Date of Award

Spring 5-22-2021

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance

Advisor(s)

James Seward

Keywords

"Windows of Opportunity", Innovation, IPOs, Lead Underwrtiers, Reputation, Tolerance of Failure

Subject Categories

Business | Finance and Financial Management

Abstract

The dissertation consists of two chapters regarding private firms financing in the capital market. The first chapter explores the long-term failure rate of private firms that issued initial public offerings (IPOs) in the public capital market. We study busted, or failed, IPOs to examine the underwriter certification hypothesis and windows of opportunity hypothesis in the new issues market. Extensive literature pointed out that time-varying characteristics of information asymmetry might induce windows of opportunity in capital market when information asymmetry is relatively low. During windows of opportunity, private firms can issue public equity with lower information costs and more favorable terms. Hypothetically, the windows of opportunity tend to occur during the periods when macroeconomic conditions are favorable and the IPO volume is high. In contrast to windows of opportunity hypothesis, we document a high bust rate of IPOs issued during the high volume periods that have been characterized as periods of reduced information asymmetries. We explain this pattern by the increased market share of low quality investment in hot IPO markets. Since low-quality investment banks are less able to identify and screen out busted, or failed, IPOs, increased participation of low-quality investment bank will lower the screening standard of IPO market during high-volume period. Therefore, high volume periods appear to provide issuers a window of misopportunity for going public. The second chapter investigates an alternative explanation of high failure rate of IPOs issued during the “windows of opportunity” that will align the contradiction between “windows of opportunity” hypothesis and related empirical results. I found that IPOs issued during the “hot” period are more likely delist due to operating inefficiency than IPOs issued during the other periods on average. However, conditional on IPOs that are still active, IPOs issued during the “hot” period are more innovative than those issued outside the “windows of opportunity”, in terms of both quantity and quality of filed patents. Moreover, lead underwriters adjust the underwriting process and direct public capitals to more innovative firms across IPO cycles. This pattern is most significant among high-reputed underwriters. Furthermore, high-reputed underwriters are more able to identify potential successful innovators during the “windows of opportunity” and make investors benefit more from those extremely innovative firms. Those results are robust after I control for the issuer-specific characteristics, the underwriting process, the “nascent” industry fixed effects, and the endogeneity. Overall, “windows of opportunity” period facilitates risk-taking behaviors of investors and drive outcome distribution of IPOs issued during this period to have fatter tails.

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