Same bed different dream composition of IPO shares and withdrawal decisions in weak market conditions
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Same bed different dream composition of IPO shares and withdrawal decisions in weak market conditions Pengda Fan & Kazuo Yamada
Accepted: 20 March 2019 # Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract The aim of this paper is to investigate the relationship between the IPO withdrawal decision and the number of secondary shares during the weak stock market conditions. Our results suggest that the withdrawal decision is determined by who plans to sell their shares at the IPO. The findings are as follows. The secondary shares of VCs are positively correlated with an IPO withdrawal decision. The secondary shares of CEOs are only correlated when the CEOs retained ownership is low, and not when CEOs retained ownership is high. These results imply that the VC profit maximization behavior is a key variable in determining IPO withdrawal.
Keywords Withdrawn IPOs . Secondary shares . Market conditions
JEL classification code G20 . G30 . G31 . L26
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11187-019-00169-2) contains supplementary material, which is available to authorized users. P. Fan College of International Management, Ritsumeikan Asia Pacific University, 1-1 Jyumonjihara, Beppu, Oita 874-8577, Japan K. Yamada (*) Faculty of Economics, Nagasaki University, 4-2-1 Katafuchi, Nagasaki 850-8506, Japan e-mail: [email protected]
1 Introduction To date, few studies have examined the nontrivial number of firms withdrawing their initial public offerings (IPOs) after registration.1 One possible explanation for IPO withdrawal is weak market conditions.2 If market conditions worsen, the offering price decreases, which leads to a drop in the capital gains of the pre-IPO owners who sell their shares at the IPOs as secondary shares. Hence, the current owners of IPO firms prefer to withdraw the IPO during weak market conditions. Then, we can say the probability of withdrawal should be highly correlated with the market condition. We dig deep into the IPO withdrawal issue and divide the pre-IPO owners into types (i.e., CEOs and VCs).3 The literature points out that conflicts between CEOs and VCs in entrepreneurial firms exist (Yitshaki 2008; Forbes et al. 2010). The conflicts relate to the differences in opinions about management styles or financial decisions. Such conflicts negatively affect subsequent firm performance (Higashide and Birley 2002; Collewaert and Fassin 2013; Collewaert and Sapienza 2016). 1 Approximately 20% of firms in the USA withdraw their IPOs after registration (Dunbar and Foerster 2008; Hao 2011). 2 Beyond Meat, a plant-based burger manufacturer, postponed its going public from late December 2018 to early January 2019, due to the instable market condition in December 2018 (BU.S. Government Shutdown Freezes IPO Market, Imperiling Expectations for 2019^ Wall Street Journal, January 10, 2019). 3 In an earlier version of this paper, we also examine the impact of other pre-IPO owners (e.g., parent companies). However, their avera
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