Audit quality, auditor compensation and initial public offering underpricing

We jointly study the impact of audit quality on auditor compensation and initial public offering (IPO) underpricing using a sample of Australian firms going public over the period 1996–2003. We find that quality (Big Four) audit firms earn significantly higher fees than non-Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non-prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signalling device that enhances post-issue market value of equity.

Effective derivative hedging and initial public offering long-run performance

We investigate the role of corporate currency risk management through the use of financial derivatives in influencing the long-run performance of a sample of Australian resources companies. We find that derivative users generally outperformed nonderivative users in the 5-year period following listing. Effective derivative users consistently outperformed the nonhedgers. Furthermore, within the population of derivative users, effective derivative users tended to perform better than ineffective hedgers. Our results indicate that effective financial risk management plays a role in long-run IPO performance.

The importance of intangible assets in initial public offerings

This paper follows Beatty and Ritter (1986), who argue that lower uncertainty about the value of an initial public offering (IPO) reduces the 'need' for the underpricing of an IPo. Australian IPOs often identify the existence of intangible assets such as goodwill, licenses, brand names, trademarks, patents and capitalized research and development costs in the prospectus. This paper analyses if IPOs identifying the existence of such intangible assets in the prospectus might reduce uncertainty about their valuation and hence allow a lower underpricing return. While the reporting of intangible assets such as goodwill and license costs in the prospectus are not significant ingredients in the level of underpricing, the identification and valuation of intangible assets such as brand names, trademarks, patents and capitalized research and development costs is significant in reducing the level of underpricing return. Our findings are also consistent with previous studies concluding that both the size of the new issue and the use of an underwriter are important in the level of underpricing return.

Board composition changes after an initial public offering

This paper follows Luoma and Goodstein (1999) who find increased stakeholder representation on the boards of U.S. companies. This study describes the changes in board composition by director type (stakeholder or shareholder) and by gender (male or female) of large Australian companies after listing. We find a substantial increase in the number of directors holding shares in the firms in which they hold their directorships and that essentially
directors putting their own capital at risk is an important element in the Australian capital market. We also report a slight decrease in the proportion of female directors post listing.

Managing news coverage around initial public offerings

We examine opportunistic behavior of initial public offering (IPO) firms in Taiwan where they are required to disclose their own earnings forecasts and are unrestricted in releasing news around the offerings. We find that prior to the offerings, IPO firms tend to report higher earnings, disclose inflated earnings forecasts, and manage more good news. News management, however, emerges as the most predominant factor in aftermarket stock prices. In particular, IPO firms have a strong preference for releasing good news related to strategy/policy that may simply provide a vision of a firm's future. Furthermore, the news releases are often forward-looking when they are positive about the firms but tend to be realized when they are negative. IPO firms also tend to engage in more window dressing activities before a larger sale of IPO shares from existing shareholders or a larger decline in insiders' holdings. Our analysis shows that managerial optimism cannot fully account for their behavior.

The gender composition of boards after an IPO

Purpose - The purpose of this paper is to empirically analyse the change in the gender composition of the boards of large Australian companies, after listing.
Design/methodology/approach - This study investigates the gender composition of the boards of large Australian companies at the time of the initial public offering (IPO) and subsequently as these companies mature into established public companies. It also investigates industry influences and organizational size influences on the board composition at the time of the IPO and subsequently.
Findings - No significant change is found in the proportion of male and female directors holding directorships at the time of the IPO and some five to eight years later when the company is recorded as a top 500 company (by market capitalization) on the Australian lists. This implies that the capital market is generally satisfied by the gender composition of boards from the time of the IPO.
Originality/value - This paper extends on previous work which provides evidence of a relatively low proportion of female directors on the boards of Australian initial public offerings.

Factors influencing money left on the table by property trust IPO issuers

While previous listed property trust (LPT) initial public offering (IPO) studies have identified low under pricing returns, this study specifically examines the amount of money left on the table by the pre-IPO owners in this category of IPO. This study investigates 58 property trust IPOs in Australia from 1994 to 2004 and finds that the amount of money left by LPT IPOs is considerably less than industrial company IPOs, implying considerably less uncertainty about the valuation of such IPOs compared to industrials. We also find that more recent (post 2000) LPT IPOs in Australia appear to be significantly different to previous LPT IPOs in both money left and under pricing terms.

Auditor change during listing : effect on IPO premiums

The study investigates the relationship between auditing services provided to 213 listed firms over a period from 1996 to 2000 by reputable (or tier 1) and non-reputable (non-tier 1) audit firms and the initial returns at listing. We use market adjusted initial return to reflect the firm’s choice of auditor during the initial public offering (IPO’s). The findings show that there is an inclination for listed firms to engage tier 1 audit firms, probably due to management’s intention of signal the firm’s favorable private information and credibility and integrity of reported financial information and ultimately increasing their chances of getting listed. The findings alos show that there is no significant difference in the initial returns of IPO’s firms irrespective of the reputation of auditors. However, there is a significant difference in the initial return of main and second board firms at listing whether firms are either audited by Tier 1 or non-Tier 1 audit firms. Firms that had upward switch showed higher returns, inconsistent with the auditor reputation hypothesis. This results, however, could be biased by the large number of new firms that did not switch auditors at listing, probably due to lack of time to make changes before listing, and/or have engaged tier 1 auditors at incorporation in anticipation of listing. However, the findings showed significant higher returns for second board firms relative to main board firms. These results do not support the widely held view that firms that seek listing do switch auditors prior to their listing for positive market signalling. The results indicate that auditor’s reputation is not an important determinant of the IPO’s initial return.

Investment banks' entry into new IPO markets and IPO underpricing

We examine the relationship between investment banks' initial public offering (IPO) market shares and their prior IPO underpricing in the new IPO market for China-based companies on the Hong Kong Stock Exchange. To gain expertise in Chinese business practices, investment banks have the incentive to obtain business in this new IPO market by providing high offer prices to the issuer, leading to less underpricing and less money on the table. We hypothesize and find that the less an investment bank underprices Chinabased company IPOs, the greater its subsequent market share of China-based company IPOs in the Hong Kong Stock Exchange. Furthermore, this relationship is driven by a bank's initial China-based company IPO deals. These results suggest that in new IPO markets, investment banks' initial market shares, obtained through lower underpricing, help them grow their market shares in later periods, possibly through the expertise gained in the initial business.

Factors influencing the direct costs of property trust IPOs

Underwriting, legal, accounting and valuation costs average around 3.3%, 0.39%, 0.23% and 0.12% of proceeds raised and are substantial costs to property trust initial public offering (IPO) issuers. As such, identifYing factors that influence these costs is important. This paper investigates factors influencing these costs as well as the total direct costs of raising equity capital by property trust IPOs in Australia from 1994 to 2004. The results suggest clear economies of scale in direct costs. In addition, IPOs that employ more debt are likely to have higher capital raising costs while those that have proportionally higher net asset values and offer stapled securities (and likely to be engaged in property development activities) have lower capital raising costs.

An exploratory study into the accountancy firms chosen by industrial company IPOS in Australia from 1994 to 2004

This study is an exploration into the choice of independent accountants made by industrial initial public offering (IPO) companies in Australia between the years 1994 to 2004. The aim of this research is to determine which companies are more likely to use one of the Top 5 accountancy firms and in so doing we seek to offer some insight into understanding the likelihood of IPO companies adopting the services of the big accounting firms. Our findings show, as predicted, that the majority of industrial IPO companies, and particularly the larger companies, used one of the Top 5 accountancy firms as their independent accountant. However, unexpected was that certain industry types were less likely to hire a Top 5 accounting firm for their independent accounting services compared to other industry categories. Our studies also found that after the year 2000 a smaller percentage of companies used independent accountants than between 1994 and 1999. Many factors contribute to the selection of an independent accountant and this paper provides some understanding of identified factors and the influence that they have over the choice of independent accountants by industrial company IPOs.

Exploratory study into the accountancy firms chosen by industrial company IPOs in Australia from 1994 to 2004

This study is an exploration into the choice of independent accountants made by industrial initial public offering (IPO) companies in Australia between the years 1994 to 2004. The aim of this research is to determine which companies are more likely to use one of the Top 5 accountancy firms and in so doing we seek to offer some insight into understanding the likelihood of IPQ companies adopting the services of the big accounting firms. Our findings show, as predicted, that the majority of industrial IPO companies, and particularly the larger companies, used one of the Top 5 accountancy firms as their independent accountant. However, unexpected was that certain industry types were less likely to hire a Top 5 accounting finn for their independent accounting services compared to other industry categories. Our studies also found that after the year 2000 a smaller percentage of companies used independent accountants than between 1994 and 1999. Many factors contribute to the selection of an independent accountant and this paper provides some understanding of identified factors and the influence that they have over the choice of independent accountants by industrial company IPOs.

Earnings management and the performance of Australian IPOs

This thesis examines earnings management in the Australian initial public offering (IPO) market. In general, the results show that Australian IPO firms do engage in earnings management at the offer date. There is sufficienct evidence to suggest that firms that manage earnings at the offer date suffer poorer long-run performance.

Financial characteristics of Australian initial public offerings from 1994 to 1999

A variety of financial characteristics of Australian initial public offerings (IPOs) for the period 1994-1999 are explored. A number of previous Australian studies have investigated the initial day underpricing and longer term underperformance of IPOs and this study updates those papers. This paper partitions the IPO data into no liability/limited liability; share option/no share option; underwriter option/no underwriter option and dividend reinvestment/no dividend reinvestment characteristics to better understand the types of IPOs that list on the Australian Stock Exchange. The data supports the findings of previous studies in that IPOs are underpriced at the time of listing and underperform the market in the first year following their listing.