What Mechanisms drive the first-day Return of IPOs?
Abstract: The mechanisms behind the positive first day market-adjusted return of IPOs on the American and Canadian markets is examined from 2000 through 2018. A set of financial variables is tested as well as the industry-specific effect and the effect of being venture capital backed. Interaction terms between industry and venture capital backing are created to identify the effect of being venture capital in each industry. EBIT, gross proceeds and the profitability multiple EBIT over total assets had significant explanatory power. In contrast, total assets, the ratio gross proceeds over total assets and profitability multiple earnings over total shares outstanding were all insignificant. Risky industries had a significantly higher first day market adjusted return (the financial industry was used as the reference). Considering the marginal effect of being venture capital-backed with respect to industry, with the inclusion of interactions terms, decreased the first day market adjusted return. In particular, in high-risk industries. The average marginal effect of VC-backing across all industries increased underpricing significantly. The increased underpricing is likely due to that VC-backing is an endogenous decision, making VC-backing more prevalent in high-risk industries. Adding interaction terms and having the financial industry as reference decreased the underpricing more in risky industries comparing to non-risky industries.
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