شکایت های قانونی اوراق بهادار ، ریسک عقب نشینی و عرضه اولیه عمومی
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17856||2011||19 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Corporate Finance, Volume 17, Issue 3, June 2011, Pages 438–456
I examine the relations between litigation risk, withdrawal risk, and the costs of going public using a sample of withdrawn and completed initial public offerings (IPOs) filed during 1996–2005. Firms with a higher probability of offer withdrawal face higher litigation risk if they complete these offers. Firms with higher litigation risk pay slightly higher gross spreads, but do not underprice their IPOs by a greater amount. Withdrawal probability is strongly and positively associated with underwriter gross spreads, consistent with underwriters charging fees that reflect the probability of not getting paid. When the pre-market demand for an IPO is weak, a higher withdrawal probability raises underpricing on completed deals.
Litigation risk poses a significant threat to firms going public in the United States. Once issuers are sued, regardless of the eventual outcome of the lawsuits, just the indirect costs due to lost management time and damaged reputation represent an enormous burden, not to mention the potentially huge legal liabilities for a young firm with limited resources. How does the legal threat affect the initial public offering (IPO) process? This paper tries to shed light on several open questions in the literature. First, is the IPO withdrawal decision affected by an issuer's legal liability concerns? How is the probability of IPO withdrawal related to litigation risk? For firms with high litigation risk, the expected costs of completing an IPO should be high for both underwriters and issuers. Therefore, I expect firms with high litigation risk to have a high probability of IPO withdrawal. However, the literature lacks empirical evidence on this question. Second, do litigation risk and withdrawal risk affect IPO underpricing? The litigation risk hypothesis for IPO underpricing argues that firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance. While many researchers have contributed to the debate (see, e.g., Ibbotson, 1975, Tinic, 1988, Hughes and Thakor, 1992, Drake and Vetsuypens, 1993, Hensler, 1995, Lowry and Shu, 2002, Zhu, 2009 and Pukthuanthong et al., 2009), one important issue has been ignored. If IPOs with greater litigation risk are more likely to be withdrawn, then the effect of withdrawal risk also needs to be considered when examining how litigation risk affects underpricing of completed IPOs. Third, do litigation risk and withdrawal risk affect underwriter gross spreads? Firms with fundamentally higher underwriting risks and requiring more extensive underwriter marketing efforts should pay higher underwriting fees. If litigation risk and withdrawal risk are part of the overall underwriting risk, I expect them to positively affect gross spreads. However, this issue has received no attention in the literature. Using a sample of withdrawn and completed IPO filings during the 1996–2005 period, I uncover several key findings. First, firms that are more likely to withdraw their IPOs, are more vulnerable to lawsuits if they complete their offers. At least one in every five IPOs filed with the SEC is withdrawn. The withdrawal decision is significantly affected by the information learned during the registration period. For issuers completing their IPOs, the estimated probability of withdrawal turns out to be a significant predictor of litigation that is brought against the issuers later. A one standard deviation increase in the probability of withdrawal raises the probability of being sued by 1%. Compared with the 4.2% unconditional probability of an IPO firm being sued, the probability of being sued increases by approximately 25%. The result suggests that the withdrawal decision is strongly influenced by litigation risk. Second, I find that firms with higher litigation risk do not underprice their IPOs by a greater amount. The results are robust to controls for withdrawal risk and the potential endogeneity of litigation risk in the underpricing regression. Given the empirical support found for the litigation risk hypothesis during the 1988–1995 sample period by Lowry and Shu (2002), I explore what may cause the lack of support for the hypothesis in the 1996–2005 sample period. Several institutional changes may contribute to the declining use of underpricing as litigation insurance. First, the increasing use of directors and officers (D&O) insurance and errors and omissions (E&O) insurance may reduce the need to insure through underpricing, and these insurance fees are likely to be substantially lower than the cost of additional IPO underpricing. Second, the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA) has increased the hurdles to successful private litigation for securities fraud, thus reducing expected litigation costs faced by issuers and underwriters.1 This reduced legal threat can also reduce the incentives to leave money on the table as an indirect form of litigation insurance. When IPO market conditions are weak, firms with higher withdrawal risk underprice their offers by a greater amount to increase the probability of completing the offer. Specifically, a one standard deviation increase in the predicted probability of withdrawal is associated with an increase of 4.94% in underpricing. This relation is not present when IPO market conditions are strong. Third, firms with higher litigation risk and withdrawal risk pay higher gross spreads to underwriters. Withdrawal risk affects gross spreads more strongly than litigation risk does. The effect of withdrawal risk on gross spreads is not only statistically, but also economically significant, more specifically, a one standard deviation increase in the probability of withdrawal increases the expected gross spread by 9.1 basis points (or 1.3% of the average gross spread). Based on the average proceeds of $104 million (2005 purchasing power), this suggests that a one standard deviation increase in the probability of withdrawal increases the dollar amount of underwriter revenue by $94,640 on completed deals. The findings suggest that underwriters are charging fees that reflect the probability of not getting paid. The remainder of this article is as follows. In Section 2, I develop the hypotheses. In Section 3, I describe the data and report the empirical results. Section 4 concludes the paper.
نتیجه گیری انگلیسی
While the relation between litigation risk and IPO underpricing has received considerable attention, we know little about how litigation risk is related to other decisions in the IPO process. The main objective of this study is to conduct a comprehensive examination of the relation of litigation risk to IPO withdrawal, underpricing, and underwriter gross spreads. In addition, this study tests the relative importance of withdrawal risk and litigation risk as determinants of underpricing and gross spreads. Several findings emerge from the analysis. First, firms with a higher likelihood of IPO withdrawal face higher litigation risk if they complete their offers, compared to other completed IPOs. Given that the offers with the greatest litigation risk would be withdrawn or never registered in the first place, the finding that the withdrawal probability is significantly related to litigation risk, even for completed IPOs, is noteworthy. Second, litigation risk does not significantly affect underpricing during 1996–2005. The finding is robust to controls for the endogeneity of litigation risk in the underpricing regression. The result suggests that the effect of litigation risk on underpricing may have changed from the earlier period, as Lowry and Shu (2002) find that firms with higher litigation risk underpriced their IPOs by a greater amount during 1988–1995. I propose several explanations for the change in the relation. Furthermore, when the pre-market demand for IPOs is weak, firms with higher withdrawal risk underprice their offers by a greater amount to increase the probability of completing the offer. In particular, if the offer price is not revised up, then each additional 13% of withdrawal probability results in underpricing that is 4.94% higher, so that a $104 million deal will leave $5.1 million more on the table. This relation is not present when the pre-market demand is strong. Last but not the least, issuers with higher litigation risk and withdrawal risk pay higher gross spreads. Furthermore, withdrawal risk affects gross spreads more strongly than litigation risk does. Each additional 13% of withdrawal probability results in gross spreads that are 9.1 basis points higher, so that a $104 million deal will pay $94,640 more to the underwriters. For deals with greater withdrawal risk, it makes sense that underwriters should be compensated more on the completed deals, since they lose money on the deals that are withdrawn. Although litigation risk represents a significant threat to firms going public in the United States, the effects of litigation risk on underpricing and gross spreads appear to be modest at best. In contrast, the effects of withdrawal risk on underpricing and gross spreads are strong. The results are consistent with the view that concerns about litigation risk affect the IPO withdrawal decision much more than the underpricing and gross spread decisions. However, it should be recognized that litigation risk may affect withdrawal probability, which in turn affects IPO pricing decisions.