of initial public offerings (IPO’s). She has published in a wide variety of journals including Bank Accounting & Finance, Commercial Lending Review, Corporate Finance Review, CPA Journal, Credit and Financial Management Review, Journal of Asset Management, Journal of Business and Economic Perspectives, and Journal of Financial Regulation and Compliance. She is also the recipient of the Meritorious Teaching, Research, and Service Awards for the years 2002, 2003, and 2005 by the College of Business and Public Administration at UND. She is currently serving as the Chairperson for the Department of Finance. Department of Finance, University of North Dakota, Box 7096, Grand Forks, ND 58202-7096, USA. Tel: þ 1 (701) 777-4690; Fax: þ 1 (701) 777-5099; E-mail: [email protected]
Abstract This study investigates after-market returns and incidence of bankruptcies and distress relative to performance and distress indicators for new public companies. The study includes firms that had an initial public offering (IPO) during the period 1995–2002. Performance measurements include after-market returns, number of bankruptcies, and number of ‘distressed’ firms. I identify firms as being ‘distressed’ if the firm’s stock price loses 95 per cent of its market value within two years from the first month-end price after going public. I further investigate the significance of ‘ex ante’ (pre-event) financial distress indicators present at the time companies go public and other indicators to predict aftermarket performance of IPO firms. I use the O-ratio, a measure of bankruptcy risk, from Ohlson’s (1980) model and investigate its ability to predict bankruptcy and stock performance for these new companies. The study also examines the impact of market-tobook ratio and underwriter quality on after-market performance of IPOs. The findings of this study may be useful to those who hold new public companies in their asset portfolios. The study might be particularly interesting to institutional investors, venture capitalists, and individual investors who regularly follow the performance of new IPOs. The results of the study indicate that using Ohlson’s (1980) O-ratio, the market-to-book ratio, and underwriter quality as selection criteria may result in a portfolio of IPOs which performs above average. Journal of Asset Management (2007) 8, 24–33. doi:10.1057/palgrave.jam.2250057 Keywords: bankruptcy, initial public offerings, performance indicators, Ohlson’s O-ratio, after-market performance, underwriter quality, technology IPOs
Introduction This study examines the after-market returns and incidence of bankruptcies and distress of firms that had initial public offerings (IPOs) during the period 1995–2002. The study investigates the significance of ‘ex ante’ (pre-event) financial distress indicators present at the
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