LA EDAD MODERNA (S XVI – XVIII)

There is a growing body of literature examining the mitigating factors or restraints on earnings management by equity issuing firms. This literature has mainly focused on the role of financial intermediaries and other third parties (prestigious underwriters, VCs, reputed auditors etc.) involved in the IPO process and role of corporate governance mechanisms (independent boards, CEO duality, audit committees etc.) in issuing firms (Morsfield and Tan, 2006, Lee and Masulis, 2011, Brau and Johnson, 2009, Chen et al., 2013, Klein, 2002, Osma, 2008). We review below some of the evidence regarding the role of third party monitors in mitigating earnings management in IPOs.

Morsfield and Tan (2006) analyse the earnings management differences between VC backed and non-VC backed sample of US IPOs. They find that VC presence is related to lower abnormal accruals in the year of IPO. Moreover, they also report that lower earnings management in VC backed IPOs partially explains the superior return performance in VC backed IPOs. Brau and Johnson (2009) relate earnings management in IPOs to the presence and prestige of VCs, underwriters, auditors and attorneys as third party certifiers. They show

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that earnings management is negatively related to presence of reputed underwriters, attorneys, auditors and VCs. Comparing the monitoring and signalling effect of reputed third party certifiers, they conclude that IPO firms select prestigious certifiers to signal their quality at IPO. In a related study, Lee and Masulis (2011) report that VC backing, in general, does not restrain earnings management in IPOs. However, they find that more reputable VCs and underwriters are associated with lower earnings management and matching reputed VCs and underwriters reduces earnings management even further. Wongsunwai (2012) finds similar results and reports that monitoring by high quality VCs restrains earnings management in IPOs and around lockup expiry. More recently, Chen et al. (2013) investigate impact of underwriter reputation on earnings management in Chinese IPOs. They find that reputed underwriters restrict pre-IPO earnings management in non-state owned enterprises issuers only. However, they fail to find any significant impact of underwriter reputation on earnings management in state owned enterprises. Consistent with the evidence from IPOs, Jo et al. (2007) find that underwriter reputation is negatively related to earnings management in SEOs and SEOs with more prestigious underwriters perform better in aftermarket compared to the SEOs with less prestigious underwriters even after controlling for the effect of earnings management.

3.8 Conclusion

This chapter offers a comprehensive review of both theoretical and empirical literature on IPO lockups, survival of IPOs, long-run performance of IPOs and earnings management in IPOs. Theoretical explanations for the use of lockups are briefly presented and discussed. Theoretical literature suggests two important motivations: signalling and commitment for the use of lockups but the empirical results in support of these arguments are not conclusive (Brau et al., 2005, Brav and Gompers, 2003). Moreover, the studies on lockups have mainly

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used firms and issue characteristics at the time of IPO to test different motivations for the use of (longer) lockups. Regardless of the motivation for lockups, prior research agrees that longer lockups are beneficial for issuing firms at the time of IPO. We extend this literature and explore impact of lockup length on certain IPOs aspects which have not received attention in previous literature. More specifically, we relate lockup length to survival, long- run performance and earnings management in IPOs. We add to the existing IPO and lockup literature by showing that lockup length is an important determinant of IPO survival, performance and earnings management.

Review of literature in section 3.4 shows that evidence on survival of IPOs in UK is scant. Although, there have been couple of recent studies on UK market, they are exclusive to the AIM. There exists no study on survival of IPOs on Main Market of LSE which is one of the world’s largest and renowned stock markets. Moreover, research on IPO survival in US has focused on finding the determinants of survival or failure of IPOs on the markets. However, the survey of literature shows that these studies have completely ignored the possible impact of lockup length on post-IPO survival. Given the diverse nature and heterogeneity of lockups on Main Market of UK, lockup length could be an important determinant of aftermarket survival of IPOs. Longer lockup could have important implications for strategic decisions of managers, particularly, in early days of IPO and these decisions might be important for survival of firms in long-run. We attempt to fill this critical gap in literature by examining IPO survival in UK and relating it to lockup length in chapter 4 of this thesis. We make important contribution to the survival literature by providing evidence that lockup length is an important determinant of IPO survival in the long term.

The long-run performance of IPOs has puzzled academic researchers since (Ibbotson and Jaffe, 1975) and this literature has grown considerably after the study of US IPOs by Ritter

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(1991). Much of US literature documents that IPOs underperform in the long-run as evidenced in survey of literature in section 3.5.1. Although, studies on UK also provide evidence of long-run IPO underperformance, results from Main Market of UK are not conclusive. For example, Coakley et al. (2008) and Gregory et al. (2010) fail to find significant underperformance of IPOs listed on Main Market. These inconsistent results (in comparison to US and other markets in the world) are intriguing and warrant further investigation. Furthermore, research on determinants of long-run performance has largely ignored lockup length as a potential determinant. Given the lack of attention on the role of lockup length in IPO performance and intriguing evidence from LSE Main Market, we examine long-run performance of IPOs in relation to the length of lockup period in chapter 5. Our study contributes to the extant literature on IPO performance by identifying that lockup length serves as an important signal of post-IPO performance in addition to the existing signals such as VC backing, underwriter reputation etc.

The survey of literature in section 3.6 reveals that there is ample empirical evidence to suggest that IPO firms engage in opportunistic earnings management through abnormal discretionary accruals. Moreover, literature on mitigating factors in earnings management has generally reported positive impact of presence and prestige of third party agents (VCs, underwriters, auditors and attorneys) involved in IPO process on restraining earnings management around IPOs. Other factors examined in prior studies in deterring earnings management include independent boards and audit committees (Klein, 2002, Osma, 2008), presence of institutional investors (Chung et al., 2002) and long-term institutional investors (Hsu and Koh, 2005). Moreover, apart from examining earnings management around IPOs, there has been limited investigation of earnings management around expiry of IPO lockups (Wongsunwai, 2012). However, research on earnings management and its mitigating factors

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in IPOs has largely ignored the role of lockup length in restraining earnings management around IPO. We fill this gap in literature by examining the role of lockup length in deterring earnings management at the time of IPO in chapter 6 of this thesis. We contribute to the earnings management literature by showing that lockup length could be an important factor in mitigating the opportunistic accruals management at the time of IPO.

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Table 3.1 Evidence on Length of Lockup Period (in days)

This table compiles the main studies on IPO lockups in US and UK. The lockup period is in number of days from the date of IPO.

Country Study Sample

Period Mean Median

Unites States Aggarwal et al.(2002) 1994-1999 188 180 Arthurs et al.(2009) 1990-1994

2001-2005 220 -

Bradley et al. (2001) 1988-1997 224 180

Brau et al. (2004) 1988-1998 230 180

Brau et al.(2005) 1988-1999 164 -

Brav and Gompers (2003) 1988-1996 254 180

Cao et al. (2004) 1995-1999 196 180

Chen et al. (2012) 1988-2003 214 180

Field and Hanka (2001) 1988-1997 187 -

Gao and Siddiqi (2012) 1989-2004 220 180 Krishnamurti and Thong (2008) 1998-2000 181 180

Martin (2011) 1996-2006 185 180

Yung and Zender (2010) 1988-2006 218 180 United Kingdom Ahmad and Jelic (2014), MM 1990-2006 468 395 Espenlaub et al. (2001), MM* 1992-1998 561 730 Hoque and Lasfer (2009), MM

and AIM**

1999-2006 391 365

Hoque (2011) †, MM and AIM 1999-2006 383-714 365-730 * Main Market

**Alternative Investment Market

† Hoque (2011) reports means and medians for different types of lockups: Absolute, Relative, Staggered etc. The reported lockup days are range of mean and median lockup periods across different lockup types.

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Table 3.2 Summary of International Evidence on IPO Long-Run Performance

Country Study Period Sample

Size Long-run Performance (%)

3 Year 5 Year

Australia Lee et al. (1996) 1976-1989 266 -51.3 -30.9

Brazil Aggarwal et al. (1993) 1980-1990 62 -47.0 ---

Canada Kooli and Suret (2004) 1991-1998 445 -9.4 19.2

Chile Aggarwal et al. (1993) 1982-1990 36 -23.7 ---

China Chan et al. (2004) 1993-1998 609 -19.77 ---

France Luleux and Murzyka (1997) 1988-1992 56 -29.2 ---

Germany Ljungqvist (1997) 1970-1993 180 -12.1 ---

Stehle et al. (2000) 1960-1992 187 -5.0 ---

Greece Thomadakis et al. (2012) 1994-2002 254 -31.4 ---

Japan Cai and Wei (1997) 1971-1992 180 -27.0 ---

Korea Kim et al. (1995) 1985-1988 169 +91.6 ---

Malaysia Ahmad-Zaluki et al. (2007) 1990-2000 454 -14.2 to 17.9 --- Spain Álvarez and González (2005) 1987-1997 52 -28.2 -21.0

Sweden Loughran et al. (1994) 1980-1990 162 +1.2 ---

Switzerland Kunz and Aggarwal (1994) 1983-1989 42 -6.1 ---

Drobetz et al. (2005) 1983-2000 109 -1.7 -26.2

Thailand Allen et al. (1999) 1985-1992 150 +10.0 to

+27.5 ---

Turkey Bildik and Yilmaz (2006) 1990-2000 244 -84.5 ---

Kiymaz (2000) 1990-1995 163 +44.1 ---

Not all studies mentioned in table have been discussed in the literature review. Moreover, some studies use range of benchmarks, different computational methods and equal as well as value weighting schemes. In these cases, the most representative results are shown in the table above.

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