Signaling and the Valuation of Unseasoned New Issues

Downes, David H.; Heinkel, Robert

doi:10.2307/2327113

Cited by 185 publications

(127 citation statements)

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“…We find that a one-percentage point increase in equity offered decreases the expected number of investors by a factor of 0.982161 (exp (-0.018)). This finding is in line with Downes and Henkel (1982), who provide empirical evidence that entrepreneurial ownership is an effective signal in an IPO context.…”

Section: Risk Levelsupporting

confidence: 91%

Signaling in Equity Crowdfunding

Ahlers¹,

Cumming

Günther

et al. 2015

Entrepreneurship Theory and Practice

1,430

1,398

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This paper presents an empirical examination of which start-up signals will small investors to commit financial resources in an equity crowdfunding context. We examine the impact of firms' financial roadmaps (e.g., preplanned exit strategies such as IPOs or acquisitions), external certification (awards, government grants and patents), internal governance (such as board structure), and risk factors (such as amount of equity offered and the presence of disclaimers) on fundraising success. Our data highlight the importance of financial roadmaps and risk factors, as well as internal governance, for successful equity crowdfunding. External certification, by contrast, has little or no impact on success. We also discuss the implications for successful policy design. Signaling in Equity CrowdfundingABSTRACT This paper presents an empirical examination of which start-up signals induce small investors to commit financial resources in an equity crowdfunding context. We examine the impact of firms' financial roadmaps (e.g., preplanned exit strategies such as IPOs or acquisitions), external certification (awards, government grants and patents), internal governance (such as board structure), and risk factors (such as amount of equity offered and the presence of disclaimers) on fundraising success. Our data highlight the importance of financial roadmaps and risk factors, as well as internal governance, for successful equity crowdfunding. External certification, by contrast, has little or no impact on success. We also discuss the implications for successful policy design. JEL Classification: G21, G24, L26Keywords: Entrepreneurial Finance, (Equity) Crowdfunding, Micro Lending, Internet, Given the recent passage of the JOBS (Jumpstart Our Business Startups) Act in the U.S., which will permit equity crowdfunding by early 2013, this number is likely to increase sharply. Small investors, who are often the primary support of start-ups, do not usually have the capability to extensively research and assess potential investments. In order to successfully raise money via an equity crowdfunding platform, therefore, start-ups need to find ways to clearly signal their value to small investors.Two contrasting London-based crowdfunding cases illustrate the issues discussed further here. In December 2011, The Rushmore Group, a start-up that now operates three bars in London, sold 10% of its equity for £1,000,000 to 143 small investors through Crowdcube.The aspiring entrepreneurs of The Rushmore Group accomplished this feat in a little over two weeks -a remarkable success story.A strikingly different outcome, however, is illustrated by our second example. In early April 2012, another owner and operator of a London bar, Meatballs, offered a 25% equity 2 stake for £300,000 on Crowdcube. Two months after the start of the offering, they had raised only £4,750.The Rushmore Group and Meatballs perform essentially the same service in the same city.Both start-ups were presented in the same fashion and on the same online platform. Why, then, di...

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Section: Risk Levelsupporting

confidence: 91%

Signaling in Equity Crowdfunding

Ahlers¹,

Cumming

Günther

et al. 2015

Entrepreneurship Theory and Practice

1,430

1,398

View full text Add to dashboard Cite

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“…Initial return is the percentage difference between the closing price on the first trading day and the offer price. Retained ownership, α is calculated as in Downes and Heinkel (1982): α = (N -N p -N s ) / N, where α is the proportionate ownership retained by the insiders (original owners); N is the total number of shares outstanding after the initial offer; N p is the number of primary shares in the initial offer (public issue); and N s is the number of secondary shares offered by the insiders for resale (offer for sale). Auditor -Big 5 is the percentage of companies audited by one of the Big 5 auditors.…”

Section: Resultsmentioning

confidence: 99%

Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance

Ahmad‐Zaluki

Campbell

Goodacre

2011

The International Journal of Accounting

127

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We find evidence of income-increasing earnings management in Malaysian IPOs, which occurs primarily for IPOs during a period of severe economic stress (the East Asian crisis). Within the high ownership concentration Malaysian market, post-IPO control concerns also appear to constrain IPO earnings management: owners seem willing to accept reduced IPO proceeds and signaling opportunities to increase the likelihood of retaining control of the company post-IPO. The requirement to provide a profit guarantee does not seem to greatly affect earnings management. IPO companies engaging in aggressive income-increasing earnings management have significantly worse market-based performance than their more conservative counterparts, but again only for IPOs issued during the economic crisis period. Overall, the results suggest that personal liquidity concerns are an important factor in IPO decisions during the economic crisis. Professor of Accounting and Finance at the University of Stirling. We appreciate the very helpful, constructive comments from Rashad Abdel-Khalik (the editor) and the two anonymous referees who have contributed significantly in helping improve the structure of the paper and the arguments therein. We have also benefited from the comments of Chris Veld, participants at the EAA Annual Conference at University College Dublin and the BAA Annual Conference at Royal Holloway, University of London. The financial support of the Malaysian government (JPA) and the Universiti Utara Malaysia is gratefully acknowledged (for Nurwati A. Ahmad-Zaluki). We thank the Public Information Centre, Kuala Lumpur Stock Exchange (Bursa Malaysia) for the usage of the library and Brahim Saadouni from the University of Manchester for the provision of his PACAP database and his collection of Malaysian prospectuses. The usual disclaimer applies. JEL classification: G32 Earnings management in Malaysian IPOs: the EastAsian crisis, ownership control and post-IPO performance AbstractWe find evidence of income-increasing earnings management in Malaysian IPOs, which occurs primarily for IPOs during a period of severe economic stress (the East Asian crisis). Within the high ownership concentration Malaysian market, post-IPO control concerns also appear to constrain IPO earnings management: owners seem willing to accept reduced IPO proceeds and signaling opportunities to increase the likelihood of retaining control of the company post-IPO. The requirement to provide a profit guarantee does not seem to greatly affect earnings management. IPO companies engaging in aggressive incomeincreasing earnings management have significantly worse market-based performance than their more conservative counterparts, but again only for IPOs issued during the economic crisis period. Overall, the results suggest that personal liquidity concerns are an important factor in IPO decisions during the economic crisis. JEL classification: G32

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“…This leads to higher agency costs as entrepreneur-founders are likely to be more reluctant to disclose proprietary information to potential IPO outside investors (Shane and Cable, 2002) while founders are also more likely to engage in opportunistic actions for personal gratification such as tunnelling at the expense of outside shareholders (Jensen and Meckling, 1976). One way to mitigate these issues is for founders to initiate costly governance mechanisms that would be too expensive to replicate in all but the highest quality firm's thereby effectively signalling quality to outside investors (Downes and Heinkel, 1982). One such mechanism is for founders to retain a significant portion of ownership (Leland and Pyle, 1997).…”

Section: Introductionmentioning

confidence: 99%

“…a negative relationship with asymmetric information. The creation and establishment of independent board committee's is an expensive process for many firms and while this can be seen as a form of signalling quality to potential outside investors (Downes and Heinkel, 1982) there is a lack of consensus in the literature regarding their beneficial impact over and above the oversight role undertaken by truly independent directors themselves (Anderson and Reeb (2004); Golden and Zajac (2001)). However despite the debate and subsequent lack of consensus in literature regarding the beneficial role of committees, and in particular board level audit committees, the highly relationshipbased business environment of West Africa (Lavelle, 2001) will likely exacerbate the findings of Turley et al (2004) who find that the formation and reliance of firms on independent audit committees actually cause net increases in agency and monitoring costs.…”

Section: Introductionmentioning

confidence: 99%

The impact of corporate governance measures on the performance of West African IPO firms

Hearn

2011

Emerging Markets Review

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This paper examines the impact on underpricing and firm market value arising from IPO firms implementing a range of governance attributes such as the separation of CEO and Chairman roles, the founder ceding CEO position, establishment of committees and board size. Furthermore I study the determinants of director retained ownership and the relation between this and underpricing. Using a comprehensive sample of 37 locally listed IPO firm's from across West Africa I find evidence of a mixed impact from the adoption of universally recognised governance mechanisms. Higher levels of retained director ownership increase underpricing in contrast to that of founders.

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Signaling and the Valuation of Unseasoned New Issues

Cited by 185 publications

References 0 publications

Signaling in Equity Crowdfunding

Signaling in Equity Crowdfunding

Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance

The impact of corporate governance measures on the performance of West African IPO firms

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