Capital-structure changes around IPOs
Evan Dudley
Warrington College of Business
University of Florida
Gainesville, FL 32611-7168
[email protected]
(352) 392-9985
and
Christopher James*
Warrington College of Business
University of Florida
Gainesville, FL 32611-7168
[email protected]
(352) 392-3486
First draft: June 2013
This draft: November 2013
JEL Classification: G32
Keywords: Capital structure, preferred shares, market timing, staged finance, initial public
offerings
*: Corresponding author. We thank Jay Ritter for graciously sharing his IPO database with us and his thoughtful
comments on an earlier draft. We also thank seminar participants at HEC Montréal, the University of Florida and at
Queen’s University for helpful comments.
Capital-structure changes around IPOs
Abstract
This paper examines capital-structure changes around IPOs. We find that the magnitude of
leverage changes as well as market timing in hot-issue markets are sensitive to sample selection
and whether preferred shares are treated as debt when computing pre-IPO leverage. Consistent
with investor concern with overinvestment, firms that rely on preferred stock prior to their IPO
are more likely to engage in staged equity financing after they go public. Overall, using a broader
sample of IPO firms, we find little evidence of transitory declines in leverage during hot-issue
markets.
1
Introduction
A number of recent empirical studies focus on leverage changes around initial public
offerings (IPOs) in order to draw inferences about managers’ valuation of the firm at the time of
the IPO (Alti, 2006) and the nature and persistence of target leverage ratios (Lemmon et al., 2008
and Baker and Wurgler, 2002). A common assumption in these studies is that leverage changes
are largely the result of managerial discretion at the time of the IPO and thus provide insights
into the determinants of capital structure. In this paper we argue that for some firms, the
magnitude of IPO-year changes in leverage and the determinants of IPO related changes in
leverage are quite sensitive to how leverage is defined and the selection criteria used to form the
sample.
We start by documenting that a substantial percentage of private firms rely heavily on
preferred stock financing before they go public. For example, in our sample of IPOs, 45 percent
of the firms had preferred stock outstanding in the year before they went public, and, for those
firms, the book value of preferred stock averaged about 75% of the book value of assets. We find
that IPO firms with preferred shares outstanding are typically financed by active investors; either
VC or private equity firms. Moreover, we find that the use of preferred stock by IPO firms has
increased over time with the growth of active-investor financing of start-ups. Firms with
preferred stock outstanding also typically have a history of losses prior to going public and as a
result have negative book equity at the time they go public. More importantly, over 90 percent of
firms in our sample with preferred stock convert all of their preferred stock into common shares
when they go public. This occurs because most convertible preferred shares require mandatory
conversion when the firm goes public.
The widespread use of preferred stock and the conversion of most preferred when firms
go public makes the magnitude of leverage at the time of an IPO quite sensitive to how leverage
is defined and to the types of firms included in the sample of IPOs. For example, most empirical
studies of leverage changes around IPOs treat preferred stock as debt when computing leverage.
The rationale for this treatment is that for publicly traded companies, preferred stock is typically
2
thought of as a fixed claim resembling debt rather than equity.1 However, treating preferred as
debt when examining capital structure changes around IPOs raises several concerns. First,
mandatory conversion of preferred shares leads to a large mechanical change in leverage at the
time of the IPO. Second, the reasons for preferred financing and thus the firm characteristics
associated with preferred are very different for private than publicly traded firms. Finally, and
perhaps most important, prior empirical studies typically restrict pre-IPO leverage to be within
the unit interval. When preferred is treated as debt, this restriction leads to a sample of IPO firms
that is skewed toward older and more profitable firms that are more likely to employ debt
financing after they go public.
To illustrate these concerns, consider the case of NetFlix’s IPO in May of 20022. At the
end of December 2001, Netflix had $30 million in total liabilities, $102 million in convertible
preferred stock outstanding and $42 million in assets. Owing to a history of losses, Netflix had a
stockholder’s deficit of about $90 million. As part of its IPO, Netflix raised $75 million in new
funding, paid off $3 million in debt and, because of the mandatory conversion requirement,
converted all of its preferred stock into common stock. If, as is typically done, preferred stock is
treated as debt, Netflix pre-IPO leverage would be 314% ((30+102)/42), which drops to 32%
after the IPO (owing largely to the conversion of preferred).3 Since the pre-IPO leverage exceeds
100%, Netflix would be excluded from the IPO firms using the sample selection criteria
employed by Alti (2006) and Baker and Wurgler (2002).
NetFlix is not an outlier. Using a sample of firms that conducted IPOs between 1975 and
2009 we show that the magnitude of leverage changes differs significantly depending on how
leverage is defined and the sample selection criteria employed. We measure book leverage in
three ways. The first measure is similar to the one used by Alti (2006), Baker and Wurgler
(2002) and Kayhan and Titman (2007) which defines debt as total liabilities plus preferred shares
1
See for example, Kayhan and Titman (2007). Ross, Westerfield and Jaffe (2010), in their corporate finance text,
argue that “preferred stock is probably more similar to debt than to common stock” due to the constant dividend rate
associated with preferred stock of public companies.
2
The change in capitalization as reported in NetFlix’s offering prospectus is provided in appendix A2. Information
on total liabilities and total assets is on page F-3 of the offering prospectus.
3
Book leverage from the pro-forma balance sheet that takes into account the conversion of preferred shares equals
74%. Book leverage taking into account the conversion of the preferred shares and the proceeds raised from the IPO
is 32%, based on the firm’s balance sheet at the end of December 2002.
3
less deferred taxes and convertible debt.4 We refer to this leverage measure as LEVPF. The
second measure (LEV) is the same as LEVPF but treats preferred as equity rather than debt. Our
final measure of leverage is the ratio of short-term plus long-term debt to total assets. This is the
measure used by Lemmon et. al. (2008). We refer to this measure as LEVSL.
As shown in Figure 1, the change in leverage is orders of magnitude larger for LEVPF
relative to LEV. Using information gathered from the offering prospectuses, we confirm that the
difference is due to the conversion of preferred shares as part of the IPO. More importantly,
including preferred as debt obscures capital structure persistence. For example, firms with preIPO preferred shares have characteristics such as high market-to-book ratios, high levels of R&D
expenditures and relatively low operating cash flows that are typically associated with low
leverage. Yet despite these characteristics, based on LEVPF, these firms have higher than
average leverage before going public and lower than average leverage after going public
We also investigate whether treating preferred as debt and excluding firms with LEVPF
outside the unit interval affects the importance of market timing as a determinant of leverage
changes for IPO firms. This analysis is motived the results of a recent study by Alti (2006) who
finds large but transitory changes in leverage (defined by LEVPF) following IPOs in so called
hot-issue markets. Alti interprets these findings as evidence of market timing by issuing firms in
hot IPO markets. Alti’s sample excludes firms with LEVPF greater that 100% and thus excludes
many younger, R&D intensive IPO firms that rely heavily on preferred stock financing prior to
going public.
As discussed in detail later in the paper, we expect that firms with preferred outstanding
are less likely to engage market timing in hot-issue markets than other IPO firms. This
expectation is based on the observation that the use of convertible preferred by firms before they
go public is part of a staged financing process. Staging by start-up firms is thought to play a role
in mitigating potential overinvestment problems between the entrepreneur and outside investors
(see for example Gompers (1995), Sahlman (1990), and Hellman (2006) for a discussion of the
reasons for the use of preferred stock by start-up firms). Staged equity financing is particularly
important role for firms that invest primarily in specialized intangible assets such as R&D (which
4
Compustat does not distinguish between convertible preferred and straight preferred stock.
4
has a greater discretionary component) and where significant private benefits may accrue to the
entrepreneur or management. We hypothesize that the same agency concerns arising from
potential overinvestment that motivates the use of preferred stock prior to going public and may
also temper investors’ enthusiasm for the shares in hot IPO markets. If so, and assuming pre-IPO
usage of preferred is a proxy for agency concerns with overinvestment problems, we would
expect lower supply elasticities in hot markets for firms with preferred stock. We refer to this as
the agency-cost hypothesis.
We show that firms with preferred stock outstanding prior to the IPO have financial
characteristics typically associated with staged equity financing (e.g. they have high levels of
R&D, little debt financing and high market-to-book ratios). Interestingly we find that the
characteristics associated with the use of preferred stock financing among IPO firms are
negatively related to the use of preferred stock among publicly traded firms, suggesting that the
reasons for issuing preferred stock are very different for start-ups than for established publicly
traded firms.
Following recent work by Hertzel, Hudson and Parrino (2012) we use the IPO firm’s
cash burn rate and the frequency of follow-on offerings to measure public-market staged
financing following the IPO. Consistent with the continued use of staged financing, we find that
cash burn rates (the ratio of the difference between investment spending and operating earnings
to IPO proceeds) are positive and significantly related to the firm’s pre-IPO reliance on preferred
shares. More importantly, we find that firms with preferred in their pre-IPO capital structure rely
more heavily on equity staging (particularly private equity offerings) and much less on debt
financing than other IPO firms after they go public.
We also document that the use of preferred stock before going public is associated with
the involvement of an active investor, though not exclusively VC investors (62% of firms with
pre-IPO preferred are VC backed). To investigate whether active investor involvement and
staged financing are related to the propensity to engage in hot-issue market timing, we divide our
sample of IPO firms into two groups based on whether or not the firm has preferred stock
outstanding at the time of the IPO. Overall we find significantly lower supply elasticities for
firms that rely on preferred shares before going public. We interpret this as evidence consistent
with the agency-cost hypothesis. More importantly, after removing the restriction that LEVPF is
5
within the unit interval, (which increases the sample of IPO firms by over 40% by including
many firms like NetFlix), we find little evidence of transitory declines in leverage in hot issue
markets.
Overall we find that the financial choices of firms made prior to going public are
significantly related to their post-IPO financing decisions. This finding is consistent with the
results of Lemmon et. al. (2008), who find a surprising degree of persistence in leverage dating
back before the firm goes public. While going public is an important life-cycle event, our results
suggest that agency problems associated with overinvestment by private firms persist after the
firm goes public despite significant changes in the information and control environment the firm
operates in. We contribute to the capital-structure literature by showing that, for a significant
fraction of firms that go public, the previously documented decline in leverage at the time of the
IPO is largely mechanical—resulting from the mandatory conversion of preferred. We also find
that the sensitivity of firms to hot-issue markets and market timing opportunities is significantly
related to the severity of agency problems arising from the potential for overinvestment. Our
findings suggest that financially constrained firms for whom external financing is rationed or
doled out sequentially are less likely to engage in market timing. These results are consistent
with Korajczyk and Levy (2003), who show that constrained firms are unable to time their issue
choice with periods of favorable macroeconomic conditions.
The remainder of the paper is organized as follows. The next section provides
background on the use of preferred stock by start-up companies. This background serves to
motivate our analysis of persistence in financing choice. In section 2 we describe our sample and
define the variables we use in our empirical analysis. In section 3 we present our empirical
results concerning leverage changes around the IPO and whether the use of preferred stock is
related to staged-equity financing after the IPO. In section 4 we examine the post IPO evolution
of leverage and the relationship between preferred financing and the sensitivity of leverage to
commonly used proxies for market timing. Section 5 concludes.
1. Background: Staging and the Use of Convertible Preferred by Start-up Companies
6
As Sahlman (1988, 1990) and Gompers (1995) point out, staged financing is a prominent
feature of start-up financing. Staging is generally thought to be a way to control agency costs
arising from providing managers with too much capital. When investments are staged, capital is
provided sequentially conditional on performance since the previous stage. Staging of
investments occurs in several ways (see Hertzel et al., 2012). One form of staged financing,
common among start-up companies, involves the use of convertible claims, typically preferred
stock.5 As Hellman (2006) and Mayers (1998) explain, the conversion feature is attractive
because if the project (or start-up) is successful, conversion occurs, which in turn frees up
additional cash and provides a readymade exit mechanism for early-round investors. An
important advantage of convertible preferred stock over straight equity is that it provides
investors with a liquidation preference while preserving the entrepreneur’s incentive to exert
effort. Preferred stock also facilitates staging by allowing the start-up to vary liquidation
preference or other contract features by financing round.
Hellman (2006) and Black and Gilson (1998) argue that combining mandatory conversion
requirements with convertible preferred stock conveys additional benefits.6 The mandatory
conversion requirement obligates investors to convert when there is a qualified public offering
(QPO), which as Metrick and Yashuda (2011) explain, is typically a public common stock
offering that meets certain thresholds such as share price and offer proceeds. Note that the
conversion also provides sequential financing similar to the type analyzed by Mayer (1998) since
conversion frees up cash that would otherwise be used to redeem the preferred shares. The
conversion of the preferred however does not typically imply a change in voting rights since
convertible preferred stock owners typically vote on an as-converted basis.
5
Kaplan and Stromberg (2003) find that convertible preferred is the most common form of financing for VC-backed
firms (appearing in over 95% of the financing rounds in their sample).
6
Most theoretical models of convertible preferred financing focus on the incentive effects of convertible preferred
for both the entrepreneur and the active investors. The optimality of convertible preferred arises from convertible
preferred providing incentives for the entrepreneur to exert effort and for the active investor to engage in value
enhancing activities. For example, Hellman (2006) argues the optimality of convertible preferred stems from the fact
that it allocates different cash flow rights to different exit decisions. When the start-up is acquired, preferred
shareholders receive a payout based on their liquidation rights. If the firm goes public, the preferred converts into
stock thus allowing the entrepreneur a pro rata share of the value of the firm. It should be noted that in Hellman’s
model, exit through acquisition or trade sale is an inferior outcome relative to going public. Greater liquidation
preferences are accorded to the investor in this case in order to compensate for the loss of liquidation preferences in
the event of an IPO.
7
Most prior studies of start-up financing focus on VC-backed investments and find
widespread use of preferred shares by VC firms. There exists however, little empirical evidence
on whether convertible preferred and staged financing are widely employed for non-VC backed
firms. As discussed later in the paper, approximately 38% of the IPOs in our sample with
preferred stock outstanding were not VC backed according to the VC designation in Jay Ritter’s
IPO data base. Based on review of a random sample of 100 non-VC backed IPOs with preferred
outstanding, we find that most of the preferred issues arise in the context of investments by
private equity firms (growth capital or buyout firms) or in the context of acquisitions by the IPO
firm prior to going public (where as part of the acquisition, the acquirer issues preferred to the
managers/owners of acquired firm).7
While there are potential advantages associated with use of convertible securities with a
liquidation preference over common stock, a natural question is why do start-ups typically use
preferred stock rather than convertible debt? There are two potential reasons. First, as discussed
earlier, convertible preferred typically has voting rights on an “as converted basis”. Thus
preferred shareholders have voting rights on par with common stock holders. Second, active
involvement by debt holders in the management of the firm may expose debt holders to equitable
subordination claims in the event that the firm becomes financially distressed.8
To summarize, previous theoretical and empirical studies suggest that convertible
preferred stock is an important aspect of the staged financing of many start-up firms. Moreover,
Gompers (1995) finds that firm characteristics related to staged financing by start-ups are
characteristics that previous empirical studies have found to be associated with low leverage (See
for example Rajan and Zingales (1995), Titman and Wessels (1988) and Lemmon et al (2008).
These findings together with the mandatory conversion of preferred suggest that the magnitude
and persistence of leverage changes among IPOs may be related to the use of convertible
7
For example, as part of its IPO, Colfax Corporation, a global supplier of pumps and fluid-handling systems,
converted all of its 175 million dollars in mandatory convertible preferred into common stock. According to the
offering prospectus, the preferred stock had been issued in conjunction with prior acquisitions by Colfax. Another
example is TA Associates’ investment in the convertible preferred of CARDTRONICs, a large ATM operator. TA
Associates describes itself as a “Global Growth Private Equity Fund”. All of TA’s investment in CARDTRONIC’s
convertible preferred was converted into common as part of the company’s IPO in 2007. Growth capital is a
designation employed in Jay Ritter’s database to describe firms with private equity investors that are neither venture
capitalists nor buyout specialists.
8
See Talyor and Sansone (2007) for a discussion of the legal liability associated with debt holders becoming
actively involved in the management of a distressed firm.
8
preferred prior to the firm going public. If financing choices are persistence then we expect that
reliance on preferred stock prior to going public will be associated with greater reliance on
equity staged financing subsequent to going public. The agency concerns that give rise to staged
financing may in turn lead to different market timing behavior for firms with pre-IPO preferred
than for other IPO firms.
2. Data and Leverage Definitions
2.1 Data
The sample consists of initial public offerings (IPOs) that occur between 1975 and 2009.
The sample of IPOs and information on the IPOs was obtained from Jay Ritter’s IPO database.9
We end the sample in 2009 in order to track post-IPO issuance for two years following the IPO.
Our sample is restricted to firms for which the offer price exceeds $5.00 per share. We exclude
utility firms (SIC 4900-4999) and financial firms (SIC 6000 -6999) as well as American
Depositary Receipts, closed-end funds, unit IPOs, limited partnerships, spinoffs and REITs. This
sample of firms is matched to stock price data from CRSP and accounting data from
COMPUSTAT with the restriction that all of the firms have accounting data on book assets and
liabilities in both the year before and the year of the IPO . Firms are included in the sample until
the first year in which they exit COMPUSTAT. We exclude observations with missing sales or
that have less that $10 million (in 2011 dollars) in book assets in the IPO year. These steps yield
a set of 3,777 IPOs. See the data appendix for details.
2.2 Leverage Definitions
We examine leverage changes using the three measures of book leverage described in the
introduction (LEVPF, LEV and LEVSL). However, unlike Baker and Wurgler (2002) and Alti
(2006), we include firms with LEVPF greater than 100%.10 The reason we include these firms is
that a substantial number of firms with preferred stock outstanding have negative book equity
(since preferred shares is treated as a liability under this definition of leverage) in the year prior
9
Information on the construction of this sample can be found in Loughran and Ritter (2004) and Jay Ritter’s
website. The database is based on the SDC IPO dataset, but with thousands of corrections and filling in of missing
observations.
10
However, we exclude firms for which LEVSL is outside the unit interval. We exclude these firms in order to
maintain comparability with earlier studies that use this definition and to minimize the effect of outliers on our
results. See for example, Hovakimian, et al. (2001), Lemmon et al. (2008), and Lin and Flannery (2013).
9
to the IPO. Requiring that LEVPF be less than or equal to 100% would exclude 1,072 firms, or
28% of our sample. Of the firms that would be excluded, 88% have pre-IPO preferred shares. As
we discuss later, this arises from the fact that many start-ups finance R&D with the proceeds
from preferred share issues and, since R&D is treated as an expense, these firms have a history
of losses that deplete the book value of common equity.11
2.3 Summary Statistics
Table 1 provides summary statistics for the firms in our sample. All financial information
is for the year end prior to the firm’s IPO. To illustrate how excluding firms with LEVPF greater
than 100% affects the types of IPO firms that are included in the sample, we report in Table 1
summary statistics for the entire sample and for the sample when a LEVPF<=100% filter is
applied. The firms that are excluded when this filter is applied are different along several
dimensions. They have lower leverage using LEVSL but higher leverage using LEVPF, due to
the extensive use of preferred shares. Eighty-eight percent of the additional 1,072 firms have preIPO preferred shares. Comparing columns (5) and (1) reveal that these additional IPO firms are
also significantly younger (10.5 vs. 17.4 years, t-stat for difference = -10.6), less profitable (9.2% EBITDA/A vs. 19.2%, t-stat for difference = -32.8), have fewer tangible assets (as
measured by PP&E where mean PP&E/Assets is 20% vs. 28.4% for the filtered sample, t-stat for
difference = -11.1) and invest more in R&D (mean R&D/Assets of 18.9% vs. 5.7% for the
filtered sample, t-stat for difference = 26.1). We also show in Table A1 in the appendix that these
differences also exist when the sample is split into firms with and without preferred shares.
Firms with preferred shares raise more capital in the IPO, belong to industries with high average
market-to-book ratios, and are more likely to be venture- or growth- capital. Overall, firms that
use preferred shares have characteristics that are typically associated with low levels of leverage.
Firms with preferred shares also have characteristics that Gompers (1995) and Hertzel et. al.
(2012) find are associated with staged financing.
11
We are not the first to point out the value-relevance of R&D spending. Lev and Sougiannis (1996) discuss how
capitalizing R&D expenses predicts future returns. Guo et al. (2005) find that R&D spending and intangible assets
such as the strength of patent protection and FDA approval are relevant measures for the valuation of biotech IPOs.
10
One potential explanation for the differences shown in Table 1 is that preferred stock is
just a proxy for VC backing and VC-backed firms are more likely to be firms with more
intangible assets and lower earnings. However, while it is true that firms with pre-IPO preferred
shares are more likely to be VC-backed, most of the differences we observe in Table 1 persist
after controlling for VC backing. As shown in Table A2 of the appendix, we find differences
similar to those in Table 1 for VC- and non VC-backed IPO firms.
To investigate whether firms with preferred shares outstanding prior to going public have
greater financing needs at the time of their IPO, we calculate the dollar burn rate for the IPO
firms in our sample. The dollar burn rate is calculated in the same way as in Hertzel et al. (2012),
as the difference between funds used for investment by a firm and the funds it generates from
operations in the year prior to the IPO.
1
where CAPX is capital expenditures, OIBDP is operating income before depreciation,
TXT and XINT equal total taxes paid and interest expense, respectively. The cash burn rate is
defined as the ratio of the dollar burn rate to total IPO proceeds. Note that our measure of the
dollar burn rate includes R&D expense because operating income is net of R&D.
As shown in Table 1, the average dollar burn rate for firms with LEVPF > 100% (see
column Add. Observations) is $7.1 million compared to -$1.3 million in the sample that excludes
these firms (see column With filter). The additional firms also have higher cash burn rates (9.3%
vs. 1.5%, t-stat for difference = 2.5). In fact, the median firm in the filtered sample has a negative
cash burn rate indicating that capital expenditures and R&D are less than internally generated
funds in the year prior to going public (i.e. they have positive free cash flow). Since the inverse
of the cash burn rate is simply the number of years of funding raised in the IPO, the higher the
cash burn rate, the faster the firm will “burn” through IPO proceeds. Firms in the filtered sample
would burn through their cash in 66 years compared with 10 years for firms with LEVPF >
100%. Splitting the sample by whether the firm has pre-IPO preferred shares reveals a similar
difference in cash burn rates (see Table A1).
Fewer tangible assets and greater investment in R&D among IPO firms with preferred
outstanding is consistent with the hypothesis that convertible preferred is used as part of a staged
11
financing process to mitigate overinvestment in intangible assets. Lower operating profits, high
R&D expenditures and few tangible assets are characteristics typically associated with firms that
use less leverage to fund their operations. As a result it is perhaps not surprising that we find
firms with preferred shares have significantly lower leverage defined by LEV and LEVSL. In
contrast, when LEVPF is used to measure leverage, firms with pre-IPO preferred shares have
more than double the pre-IPO leverage (134%) than firms without preferred (67%).
At this point, a natural question to ask is whether the same factors associated with the use
of preferred shares by IPO firms are associated with the use of preferred shares by established
publicly traded firms. We address this question by comparing IPO firms to public firms based
on whether or not they have preferred stock outstanding. The public firms sample consists of the
universe of publicly traded firms in COMPUSTAT from 1975 to 2009 that are not financial
institutions or regulated utilities. We report summary statistics for these firms in the third year
they appear in COMPUSTAT.12 As shown in Table 2, for publicly traded firms, the
characteristics associated with the use of preferred financing are very different from the
characteristics associated with preferred financing among IPO firms. For example, public firms
with preferred shares on average use more debt, have more tangible assets, spend less on R&D
and have lower market-to-book ratios than firms with no preferred stock outstanding. Indeed,
unlike IPO firms, public firms that use preferred shares have characteristics that are typically
associated with greater leverage and higher debt capacity (see for example Lemmon et al., 2008)
which is why preferred shares are typically considered a close substitute for debt financing.
A simple logistic regression (tabulated in the appendix in Table A3) of the likelihood of
having preferred stock outstanding on earnings, leverage, market-to-book, PPE/A, and
investment spending confirms that the characteristics that are positively associated with preferred
share financing among IPO firms are negatively associated with preferred share usage among
publicly traded companies. For example, among IPO firms, we find a positive and statistically
significant relationship between the likelihood of preferred and spending on R&D. For public
firms, we find just the opposite. The effect of leverage (measured with LEVSL) is significantly
12
Alternatively, summary statistics could be reported using every year in which these firms appear in
COMPUSTAT. This would render the comparison less accurate as we only have one firm-year observation for the
IPO firms (e.g. the year prior to the IPO). The comparison is robust to using every firm-year for the public firm
sample, however.
12
negative for IPO firms, but it is significantly positive for public firms. Asset tangibility
(measured with PPE/A) negatively affects the incidence of preferred share financing in IPO
firms, but the effect of this variable is significantly positive for public firms. Overall these results
suggest that reasons for preferred financing among publicly traded firms are very different from
the reasons IPO firms use preferred.
2.4 Changes in Leverage Around the IPO
Panel A of Table 3 reports the evolution of average leverage from the year preceding the
IPO to 5 years after the IPO across the firms in our sample. As shown, the change in leverage in
the IPO year and in subsequent years varies with how leverage is defined. For example, using
LEVPF we find a decrease in average leverage for all firms in the IPO year of over 60% (from
95% to 37% after the IPO). In contrast, using LEV (which treats preferred shares as equity) we
find a more modest decline in leverage in the IPO year of 28% (from 64% pre-IPO to 38% after
the IPO).
Panels B and C of Table 3 provide summary statistics for the change in leverage for firms
with and without preferred shares in our sample. As is typical in studies reporting longitudinal
evidence, we report averages conditional on firms remaining in the COMPUSTAT database. In
event year +5, for example, firms that were acquired, went private, or no longer reported
financial statements following financial distress are not included if such events occur before year
+5. For all three book-leverage measures we find that the IPO is associated with a permanent
decline in leverage (although for both groups of firms leverage increases slowly in the five years
subsequent to the IPO). The decline in the LEVPF leverage measures is greater for the firms with
preferred shares outstanding prior to going public.
To investigate whether conversion of preferred leads to the significant decline in
LEVPF in the IPO year, we examine the fraction of firms that continue to have preferred
outstanding after their IPO. As shown in Table 4, 91% of firms of the firms with pre-IPO
preferred outstanding have no preferred outstanding after their IPO. For these firms with pre-IPO
preferred shares, the book value of preferred shares equals 74% of total assets in the year prior to
the IPO year. In contrast, after the IPO preferred shares are just 0.81% of total assets on average
(see Panel B). Moreover, most firms with pre-IPO preferred stock do not issue preferred after
13
they go public. Five years after the IPO, only 13% of firms with pre-IPO preferred shares have
preferred shares on their balance sheet. The increase from 9% to 13% is primarily the result of
changes in the sample of firms rather than the new issuance of preferred.
The COMPUSTAT database does not provide information on the conversion of preferred
stock. To determine whether the reduction of preferred shares outstanding results from
conversion (as opposed to the shares being repurchased or redeemed) we read the offering
prospectuses for a random sample of 100 IPO firms that had preferred stock prior to going
public. The offering prospectus provides a pro forma analysis of the effect of the IPO proceeds
on the firm’s capital structure. In every one of the sampled prospectuses the pro forma reduction
in preferred occurs because of conversion. Appendix A.2 provides several examples of the
discussion in the offering prospectus concerning conversion.
Overall our findings suggest that for about 44% of IPO firms, the magnitude of the
decline in leverage in the IPO year is quite sensitive to whether preferred shares are classified as
a debt or an equity claim when measuring leverage.13 More importantly, the potential to
mischaracterize IPO leverage changes has increased over time as the use of preferred stock by
start-ups has become more common in recent years. As shown in Figure 2, the percentage of
firms with preferred stock outstanding before their IPO has more than doubled since the early
1980’s. For example, during the 1975 through 1985 time period 20% of IPO firms had preferred
shares outstanding in the year before they went public. In contrast, from 2000 to 2009, 64% of
IPO firms had preferred shares outstanding prior to going public.14
3. Preferred Stock and Post IPO Financing Choices
The relationship between pre-IPO use of preferred and the magnitude and persistence of
leverage changes around IPOs is likely to depend on a couple of factors including: (1) the extent
to which IPOs represent a significant life cycle event related to the firm’s financing needs and
debt capacity, (2) the need for continued monitoring by providers of external capital and, (3) the
13
There are 1,673 firms with pre-IPO preferred shares in our sample out of 3,777 total IPOs.
The percentage of firms going public with pre-IPO preferred shares is high in some years before 1980, but the
total number of IPOs is quite low during that time period: there are only 14 firms that go public in our sample
between 1975 and 1979.
14
14
extent to which firms with different characteristics respond differently to market timing
opportunities. We investigate these factors in the next two sections.
3.1 Preferred Stock and the Frequency of Post IPO Financing
Given the importance of pre-IPO preferred shares for some firms in our sample, a natural
question to ask is whether the conditions necessitating staged financing that prevailed before the
IPO also persist after the IPO. In Table 5 we compare average investment (the sum of capital
expenditures and R&D), capital expenditures, and research and development expenses as a
fraction of book assets of firms with preferred to the expenditures of other IPO firms. As shown,
firms with pre-IPO preferred shares continue to invest more than their counterparts in the five
years after going public. The higher rate of investment for these firms is the result of higher
spending on R&D and not higher capital expenditures. Also notice that for firms with preferred
shares, the dollar burn rate as a fraction of their assets is over twice that of firms without pre-IPO
preferred shares, which suggests that the firms in this group continue to require additional
external financing. Overall, the results in Table 5 indicate the greater financing needs of firms
with preferred stock at the time they go public continue well after the IPO.
We next investigate the extent to which firms with pre-IPO preferred shares meet their
greater financing needs through staged equity financing. We assess the use of staged financing
by examining follow-on offerings after the IPO. We define a follow-on issue as a security issue
that occurs at least 30 days after the IPO. 15 Firms that were acquired or delisted prior to an
issuance date are deemed not to have undertaken a follow-on issue. We obtain information on
security issuances for the firms in our sample from SDC (public and private equity and debt
issues) and Dealscan (bank loans). Dealscan packages that do not have a term loan are not
included as follow-on financing transactions. The reason is that credit line facilities may be
drawn or undrawn (Dealscan does not specify which) and these types of facilities are typically
used for short-term liquidity rather than for permanent financing.16
To examine whether the frequency of follow-on issues is greater for firms with preferred
stock, we estimate a Poisson regression of the relation between the frequency of follow-on issues
15
We use this cutoff to insure that follow-on financings are not part of the initial financing event related to the IPO.
We use a table provided by Michael Roberts to link Dealscan packages to our sample of IPOs. This table is based
on Chava and Roberts (2008).
16
15
and the use of pre-IPO preferred stock, controlling for firm characteristics and the firm’s cash
burn rate at the time of the IPO. The regression specification is similar to the one used by Hertzel
et al. (2012). We also estimate a hazard model of the time or duration until the first follow-on
financing event that occurs within 24 months of the IPO. However, the advantage of the Poisson
model is that this model distinguishes between firms that undertake multiple follow-on issues
after the IPO from firms that undertake only one follow-on issue subsequent to the IPO. In this
respect, modeling the frequency of events rather than the time until the first event is a more
accurate measure of staged financing. Both models include industry and IPO-year dummy
variables.
Included in both types of model are the first-day return (RET1), the return over the next
20 days (RET20) and dummy variables for whether IPO volume in the month of the IPO is in the
upper or lower 1/3 of the distribution of monthly volume in our sample. As in Hertzel et al. we
include these variables to control for possible signaling, market timing or discovery effects that
might motivate follow-on offers. Also included are controls for asset tangibility and VC
financing. Note that capital expenditures, R&D spending and IPO proceeds are contained in the
regressions because these variables are components of the cash burn rate. See equation (1).
Table 6 presents the regression results. Not surprisingly, an important determinant of
follow-on issues is financing needs: the coefficient on the cash burn rate in column 1 is positive
and statistically significant at the .01 level. Poisson regression coefficients measure semielasticities of the frequency of issues to changes in the independent variable. The economic
significance of a variable can therefore be measured as the product of the coefficient estimate
multiplied by one standard deviation times 100. The cash burn rate estimate implies that a onestandard deviation increase in the cash burn rate increases the number of follow-on issues per
year by over 12% (see Panel B). Columns two and three show that firms with preferred shares
have significantly higher frequencies of follow-on issues. The coefficient on the preferred share
dummy in column 3 implies that controlling for firm characteristics, the frequency of follow-on
issuances is 25.2% greater for firms with preferred shares (see Panel B). 17
17
The significance of preferred shares in the Poisson regression also addresses a methodological issue in studies of
staging raised by Da Rin, Hellmann, and Puri (2011). Standard measures of staging such as the number of VC
rounds or the time between rounds measure the ex-post realization of staging rather than the ex-ante intent of
16
The last regression specification (model (4)) restricts the sample period to IPOs filed after
1995. The reason for doing so is that Dealscan coverage of bank loans prior to that year is sparse.
The sign, statistical significance, and economic significance of the variables remains unchanged
when the sample is restricted to this time period.
The joint significance of preferred shares and the cash burn rate in both the Poisson and
hazard model regressions suggests that preferred shares are measuring a factor that is distinct
from the firm’s investment-opportunity set, as measured by the cash burn rate. One possibility is
that preferred shares measure institutional monitoring of overinvestment after the IPO that is not
measured by components of the cash burn rate such as R&D spending. For this explanation to
hold, preferred share investors must hold on to their common equity after the IPO. Results from
prior studies and observed equity ownership concentration after the IPO in our sample suggest
that this is likely to be the case. Barry et al. (1990) report that VC investors maintain their
investment in the firm for up to a year after the IPO, and serve on the boards of their firms after
the IPO. Cao (2011) finds that buyout sponsors of reverse LBOs continue to hold a substantial
fraction of equity up to 3 years after the IPO (about 23%, down from 40% in the IPO year).
Huang et al. (2013) find that VC investors in their sample hold about 8% of the equity in year 3
following the IPO, down from 16% at the end of the IPO year. In untabulated results, we also
find that ownership concentration after the IPO is significantly greater for firms with pre-IPO
preferred stocks. Based on 13-F filings, the median Herfindahl-Hirschleifer index value is
significantly greater for firms with preferred shares than for firms without preferred shares in
quarters 2 to 8 following the IPO.
3.2 Preferred Stock and the Type of Follow-On Issues
We next examine differences in the type of follow-on issues between firms with and
without preferred stock prior to going public. Given that firms in the preferred sample invest
more in R&D and have significantly lower operating cash flows and fewer tangible assets, we
would expect these firms to rely more heavily on staged equity financing.
staging. Preferred shares do not suffer from this drawback because they are issued before the realization of privateand public-market staging.
17
Table 7 provides summary statistics by type of security used in follow-on issues that
occur within 24 months of the IPO. Because Dealscan’s coverage of bank loans is limited prior
to 1994, we restrict this part of the analysis of post IPO financing to the 1994 through 2009 time
period. This restriction reduces our sample to 1,827 firms; 721 of which undertook at least one
follow-on offering, for a total of 1,307 follow-on offerings. Table 7 also provides the number of
follow-on issues by type of issue for the overall sample and the average principal amount of the
offering relative to the firm’s cash needs at the time of the offering (i.e. the at-issue cash burn
rate as defined earlier).
Across all firms, the majority (46.2%) of follow-on issues are public equity offerings.
The next most common financing are term loans made by banks (24.1%). Reliance on new
equity and debt financing differs significantly between firms with and without pre-IPO preferred
financing. Consistent with greater reliance on public- equity staged financing, the percentage of
firms with follow on equity offerings is significantly greater in the preferred group. For example,
conditional on a follow-on offering, 68% of the firms with preferred shares issue equity
compared with 58% of the follow-on offerings by the firms without preferred shares (the
difference is significant at the 1% level if independence between the two samples is assumed).
Half of this difference comes from the greater incidence of private equity issues by firms with
preferred. In contrast, only 20% of follow-on issues by firms with pre-IPO preferred shares are
bank-term loans compared with 29% for firms without pre-IPO preferred shares. The difference
is significant at the 1% level. This difference is inconsistent with the hypothesis that that firms
with pre-IPO preferred are more likely to substitute bank debt for preferred stock that was used
before going public.
Table 7 also provides evidence of greater reliance on staged financing after firms with
preferred shares go public. For example, notice that for the total sample, the at-issue cash burn
rates are significantly higher for firms in the preferred group. The difference in cash burn rates is
entirely driven by equity issues, regardless of type. The higher cash burn rates also arise from
much higher cash needs and not from smaller offerings for firms in the preferred sample. Indeed,
unreported results show that the average size of public equity offering (relative to book assets) is
significantly larger for the preferred group than the group without preferred.
18
The term to maturity and financial covenants associated with bank loan contracts are
widely viewed ways of providing creditors state contingent control rights. If overinvestment
concerns motivate the greater reliance on staged financing among firms with pre-IPO preferred
stock, we would expect that conditional on borrowing, bank funding would be more state
contingent, i.e. more contingent on the performance of the borrowing firm. To investigate this
issue, we obtain from Dealscan information on the term to maturity and the number of financial
covenants for loans made 12 months prior to 24 months after the IPO for the firms in our
sample.18
In the appendix (see Table A4) we report the results of multivariate regressions relating
the number of financial covenants and loan term to maturity to firm financial characteristics as
well as whether or not the firm had preferred stock outstanding before going public. Consistent
with the contracting cost argument described in Barclay and Smith (1995), we find that the
number of covenants is greater, and that the maturity of debt is significantly shorter for firms in
the preferred stock group. Overall these results are consistent with the argument that agency
concerns lead to more contingent performance-based funding for firms with preferred shares
outstanding at the time of their IPO.
Summarizing the results of this section, firms that engage in staged financing prior to
going public continue to engage in staged financing after their IPO, as displayed by the greater
frequency of issuance after the IPO by these firms and conditional on issue, higher cash burn
rates. Moreover we find no evidence that firms with preferred stock prior to going public have a
greater propensity to use debt financing after they go public.
4. Market Timing and Persistence in Leverage After the IPO
Alti (2006) finds that market timing is a significant, although transitory, determinant of
capital structure: the effects of IPO year timing on leverage do not last more than 2 years in his
sample. Alti’s measure of market timing is whether the IPO occurs in a hot-issue market, defined
18
Nini, Smith and Sufi (2011) and Chava and Roberts (2008) argue that financial covenants provide lenders with
state contingent control rights. The idea is that the violation of a financial covenant (a so called technical default)
shifts control rights to bank lenders, who use the threat of the withdrawal of funding as a way of influencing the
borrower’s investment decisions. Barclay and Smith (1995) and Guedes and Opler (1996) argue that shortening the
term to maturity of a firm’s debt increases the information sensitivity of a firm’s cost of debt financing, thus
reducing under- and over-investment problems
19
as a month in which there are a large number of issues relative to the de-trended monthly average
IPO volume during his sample period. In this section, we compare the effect and persistence of
measures of market timing used in Alti’s study on the size of the IPO proceeds and on changes in
capital structure around the time of the IPO. We also use Alti’s measure of market timing to
investigate whether active investors have a greater propensity to engage in market timing and
whether market timing differences explain changes in leverage around the IPO.
As discussed earlier, greater concerns with potential overinvestment problems may lead
firms with preferred stock outstanding to be less sensitive to overvaluation because investors
prefer to stage their investments in these types of firms, even in markets with low adverse
selection problems (i.e. in hot IPO markets). The basic idea is that investors are sensitive to the
potential for overinvestment by the firms’ managers, and as a result concerns related to agency
issues within these firms temper investors’ enthusiasm for the company’s shares in hot IPO
markets. The overinvestment hypothesis predicts a lower supply elasticity of new capital for
firms that have pre-IPO preferred shares than for firms without pre-IPO preferred shares.
Alternatively, capital market sophistication may lead active investors to more vigorously exploit
perceived market timing opportunities.
We employ Alti’s Hot-Cold market classification as a measure of market timing. We use
this classification for a couple of reasons. First, as discussed frequently in the literature, timing
measures such as past market-to-book ratios (Baker and Wurgler, 2002) or post IPO market
returns (Loughran and Ritter, 1995) are open to alternative interpretations. For example, current
market-to-book may be a noisy proxy for current investment opportunities and market conditions
leading to a spurious link between market timing and investment opportunities. This is a
particular concern when investigating differences in the propensity to market time between firms
with very different growth and investment opportunities, which appears to be the case for firms
grouped by the use of preferred stock. Second, Alti’s analysis focuses specifically on market
timing and the impact on capital structure changes around IPOs—the focus of our study.
An obvious drawback of the Hot-Cold market classification is that it may not capture the
full extent of market timing. Specifically, market timing can be motivated by market or sector
wide overvaluation, or by firm specific overvaluation. Hot-issue markets are more likely to be
associated with the former than the latter. However, this is less of a concern in the context of our
20
analysis because we are interested in the differences in the propensity to market time and not on
the overall importance of market timing for capital structure choice.
We test the hypotheses concerning market timing using the following regression model,
where the dependent variable is the ratio of gross IPO proceeds to book assets (in percentage
points) in the IPO year.
,
where HOT is Alti’s measure of hot IPO markets and
,
(3)
is a vector of controls that describes
the firm’s characteristics at the time it goes public. If overinvestment concerns lead to lower
supply elasticities then we would expect the coefficient on HOT to be significantly greater for
firms without pre-IPO preferred shares than for firms with pre-IPO preferred shares.
Table 8 provides estimates of the relationship between offer proceeds and hot-issue
markets. To examine if the results are sensitive to whether the sample is limited to firms with
LEVPF<=100, we report regression results with and without the LEVPF filter. As shown, the
impact of hot-issue markets on offer proceeds is significantly greater when the narrow sample is
used. The ratio of proceeds to book assets is 5.11% greater in hot IPO markets for the filtered
sample compared with 2.98% for the unfiltered sample. (p-value for the difference in
coefficients = 1%, see panel B). Not using the filter substantially reduces the impact of hot-issue
markets on offer proceeds because, consistent with the agency-cost hypothesis, offer proceeds
are significantly less sensitive to hot-issue markets for firms with preferred shares outstanding.
As shown in Table 8, firms with pre-IPO preferred stock do not appear to time the IPO
market. In particular, the coefficient estimates on HOT are greater for firms without preferred
shares in both the filtered and unfiltered samples. In the unfiltered sample, IPO proceeds as a
fraction of book assets are 5.11% greater during hot markets for firms without preferred (tstat=3.35) compared with only 1.01% for firms with preferred stock (t-stat=0.53). These two
coefficients are significantly different at the 10% level of confidence (see Panel B). Overall, the
finding that firms with preferred do not increase their offer size during hot issues market is
consistent with the agency-cost hypothesis. For firms with pre-IPO preferred shares, we find no
evidence that they time hot markets.
21
4.1 Market-timing and Capital Structure Changes
The lack of any significant relationship between IPO offer proceeds and hot market
conditions for firms with preferred shares suggests that market timing may have less of an
impact on the capital structure of these firms. We investigate the impact of hot-issue markets on
leverage for these two groups of firms by regressing IPO-year changes in leverage (measured
with LEVPF or LEVSL) on HOT and a set of control variables. Again, in order to illustrate the
sensitivity of market timing to restricting the sample to firms with LEVPF <=100, we provide
regression results for the entire sample as well as the restricted sample. The first column of Table
9 provides estimates of the market timing regression using the restricted sample and Alti’s
definition of leverage (LEVPF). As shown, leverage is 1.58% lower in hot markets (the
difference is only marginally significant with a t-statistic= – 1.78). In comparison, Alti’s estimate
of the hot-market effect on leverage is -3.57%.
Recall that Alti’s sample ends in 1999 so that part of the reason we find less hot-issue
market timing is that our sample period is different. Overall we find evidence that market timing
is much stronger early in the sample period. To illustrate this, in Table 10 we report estimates of
the leverage regression using a sample of IPOs from the 1980-2009 time period. As shown in
Table 10, we find little evidence of a significant decline in leverage during hot-issue markets for
the overall sample, regardless of which measure of leverage we use. See columns (1), (4) and (7).
Both tables 9 and 10 do not show any significant relationship between leverage changes
and hot-market conditions for the unfiltered sample (see column 4 in each table). This result
arises because the broader sample includes more firms with preferred shares outstanding and as
shown, we find no evidence that hot issues markets are related to leverage changes for these
firms. Comparing columns 5 and 6 in Table 9 (as well as columns 8 and 9) reveals the effect of
market timing is entirely driven by firms without preferred shares. In particular, as shown in
column five, the coefficient on HOT implies that leverage of firms with no preferred shares is
2.33% lower in hot IPO markets (t-statistic=-2.25). However for firms with preferred shares we
find no significant relationship between leverage changes and market conditions.
The lack of any significant market timing effects on capital structure in the overall
sample appears to be due to the increasing use of staged financing by professional investors over
22
time, as measured by the use of preferred shares. From 1975-1999, only 40% of IPOs had preIPO preferred shares, compared with 64% over 2000-2009. The difference in frequencies across
the two sample periods is significant at the 1% level (t-stat=10.9). Similarly, we find (using the
filtered sample with LEVPF) that during 1975-1984, leverage fell significantly in hot-market
IPOs, compared with no significant effect of hot markets during 1985-2009. The corresponding
frequencies of IPO firms with preferred shares were 19% and 45% during these two sample
periods. We obtain similar results when the sample is split into pre- and post-1989 issues.
We also investigate whether the findings of Baker and Wurgler (2002) concerning
market timing are sensitive to the filters used to construct the sample. In addition, we examine
whether there are differences between firms without and with preferred shares in the propensity
to market time using Baker and Wurgler’s identification strategy. Specifically, Baker and
Wurgler examine the relationship between leverage and the issue-weighted average market-tobook ratio from the time of a firm’s IPO. As shown in Table 11, we find that the impact of
market timing in the IPO year is significantly less (although still statistically significant) when
the LEVPF filter is not used and preferred is not treated as a debt claim. In addition, consistent
with the findings reported in Table 9, we find that the effect of issue-weighted market-to-book is
significantly smaller in absolute value (although still statistically significant) for firms with preIPO preferred stock.
5. Conclusion
In most studies of capital structure, whether preferred stock is treated as debt or equity is
relatively innocuous, partly because few publicly traded U.S. firms have preferred stock
outstanding, and for those with preferred stock, this type of security is generally a small fraction
of total equity. For nearly half of companies going public, however, the common practice of
including preferred as debt is not innocuous. Almost all VC-backed IPOs have large amounts of
convertible preferred stock outstanding prior to the IPO, and this preferred stock almost always
has a mandatory conversion feature conditional on going public.
We find significant differences in both the magnitude of leverage changes and the
importance of market timing based on whether or not preferred stock is treated as debt or equity
prior to the IPO. When preferred shares are treated as debt, restricting the sample of IPOs to
23
firms with leverage ratios less or equal to 100% biases the sample toward more mature and
profitable firms. Treating preferred shares as equity removes this restriction because the
excluded firms typically have a history of losses prior to the IPO. Our results show that including
these firms significantly reduces the effect of market timing in the overall sample. The reason is
that firms with preferred shares are engaged in staged financing after the IPO and overinvestment
concerns prevent these firms from engaging in market timing to the same extent as other IPO
firms.
Firms with preferred also have different characteristics that persist and shape their
financing activities after going public. These firms go public at an earlier time in their corporate
life-cycle and are more likely to stage their capital raising activities after the IPO. These firms
have a marked preference for equity instead of debt due to the intangible nature of their
investments. Debt issues by these firms have more covenants and shorter maturities, which is
consistent with the greater need for monitoring by these firms. Finally, our results show that
leverage exhibits a path dependency that begins well before a firm goes public, despite changes
that occur in a firm’s operating environment and ownership structure during that time.
24
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Figure 1: Average leverage of firms going public in event time around the IPO. This figure
plots average leverage in event time around the IPO for IPOs occurring between 1975and 2009. Year 0 is the year
of the IPO. Leverage is the ratio of book debt to book assets. For leverage (LEVPF), book debt includes preferred
shares. For leverage (LEV), book debt excludes preferred shares. For leverage (LEVSL) book debt is the sum of
short- and long-term debt.
28
400
120.0
350
100.0
300
Nb. IPOs
200
60.0
150
WITH PREF(%)
80.0
250
40.0
100
20.0
50
0.0
0
Nb. IPOs
WITH PREF(%)
Figure 2: Number of IPOs per year. IPO volume is reported in the left-hand side axis. The percentage of
IPOs that are undertaken by firms with pre-IPO preferred shares (WITH PREF(%)) is reported in the right-hand side
axis.
29
Table 1
Summary statistics – IPO firms
This table reports summary statistics of firm characteristics in the year preceding the IPO, except for RET1, PROCEEDS, VC, TECH, and Age which are
measured at the time of the IPO. Returns and financial ratios except for MB are in percentage points. The sample With filter excludes observations for which the
ratio of book debt to total assets (LEVPF) exceeds 100%. The additional observations in column (5) and (6) are the incremental observations that result from
removing this filter. Book debt is the sum of total liabilities and preferred shares minus convertible debt and deferred taxes. Book leverage LEVPF is the ratio of
book debt to total assets. LEV is the ratio of book debt less preferred shares to book assets. LEVSL is the ratio of short term and long-term debt to total assets.
Market-to-book (MB) is defined as book debt plus the market value of equity divided by total assets. Profitability, EBITDA, is defined as earnings before
interest, taxes and depreciation. CAPX denotes capital expenditures, RD is research and development expense. INV is the sum of CAPX and RD, where missing
values of RD are set to zero. PROCEEDS equals the IPO proceeds in millions of 2011 dollars and includes primary and secondary shares but assumes that overallotment options are not exercised. RET1 is the first-day return on the IPO day. Log(SALE) is the log of sales in millions of 2011 dollars. VC is a dummy for
whether the firm had venture-capital financing prior to the IPO. TECH is a dummy for whether the firm is in the technology industry. Age is the founding age of
the firm at the time of the IPO. MB (SIC3 pre-IPO) equals the mean market-to-book ratio in the issuing firm’s industry in the year prior to the IPO. PPE is
property, plant and equipment. The dollar burn rate (DBR) is the difference between capital expenditures and operating cash flows in the year prior to the IPO in
millions of 2011 dollars. Cash burn rate is ratio of the dollar burn rate to total proceeds. DBR/Cash is the ratio of the dollar burn rate to the firm’s cash holdings
in the year prior to the IPO. The column labeled TSTAT reports t-statistics for the difference in means across firms in columns (1) and (5).
Continued on next page.
30
With filter (N=2,705)
LEVPF
LEV
LEVSL
EBITDA/A
PPE/A
INV/A
CAPX/A
RD/A
PROCEEDS
RET1
Log(SALE)
VC
TECH
AGE
MB(SIC3 pre-IPO)
Dollar burn rate (DBR)
Cash burn rate
DBR / Cash
WITH PREF
Without filter (N=3,777)
Add. Observations (N=1,072)
T-STAT
MEAN
(1)
MEDIAN
(2)
MEAN
(3)
MEDIAN
(4)
MEAN
(5)
MEDIAN
(6)
Col. (1) vs. Col. (5)
(7)
67.4
62.8
33.3
19.2
28.4
16.2
10.6
5.7
82.3
13.5
4.2
0.25
0.33
17.4
2.2
-1.3
1.5
-41.8
0.27
70.5
65.6
32.7
19.1
21.8
11.1
6.7
0.0
39.8
6.3
4.2
0.0
0.0
10.0
2.0
-1.3
-4.6
-35.4
0.0
97.1
64.2
32.2
11.1
26.0
19.5
10.1
9.4
83.6
17.0
3.9
0.37
0.40
15.5
2.4
1.1
3.7
-15.6
0.44
81.2
64.8
28.7
16.0
18.8
13.8
6.3
0.0
45.5
7.4
3.9
0.0
0.0
9.0
2.2
-0.6
-1.9
-16.0
0.0
172.1
67.9
29.4
-9.2
20.0
27.8
8.9
18.9
87.2
25.8
3.3
0.68
0.59
10.5
2.9
7.1
9.3
41.3
0.88
143.7
60.9
18.3
-1.0
14.1
25.1
5.6
14.8
58.4
10.9
3.3
1.0
1.0
6.0
2.8
3.3
6.5
46.5
1.0
60.6
5.1
-4.4
-32.8
-11.1
18.4
-4.0
26.1
0.7
10.1
-16.3
26.9
15.0
-10.6
20.4
3.6
2.5
12.5
41.2
31
Table 2
Summary statistics – public firms
This table reports summary statistics of firm characteristics and information on the composition of the sample of
publicly traded firms excluding financials and utilities. Firm characteristics are taken in the third year the firm shows
up in COMPUSTAT for the 1975-2009 period. Returns and financial ratios except for MB are in percentage terms.
Book debt is the sum of total liabilities and preferred shares minus convertible debt and deferred taxes. Book
leverage LEVPF is the ratio of book debt to total debt. LEV is the ratio of book debt less preferred shares to book
assets. LEVSL is the ratio of short term and long-term debt to total assets. Market-to-book, MB, is defined as book
debt plus the market value of equity divided by total assets. Profitability, EBITDA, is defined as earnings before
interest, taxes and depreciation. CAPX is capital expenditures, RD is research and development expense. INV is the
sum of CAPX and RD, where missing values of RD are set to zero. Log(SALE) is the log of sales in millions of
2011 dollars. PPE is property, plant and equipment. The column labeled TSTAT reports t-statistics for the difference
in means across firms without preferred shares and firms with preferred shares.
NO PREF
LEVPF
LEV
LEVSL
EBITDA/A
PPE/A
INV/A
CAPX/A
R&D/A
Log(SALE)
MB
AT
PREF/A
N
WITH PREF
MEAN
MEDIAN
MEAN
MEDIAN
TSTAT
43.32
43.32
23.07
8.17
31.32
12.17
8.20
3.92
4.79
1.68
695.48
0.00
41.52
41.52
19.38
11.47
24.32
8.92
5.36
0.00
4.75
1.26
63.72
0.00
67.68
53.90
32.38
5.19
34.28
10.06
7.35
2.65
5.31
1.46
902.82
13.78
60.56
51.97
30.41
10.10
29.05
6.93
4.98
0.00
5.30
1.11
87.29
4.78
-37.26
-17.92
-18.64
6.83
-5.04
8.24
4.16
6.96
-11.02
7.45
-1.66
-49.67
11704
2080
32
Table 3
Evolution of leverage after the IPO
Panel A reports mean cumulative change in leverage since the year preceding the IPO for measures of book leverage
and the IPO year for measures of market leverage. All leverage ratios are in percentage points. LEVPF equals the
ratio of book debt to total assets. LEVSL is the sum of short- and long-term debt to total assets. LEV is the ratio of
book debt less preferred shares to book assets. LEVM is market leverage, defined as the ratio of the sum of shortand long-term debt to the market value of assets. Panels B and C report mean values for the subsamples of firms
without and with pre-IPO preferred shares, respectively. Panel C also tests for the difference in means between firms
with and without pre-IPO preferred shares. *** indicates significance at the 1% level, ** at the 5% level and * at the
10% level.
Panel A: All firms
TIME
LEVPF-LEVPF(pre-IPO)
LEV-LEV(pre-IPO)
LEVSL-LEVSL(pre-IPO)
LEVM-LEVM(IPO)
0
1
2
3
4
5
-60.89
-55.63
-52.24
-50.06
-47.15
-44.90
-28.42
-25.20
-23.00
-21.07
-19.89
-19.62
-16.59
-13.30
-11.71
-10.88
-10.13
-10.40
0.00
5.31
8.37
10.25
12.40
12.60
Panel B: Firms without pre-IPO preferred shares
TIME
LEVPF-LEVPF(pre-IPO)
LEV-LEV(pre-IPO)
LEVSL-LEVSL(pre-IPO)
LEVM-LEVM(IPO)
0
1
2
3
4
5
-28.73
-25.39
-22.77
-20.80
-20.04
-19.53
-28.80
-25.65
-23.18
-21.62
-20.76
-20.41
-17.75
-13.62
-11.70
-10.81
-10.26
-10.59
0.00
6.44
9.85
12.50
14.93
15.65
Panel C: Firms with pre-IPO preferred shares
TIME
LEVPF-LEVPF(pre-IPO)
LEV-LEV(pre-IPO)
LEVSL-LEVSL(pre-IPO)
LEVM-LEVM(IPO)
0
1
2
3
4
5
-101.34***
-94.91***
-91.66***
-89.84***
-84.75***
-81.56***
-27.94
-24.63
-22.75
-20.32
-18.69*
-18.47
-15.13***
-12.90
-11.73
-10.97
-9.95
-10.14
3.83***
6.38***
7.19***
8.90***
8.19***
33
Table 4
Proportion of preferred shares for firms with preferred shares in the pre-IPO year
This table reports summary statistics on the use of preferred shares by firms that report having preferred shares in
the fiscal year preceding the IPO. Dummy: PREF>0 equals one if the firm has preferred shares. PREF/A is the ratio
of preferred shares to total assets (in pct. points). PREF/A, PREF>0 is the average amount of preferred shares to
book assets, conditional on having preferred shares. N NO PREF and N WITH PREF are the number of firms
without and with preferred shares in a given year. Time is in fiscal years relative to the year the firm goes public
(year 0).
Time
Dummy:
PREF>0
PREF/A
PREF/A,
PREF>0
N NO
PREF
N WITH
PREF
-1
0
1
2
3
4
5
1.00
0.10
0.09
0.10
0.11
0.12
0.13
74.21
0.81
0.86
1.04
1.90
2.16
2.58
74.21
8.54
9.44
10.53
17.30
18.47
20.23
0
1514
1371
1187
1027
897
753
1673
159
137
130
127
119
110
34
Table 5
Evolution of investment and internal financing resources after the IPO as a percentage of assets
This table reports the mean value in event time relative to the IPO year (year 0). OCF denotes operating cash flows.
All other variables are defined in Table 1. The stars in Panel C test for the difference in means between Panels B and
C. *** indicates significance at the 1% level of confidence, ** at the 5% and * at the 10% level.
Panel A: All firms
Time
INV/A
CAPX/A
R&D/A
Dollar burn rate / A
OCF/A
-1
0
1
2
3
4
5
19.52
14.01
15.82
14.49
13.75
13.18
12.67
10.10
9.30
9.85
8.08
7.17
6.67
6.23
9.42
4.71
5.97
6.40
6.58
6.50
6.44
5.59
3.94
6.83
5.63
4.17
3.12
2.01
4.51
5.47
3.17
2.57
3.04
3.60
4.27
Panel B: Firms without pre-IPO preferred shares
Time
INV/A
CAPX/A
R&D/A
Dollar burn rate / A
OCF/A
-1
0
1
2
3
4
5
15.90
13.48
14.63
12.64
11.35
11.07
10.28
10.81
10.68
11.05
8.81
7.71
7.21
6.43
5.08
2.80
3.58
3.83
3.64
3.85
3.85
-1.02
2.01
5.52
4.09
2.70
2.21
0.84
11.83
8.76
5.68
4.81
4.98
4.95
5.58
Continued on next page.
35
Panel C: Firms with pre-IPO preferred shares
Time
INV/A
CAPX/A
R&D/A
Dollar burn rate / A
OCF/A
-1
0
1
2
3
4
5
24.07***
14.68***
17.37***
16.96***
17.02***
16.11***
16.14***
9.20***
7.56***
8.29***
7.11***
6.44***
5.92***
5.95
14.87***
7.11***
9.08***
9.85***
10.58***
10.18***
10.19***
13.90***
6.40***
8.59***
7.79***
6.30***
4.46***
3.80***
-4.71***
1.27***
-0.17***
-0.56***
0.23***
1.61***
2.27***
36
Table 6
Hazard and count model analysis of follow-on issues during the 24-month period following the IPO
Panel A of this table reports Poisson and Hazard model regression estimates of the frequency of follow-on issues within 24 months of the IPO. Follow-on issues
that occur within 30 days of the IPO are excluded. The reported estimates are based on maximum likelihood estimates of a Poisson count model or MLE
estimates of an exponential hazard model with frailty. Heteroskedasticity robust t-statistics are in parentheses. RET20 is the 20-day stock return of the IPO firm
in percentage points. Primary fraction is the fraction of primary shares in the IPO. The high and low IPO volume dummy variables indicate whether an IPO
occurred during a month when monthly IPO volume was in either the top or bottom 1/3 of the distribution for the sample. The other independent variables are
defined in Table 1. Panel B reports the economic significance (in percent) of select variables, measured as the semi-elasticity times one standard deviation change
in the variable for continuous variables, and times a one-unit change for binary variables. For the Poisson model, the semi-elasticity for continuous variables
equals 100 times the regression coefficient. The semi-elasticity for dummy variables equals 100 times (exp( -1). The hazard-model semi-elasticity equals 100
times the coefficient estimate. All models contain industry (3-digit SIC) and year (IPO-year) dummy variables. Regression models (4) cover the 1995-2009
sample period.
Continued on next page.
37
Panel A: Coefficient estimates
Poisson count model estimates
PPE/A (decimal)
Cash burn rate (decimal)
(1)
(2)
(3)
(4)
(1)
(2)
(3)
(4)
0.14
(0.84)
0.50
(4.28)
0.34
(2.04)
0.16
(0.93)
0.47
(4.03)
0.23
(3.54)
0.43
(2.46)
-0.20
(-2.73)
-0.27
(-1.89)
0.14
(2.05)
0.54
(5.46)
-0.08
(-0.88)
0.49
(2.84)
0.34
(1.36)
0.61
(3.87)
0.28
(3.10)
0.86
(3.38)
-0.20
(-1.96)
-0.04
(-0.17)
0.18
(2.36)
0.49
(4.32)
-0.04
(-0.23)
0.63
(2.87)
0.12
(0.39)
1.01
(4.70)
0.51
(1.72)
0.45
(1.43)
0.02
(0.08)
0.12
(0.98)
0.51
(3.68)
1.78
(7.36)
-0.54
(-3.67)
0.67
(1.66)
0.32
(2.81)
0.40
(1.27)
-0.12
(-0.42)
0.10
(0.75)
0.50
(3.52)
1.80
(7.48)
-0.49
(-3.36)
0.72
(1.69)
0.11
(0.36)
0.99
(4.57)
0.30
(2.58)
0.49
(1.57)
0.05
(0.17)
0.00
(0.01)
0.50
(3.58)
1.80
(7.47)
-0.54
(-3.71)
0.69
(1.72)
-0.08
(-0.15)
1.18
(3.45)
0.40
(2.23)
1.33
(2.59)
0.06
(0.14)
0.02
(0.12)
0.50
(3.08)
1.68
(5.62)
-0.88
(-3.56)
1.24
(2.47)
1975-2009
-3978
3777
1228
1975-2009
-3982
3777
1228
1975-2009
-3975
3777
1228
1995-2009
-1771
1735
571
Dummy: PREF>0
Age/100
Fraction secondary
VC
RET1 (decimal)
RET20 (decimal)
Dummy: high IPO volume
Dummy: low IPO volume
Time period
Log likelihood
Number of subjects
Number of failures
Hazard model estimates
0.42
(2.36)
-0.12
(-1.69)
-0.27
(-1.92)
0.15
(2.07)
0.54
(5.43)
-0.08
(-0.87)
0.46
(2.79)
1975-2009
3777
0.24
(3.85)
0.37
(2.06)
-0.17
(-2.33)
-0.34
(-2.42)
0.15
(2.11)
0.54
(5.38)
-0.06
(-0.70)
0.46
(2.78)
1975-2009
3777
1975-2009
3777
1995-2009
1735
Continued on next page.
38
Panel B: Economic significance (% change in hazard in response to 1SD or 1 unit increase in variable X)
Poisson count model estimates
Parametric model with frailty
(1)
(2)
(3)
(4)
(1)
(2)
(3)
(4)
PPE/A (decimal)
3.1
7.3
3.4
7.4
2.5
10.8
2.4
-1.6
Cash burn rate (decimal)
12.0
11.2
14.7
24.3
23.6
28.4
27.5
25.2
31.9
31.9
29.5
40.0
Dummy: PREF>0
Age/100
7.3
7.3
7.3
16.5
7.3
7.3
9.2
23.9
Fraction secondary
-2.5
-3.7
-4.3
-4.4
0.5
-2.6
1.0
1.3
VC
-27.3
-34.1
-26.9
-3.7
11.9
9.6
0.1
2.4
RET1 (decimal)
5.1
5.1
5.0
6.2
17.6
17.1
17.3
17.2
RET20 (decimal)
11.9
12.0
12.0
10.8
39.6
40.1
39.9
37.4
Dummy: high IPO volume
-7.5
-6.0
-7.6
-3.4
-53.5
-49.0
-54.4
-88.3
Dummy: low IPO volume
58.6
59.0
62.6
87.9
66.8
72.1
69.1
123.6
39
Table 7
Type of follow-on issues that occur within 24 months of the IPO
This table reports the frequency and cash burn rate of follow-on issues that occur within 24 months after the IPO. Firms that were acquired or delisted prior to a
follow-on issue are deemed not to have issued any securities within 24 months after the IPO. The sample is based on 721 IPOs that occurred between 1994 and
2009 for which at least one follow-on issue occurred during the 24 month period after the IPO. The at-issue cash burn rate equals the ratio of the difference
between capital expenditures and operating cash flows to the amount raised in the follow-on issue. This ratio is reported in percentage points and is winsorized at
the top and bottom 1st percentiles. Freq. reports the percentage of follow-on issues in each category. Debt/bank indicates Dealscan packages that include a term
loan. Debt/private and Equity/private are private debt and equity placements obtained from SDC. Debt/public and Equity/public are public debt and equity issues,
also obtained from SDC. The stars indicate whether the difference between firms without and with pre-IPO preferred shares is significantly different; ***
indicates significance at the 1% level of confidence, ** at the 5% and * at the 10% level.
ALL FIRMS (1,307 follow-on issues)
At-issue cash burn rate (%)
NO PREF (597 follow-on issues)
At-issue cash burn rate (%)
WITH PREF (710 follow-on issues)
At-issue cash burn rate (%)
Type of issue
Mean
Median
Freq. (%)
Mean
Median
Freq. (%)
Mean
Median
Freq. (%)
Debt
Bank
Private
Public
68.2
64.7
82.2
7.5
2.6
-3.4
37.4
-1.5
36.2
24.1
10.9
1.1
68.5
73.8
60.8
18.8
1.2
-2.8
28.9
4.2
41.7
29.0
11.4
1.3
67.8
53.6
101.6
-5.3
3.4
-3.8
44.5
-3.9
31.5
20.0***
10.6
1.0
Equity
Private
Public
Preferred
96.3
188.5
59.2
205.2
-0.9
65.3
-6.2
37.9
63.8
12.2
46.2
5.4
59.6
170.4
29.6
124.6
-10.6
10.0
-12.5
16.1
58.3
9.7
44.6
4.0
122.5**
198.8
82.6*
247.2
6.4***
94.3**
-0.7***
46.7*
68.5***
14.4**
47.6
6.5**
Total
86.1
0.5
100.0
63.3
-4.6
100.0
105.3**
5.0***
100.0
40
Table 8
Market timing and issuance activity
The dependent variable is total IPO proceeds relative to total assets, expressed in percentage points. Filter excludes
observations for which the ratio of book debt to total assets (LEVPF) exceeds 100%.The independent variables are
defined in Table 1. Industry dummies, based on 3-digit SIC codes, are included but not reported. T-statistics are in
parentheses; they are based on standard errors that are robust to heteroskedasticity.
Panel A: Regression estimates
Filter:
Sample:
HOT
MB
EBITDA/A
Log(SALE)
PPE/A
RD/A
Dummy: missing RD
LEVSL(pre-IPO)
AdjRSq
N
Yes
No
ALL
NO PREF
WITH PREF
ALL
NO PREF
WITH PREF
5.11
(4.18)
3.28
(7.84)
0.22
(6.72)
-6.65
(-19.43)
-0.10
(-3.60)
0.19
(2.80)
-3.01
(-2.53)
-0.07
(-2.66)
6.16
(4.02)
3.78
(7.24)
0.19
(4.75)
-6.01
(-14.47)
-0.07
(-2.18)
0.25
(2.78)
-1.74
(-1.20)
-0.08
(-2.52)
2.75
(1.14)
1.61
(2.66)
0.28
(4.87)
-8.66
(-10.16)
-0.22
(-3.80)
0.14
(1.33)
-7.28
(-3.07)
-0.02
(-0.29)
2.98
(2.62)
2.42
(8.15)
0.15
(6.30)
-6.64
(-21.00)
-0.11
(-4.42)
0.22
(4.80)
-2.18
(-1.87)
0.01
(0.28)
5.11
(3.35)
3.82
(7.47)
0.17
(4.38)
-6.33
(-15.54)
-0.11
(-3.25)
0.28
(3.29)
-0.85
(-0.57)
-0.02
(-0.53)
1.01
(0.53)
1.30
(3.56)
0.11
(3.39)
-6.76
(-11.10)
-0.13
(-2.89)
0.19
(3.31)
-4.07
(-1.88)
0.06
(1.54)
0.404
2705
0.391
1978
0.421
727
0.337
3777
0.379
2104
0.273
1673
Panel B: p-values for difference in coefficient on HOT
Filter:
Yes
No
Sample:
ALL
NO PREF
WITH PREF
Without vs. with filter
NO PREF vs. WITH PREF
0.01
0.04
0.18
0.38
ALL
NO PREF
0.07
41
WITH PREF
Table 9
Change in capital structure during the IPO year -- full sample
The dependent variable is the change in leverage relative to the year preceding the IPO: LEVSL-LEVSL(pre-IPO) or LEVPF-LEVPF(pre-IPO). Leverage(preIPO) is measured with LEVSL, defined as the ratio of short- and long-term debt to book assets, or with LEVPF, defined as the ratio of book debt to book assets.
Filter excludes observations for which the ratio of book debt to total assets (LEVPF) exceeds 100%. The other variables are defined in Table 1. Industry
dummies, based on 3-digit SIC codes, are included but not reported. T-statistics are in parentheses; they are based on standard errors that are robust to
heteroskedasticity.
Continued on next page.
42
Panel A: Regression estimates
Filter:
Dep. variable:
HOT
MB
EBITDA/A
Log(SALE)
PPE/A
RD/A
Dummy: missing RD
Yes
LEVPF-LEVPF(pre-IPO)
ALL
NO PREF
WITH PREF
No
LEVPF-LEVPF(pre-IPO)
ALL
NO PREF
WITH PREF
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
-1.58
(-1.78)
-1.67
(-8.11)
-0.16
(-8.84)
4.34
(17.00)
0.02
(1.01)
-0.23
(-6.47)
0.71
(0.84)
-3.09
(-3.18)
-1.79
(-7.22)
-0.15
(-7.40)
4.15
(14.81)
-0.01
(-0.26)
-0.16
(-3.78)
0.23
(0.24)
1.19
(0.64)
-1.20
(-3.26)
-0.21
(-5.29)
5.84
(8.39)
0.11
(2.04)
-0.18
(-2.98)
2.27
(1.07)
-0.98
(-1.13)
-1.43
(-8.99)
-0.12
(-8.22)
5.60
(20.59)
0.07
(2.78)
-0.24
(-8.10)
1.67
(1.67)
-2.33
(-2.25)
-1.91
(-7.01)
-0.13
(-5.78)
4.78
(14.75)
0.02
(0.87)
-0.20
(-4.15)
-0.02
(-0.01)
-0.77
(-0.56)
-0.75
(-3.78)
-0.10
(-4.76)
5.82
(11.41)
0.13
(3.57)
-0.14
(-3.87)
3.56
(2.08)
-1.27
(-1.96)
-1.03
(-9.51)
-0.07
(-7.04)
1.89
(10.10)
0.07
(4.18)
-0.08
(-4.53)
0.03
(0.04)
-0.66
(-45.68)
-1.84
(-2.03)
-1.70
(-8.77)
-0.06
(-3.78)
1.91
(7.64)
0.05
(2.29)
-0.07
(-1.95)
0.16
(0.17)
-0.65
(-33.25)
-0.80
(-0.82)
-0.50
(-3.74)
-0.06
(-4.59)
1.69
(5.22)
0.11
(3.91)
-0.08
(-3.96)
0.84
(0.68)
-0.69
(-29.07)
-0.68
(-41.57)
-0.60
(-30.88)
-0.75
(-21.41)
-0.97
(-137.06)
-0.68
(-18.00)
-0.99
(-129.53)
0.503
2705
0.459
1978
0.569
727
0.938
3777
0.561
2104
0.957
1673
0.547
3777
0.518
2104
0.593
1673
LEVSL(pre-IPO)
LEVPF(pre-IPO)
AdjRSq
N
No
LEVSL-LEVSL(pre-IPO)
ALL
NO PREF
WITH PREF
43
Panel B: p-values for the difference in coefficients on HOT
Filter:
Dep. variable:
PREF vs. NO PREF
Yes
LEVPF-LEVPF(pre-IPO)
No
LEVPF-LEVPF(pre-IPO)
No
LEVSL-LEVSL(pre-IPO)
0.02
0.34
0.41
44
Table 10
Change in capital structure during the IPO year – 1980-2009
The dependent variable is the change in leverage relative to the year preceding the IPO: LEVSL-LEVSL(pre-IPO) or LEVPF-LEVPF(pre-IPO). Leverage(preIPO) is measured with LEVSL, defined as the ratio of short- and long-term debt to book assets, or with LEVPF, defined as the ratio of book debt to book assets.
Filter excludes observations for which the ratio of book debt to total assets (LEVPF) exceeds 100%. The other variables are defined in Table 1. Industry
dummies, based on 3-digit SIC codes, are included but not reported. T-statistics are in parentheses; they are based on standard errors that are robust to
heteroskedasticity.
Continued on next page.
45
Panel A: Regression estimates
Filter:
Dep. variable:
HOT
MB
EBITDA/A
Log(SALE)
PPE/A
RD/A
Dummy: missing RD
LEVPF(pre-IPO)
Yes
LEVPF-LEVPF(pre-IPO)
NO
WITH
ALL
PREF
PREF
No
LEVPF-LEVPF(pre-IPO)
NO
WITH
ALL
PREF
PREF
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
-1.21
(-1.35)
-1.66
(-8.04)
-0.16
(-9.05)
4.36
(17.03)
0.02
(1.05)
-0.23
(-6.55)
0.63
(0.74)
-0.68
(-41.58)
-2.75
(-2.83)
-1.77
(-7.15)
-0.15
(-7.55)
4.15
(14.81)
-0.01
(-0.26)
-0.16
(-3.80)
0.19
(0.20)
-0.60
(-30.93)
1.61
(0.87)
-1.20
(-3.24)
-0.21
(-5.38)
5.99
(8.67)
0.12
(2.15)
-0.19
(-3.08)
1.92
(0.91)
-0.76
(-21.19)
-0.78
(-0.88)
-1.42
(-8.95)
-0.12
(-8.33)
5.63
(20.68)
0.07
(2.82)
-0.24
(-8.12)
1.60
(1.59)
-0.97
(-136.98)
-2.03
(-1.94)
-1.89
(-6.95)
-0.13
(-5.90)
4.78
(14.74)
0.02
(0.86)
-0.21
(-4.15)
-0.05
(-0.04)
-0.68
(-17.99)
-0.67
(-0.48)
-0.76
(-3.79)
-0.10
(-4.83)
5.88
(11.53)
0.14
(3.67)
-0.14
(-3.89)
3.41
(1.99)
-0.99
(-129.16)
-1.06
(-1.63)
-1.02
(-9.44)
-0.07
(-7.22)
1.90
(10.12)
0.07
(4.15)
-0.08
(-4.53)
0.00
(0.00)
-1.57
(-1.74)
-1.68
(-8.72)
-0.07
(-4.00)
1.91
(7.65)
0.05
(2.28)
-0.06
(-1.90)
0.12
(0.14)
-0.71
(-0.72)
-0.50
(-3.74)
-0.06
(-4.62)
1.70
(5.23)
0.11
(3.84)
-0.08
(-3.98)
0.88
(0.70)
-0.66
(-45.60)
-0.65
(-33.18)
-0.69
(-29.03)
0.548
3763
0.519
2097
0.593
1666
LEVSL(pre-IPO)
AdjRSq
N
No
LEVSL-LEVSL(pre-IPO)
NO
WITH
ALL
PREF
PREF
0.504
2692
0.459
1971
0.572
721
0.939
3763
46
0.561
2097
0.957
1666
Panel B: p-values for the difference in coefficients on HOT
Filter:
Dep. variable:
NO PREF vs. WITH PREF
Yes
LEVPF-LEVPF(pre-IPO)
No
LEVPF-LEVPF(pre-IPO)
No
LEVSL-LEVSL(pre-IPO)
0.02
0.41
0.50
47
Table 11
The effect of EFWA on the cumulative change in leverage since the IPO
Book leverage (LEVSL) is defined as the ratio of the sum of short- and long-term debt to total assets. The dependent
variable equals the cumulative change in book leverage (LEVSL) since the year preceding the IPO: LEVSLLEVSL(pre-IPO). NO PREF and WITH PREF denote the subsamples of IPOs without and with pre-IPO preferred
shares, respectively. EFWA equals the Baker and Wurgler (2002) measure of market timing, where equity issues are
defined as the change in book equity minus the change in retained earnings and debt issues are defined as the change
in total debt. The other variables are defined in Table 1. Industry dummies, based on 3-digit SIC codes, are included
but not reported. T-statistics (reported in parentheses) are based on heteroskedasticity robust standard errors. The
bottom rows test for the difference in coefficients on MB and EFWA between firm without and with pre-IPO
preferred shares.
Sample:
Dep. variable:
NO PREF
LEVSL-LEVSL(pre-IPO)
IPO+1
Regression estimates
EFWA(t-1)
MB(t-1)
IPO+3
IPO+5
-2.46
(-7.61)
-2.63
(-6.54)
WITH PREF
LEVSL-LEVSL(pre-IPO)
IPO+1
-1.51
(-6.76)
-0.25
(-7.82)
1.90
(6.13)
0.22
(8.74)
-0.23
(-2.70)
1.40
(1.34)
-0.69
(-38.88)
-0.18
(-5.60)
1.68
(4.59)
0.18
(6.58)
-0.27
(-3.59)
1.85
(1.50)
-0.70
(-32.82)
-0.26
(-6.01)
2.03
(4.59)
0.18
(4.88)
-0.31
(-3.24)
-0.11
(-0.08)
-0.77
(-29.20)
-0.62
(-3.68)
-0.20
(-7.13)
1.89
(5.50)
0.28
(8.90)
-0.15
(-2.58)
1.35
(1.09)
-0.72
(-39.58)
0.478
1959
0.479
1544
0.478
1223
0.552
1508
P-values: NO PREF vs. WITH PREF
EFWA(t-1)
MB
0.00
0.01
0.03
EBITDA/A(t-1)
Log(SALE)(t-1)
PPE/A(t-1)
RD/A(t-1)
Dummy: missing RD
LEVSL(pre-IPO)
AdjRSq
N
48
IPO+3
IPO+5
-1.44
(-4.94)
-1.56
(-4.13)
-0.13
(-4.24)
2.57
(5.35)
0.25
(6.70)
-0.04
(-0.78)
6.91
(3.92)
-0.74
(-29.76)
-0.19
(-4.80)
2.62
(4.88)
0.19
(3.86)
-0.14
(-2.21)
1.89
(0.87)
-0.84
(-27.22)
0.492
1129
0.527
844
Appendix A1
Sample construction
The sample consists of initial public offerings (IPOs) that occur between 1975 and 2009. This list is
obtained from Jay Ritter. We end the sample in 2009 in order to track post-IPO issuance for two years
following the IPO. Our sample is restricted to firms for which the offer price exceeds $5.00 per share. We
exclude utility firms (SIC 4900-4999) and financial firms (SIC 6000 -6999) as well as American
Depositary Receipts, closed-end funds, unit IPOs, spinoffs, limited partnerships and REITs. This sample
of firms is matched to stock price data from CRSP and accounting data from COMPUSTAT with the
restriction that all of the firms have accounting data on book assets and liabilities in both the pre-IPO and
IPO year. These steps yield a set of 3,777 IPOs after imposing a number of filters described below that
are meant to ensure the quality of the accounting data, especially in the pre-IPO year.
We exclude observations that have less that $10 million (in 2011 dollars) in book assets in the IPO year.
Book debt equals total liabilities (COMPUSTAT annual item LT) and preferred stock (Item PSTKL,
replaced by the redemption value of preferred stock (PSTKRV) when missing) minus deferred taxes
(TXDITC) and convertible debt (DCVT). Book equity is total assets (A) minus book debt. Market-tobook ratio, MB, is defined as book debt plus market equity (common shares outstanding (CSHO) times
share price (PRCC_F) divided by total assets. We drop observations that are greater than the 99th
percentile of this ratio, starting in the IPO year. Leverage (LEVPF) equals the ratio of book debt to total
assets in percentage points. Leverage (LEVSL) equals the sum of short- and long-term debt to book assets
in percentage points. Observations with leverage (LEVSL) over 100% are excluded from the sample
Profitability is measured by EBITDA where EBITDA is earnings before interest, taxes, and depreciation.
Log(SALE) is the logarithm of net sales (item SALE) in millions of 2011 dollars. Asset tangibility,
denoted as PPE, is defined as net plant, property, and equipment. RD is research and development
expense, replaced with zero when missing. A dummy variable RDD takes the value of one when item
XRD is missing. We use total assets to deflate R&D expenses in order to ensure comparability with other
studies. In some tables, SALE is used to deflate R&D instead of book assets in order to minimize the
incidence of outliers as R&D expenses are intangible and do not get recorded as an asset on the balance
sheet.
Total investment, INV, is measured as the sum of capital expenditures (item CAPX) and research and
development expense (set to zero when missing).19 Debt issues, DI, equal the change in book debt divided
by total assets at the end of the current year. Observations with INV/A greater than the 99th percentile are
dropped from the sample. We drop firm-year observations for which the change in book debt over total
assets or the change in book equity net of retained earnings over total assets are less than the 1st percentile
or exceed the 99th percentiles, starting in the IPO year. We also drop firm-year observations for which
EBITDA/A, CAPX/A, or the change in retained earnings over book assets is greater than 100% in
absolute value.
19
Missing values of R&D are set to zero in order not to bias the sample in favor of firms whose primary investments
are in the form of research and development expenses.
49
Appendix A2
Examples of IPO prospectuses with convertible preferred shares
First Virtual Holdings
The following table sets forth the (i) capitalization of the Company as of
September 30, 1996, (ii) pro forma capitalization as of such date after giving effect to the
assumed exercise of warrants outstanding at September 30, 1996 to purchase 1,328,006 shares of
Common Stock at an exercise price of $0.01 per share, conversion of all outstanding shares of
Preferred Stock into 2,333,317 shares of Common Stock and an amendment of the Company's
Certificate of Incorporation on or prior to the closing of the offering and (iii) as adjusted
capitalization to give effect to the application of the estimated net proceeds from the sale by the
Company of the 2,000,000 shares of Common Stock offered by the Company hereby (after
deduction of the underwriting discounts and commissions and estimated expenses of the
offering).
Amazon.com
The following table sets forth at March 31, 1997 the (i) actual capitalization of the Company, (ii)
the pro forma capitalization of the Company, giving effect to the conversion of the outstanding
Preferred Stock into Common Stock upon the closing of this offering, and (iii) the pro forma
capitalization as adjusted to reflect the receipt of the estimated net proceeds from the sale of the
3,000,000 shares of Common Stock offered hereby at the initial public offering price of $18.00
per share and after deducting the underwriting discount and offering expenses payable by the
Company. This table should be read in conjunction with the Company's financial statements and
the notes thereto included elsewhere in this Prospectus.
NetFlix
The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2002:
-
on an actual basis;
-
on a pro forma basis assuming the conversion of all shares of our preferred stock into
shares of common stock automatically upon completion of this offering, including
shares to be issued to certain studios immediately prior to this offering and the filing
of our amended and restated certificate of incorporation upon completion of this
offering; and
-
on a pro forma as adjusted basis to reflect the sale of 5,500,000 shares of our common
stock at the initial public offering price of $15.00 per share, less the underwriting
discounts and commissions and estimated offering expenses, and repayment of $13.9
million of our subordinated promissory notes, which will result in a $10.8 million
charge to expense in the period of the offering.
This information should be read in conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and our financial statements and notes to those
statements appearing elsewhere in this prospectus.
50
March 31, 2002
Cash and cash equivalents
Actual
$15,671
Pro Forma
$15,671
Pro Forma As
Adjusted
$76,471
Subordinated promissory notes, net of
unamortized discount of $10.8 million
$3,158
$3,158
$0
Capital lease obligations, net of current
portion
Total long-term debt
$959
$4,117
$959
$4,117
$959
$959
$101,479
$351
$0
$0
$0
$0
$101,830
$0
$0
Preferred stock, $0.0001 par value; no
shares issued or outstanding (pro forma
and pro forma as adjusted)
$0
$0
$0
Series A convertible preferred stock,
0.001 par value; no shares issued or
outstanding (pro forma and pro forma as
adjusted)
$4
$0
$0
Series F Convertible Preferred Stock,
$0.001 par value; no shares issued or
outstanding (pro forma and pro forma as
adjusted)
Common stock, $0.001 par value
Additional paid-in capital
Deferred stock-based compensation
Accumulated deficit
Total stockholders' equity (deficit)
Total capitalization
$3
$2
$74,752
-$23,859
-$141,774
-$90,872
$15,075
$0
$15
$176,576
-$23,859
-$141,774
$10,958
$15,075
$0
$21
$251,295
-$23,859
-$152,541
$74,916
Redeemable convertible preferred stock
and warrants:
Series B, C, D, E and E-1 Convertible
Preferred Stock; no shares issued or
outstanding (pro forma and pro forma as
adjusted)
Convertible preferred stock warrants
Total redeemable convertible preferred
stock and warrants
Stockholders' equity (deficit):
Tropical Sportswear
The Company intends to use the net proceeds of the Offering as follows: (a)
51
approximately $3.9 million to redeem all of the Company's outstanding preferred stock; and (b)
the remaining approximately $13.6 million to repay amounts outstanding under the $40 million
revolving credit line (the "Facility") constituting part of the Credit Agreement.
Einstein Bros. Bagels
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus (i) gives effect to a 225-for-1 stock split declared by the board
of directors of the Company on July 8, 1996, (ii) gives effect to the conversion of the Company's
$120.0 million convertible loan facility from Boston Chicken, Inc. ("Boston Chicken") into
15,307,421 shares of Common Stock on June 17, 1996, (iii) assumes the conversion of 6,250
shares of preferred stock, par value $.01 per share, of the Company into 459,559 shares of
Common Stock and (iv) assumes no exercise of the over-allotment option granted by the
Company to the Underwriters.
Extensity
The table below provides the pro forma effects of the initial public offering
December 31, 1999
Actual
Pro Forma
Pro Forma As
Adjusted
Cash, cash equivalents and short-term
investments
Working capital
Total assets
$24,285
$13,227
$31,661
$24,285
$13,227
$31,661
$96,985
$85,927
$104,361
Notes payable and capital lease obligations,
noncurrent portion
$1,285
$1,285
$1,285
$49,648
-$35,061
$0
$14,587
$0
$87,287
Consolidated balance sheet data:
Mandatorily redeemable convertible
preferred stock
Total stockholders' equity (deficit)
Rosetta Stone
The table provides financial on a pro forma basis after giving effect to (i) the conversion of all
outstanding shares of preferred stock into 14,507,714 shares of our common stock, which will
occur automatically immediately prior to the closing of this offering, (ii) the issuance of 154,672
shares of restricted common stock we made to some of our employees, and (iii) the issuance of
591,491 shares of our common stock we made to 10 of our key employees, including our named
52
executive officers, which number of shares is net of the shares withheld by us to satisfy the tax
withholding obligations relating to the "net issuance" of the stock grants
Neutral Tandem Inc
The pro forma as adjusted balance sheet data as of June 30, 2007 give effect to this offering of
common stock at a price of $14.00 per share, the mandatory conversion of all of our preferred
stock into an aggregate of 18,000,230 shares of common stock upon the closing of this offering,
the reclassification of warrants from liabilities to shareholders’ equity, and the application of the
net proceeds therefrom as described under “Use of Proceeds”.
53
Table A1
Comparison of samples with (WITH PREF) and without pre-IPO preferred shares (NO PREF)
This table reports summary statistics of firm characteristics in the year preceding the IPO, except for RET1, PROCEEDS, VC, TECH, and Age which are
measured at the time of the IPO. Returns and financial ratios except for MB are in percentage points. NO PREF and WITH PREF denote subsamples of firms
without and with pre-IPO preferred shares, respectively. Book debt is the sum of total liabilities and preferred shares minus convertible debt and deferred taxes.
Book leverage LEVPF is the ratio of book debt to total assets. LEV is the ratio of book debt less preferred shares to book assets. LEVSL is the ratio of short term
and long-term debt to total assets. Market-to-book (MB) is defined as book debt plus the market value of equity divided by total assets. Profitability, EBITDA, is
defined as earnings before interest, taxes and depreciation. CAPX denotes capital expenditures, RD is research and development expense. INV is the sum of
CAPX and RD, where missing values of RD are set to zero. PROCEEDS equals the IPO proceeds in millions of 2011 dollars and includes primary and secondary
shares but assumes that over-allotment options are not exercised. RET1 is the first-day return on the IPO day. LSALE is the log of sales in millions of 2011
dollars. VC is a dummy for whether the firm had venture-capital financing prior to the IPO. TECH is a dummy for whether the firm is in the technology industry.
Age is the founding age of the firm at the time of the IPO. MB (SIC3 pre-IPO) equals the mean market-to-book ratio in the issuing firm’s industry in the year
prior to the IPO. PPE is property, plant and equipment. The dollar burn rate (DBR) is the difference between capital expenditures and operating cash flows in the
year prior to the IPO in millions of 2011 dollars. Cash burn rate is ratio of the dollar burn rate to total proceeds. DBR/Cash is the ratio of the dollar burn rate to
the firm’s cash holdings in the year prior to the IPO. The column labeled TSTAT reports t-statistics for the difference in means across firms with no pre-IPO
preferred shares and firms with pre-IPO preferred shares.
All firms (N=3,777)
LEVPF
LEV
LEVSL
EBITDA/A
PPE/A
INV/A
CAPX/A
RD/SALE
PROCEEDS
RET1
NO PREF (N=2,104)
WITH PREF (N=1,673)
T-STAT
MEAN
(1)
MEDIAN
(2)
MEAN
(3)
MEDIAN
(4)
MEAN
(5)
MEDIAN
(6)
Col. (3) vs. Col. (5)
(7)
97.1
64.2
32.2
11.1
26.0
19.5
10.1
27.0
83.6
17.0
81.2
64.8
28.7
16.0
18.8
13.8
6.3
0.0
45.5
7.4
67.7
67.7
35.4
19.7
28.7
15.9
10.8
8.7
79.4
12.6
68.5
68.5
34.5
20.0
22.1
10.7
6.7
0.0
36.0
6.0
134.1
59.9
28.2
0.3
22.7
24.1
9.2
49.9
89.0
22.5
108.4
58.3
20.9
10.0
16.0
20.2
6.0
7.3
55.0
9.5
-34.6
8.6
8.9
23.4
8.5
-14.1
4.4
-11.4
-1.6
-8.8
54
Log(SALE)
VC
GC
TECH
AGE
MB(SIC3 pre-IPO)
Dollar burn rate (DBR)
Cash burn rate
DBR / Cash
Pct. secondary shares
3.9
0.37
0.03
0.40
15.5
2.4
1.1
3.7
-15.6
16.5
3.9
0.0
0.0
0.0
9.0
2.2
-0.6
-1.9
-16.0
5.9
4.1
0.17
0.02
0.30
17.5
2.2
-1.5
-0.4
-46.4
18.7
4.1
0.0
0.0
0.0
11.0
2.0
-1.3
-4.9
-40.7
10.8
55
3.7
0.62
0.05
0.53
12.9
2.7
4.3
8.8
16.4
13.6
3.7
1.0
0.0
1.0
7.0
2.5
0.8
1.9
15.1
0.0
7.8
-31.9
-6.2
-14.6
7.7
-15.7
-2.7
-3.2
-10.1
7.3
Table A2
Mean values by whether a firm is VC-backed and if it has pre-IPO preferred shares
This table reports mean values for the sample of IPO firms. Firms are split into four groups according to whether
they have VC financing and pre-IPO preferred share financing. Panel A reports summary statistics for firms without
VC financing. Panel B reports summary statistics for firms with VC financing. TSTAT reports the difference in
means across firms with and without pre-IPO preferred shares (PREF). Variable definitions are located in Table 1.
Panel A: No VC financing prior to the IPO
N
Pct
Variable
LEVPF
LEV
LEVSL
EBITDA/A
PPE/A
INV/A
CAPX/A
RD/A
PROCEEDS
RET1
Log(SALE)
TECH
AGE
MB(SIC3 pre-IPO)
Dollar burn rate (DBR)
Cash burn rate
DBR / Cash
NO PREF
WITH PREF
TOTAL
1747
73.2
641
26.8
2388
100.0
NO PREF
WITH PREF
TSTAT
69.32
69.32
36.92
20.69
29.80
14.52
10.81
3.71
85.12
12.65
4.26
0.25
18.96
2.11
-2.40
-0.82
-52.55
103.38
70.61
41.17
11.57
28.35
13.35
8.69
4.67
123.00
12.53
4.72
0.27
21.15
2.24
-1.68
0.68
-18.64
-21.33
-1.12
-3.80
10.29
1.35
1.67
3.82
-2.12
-3.61
0.10
-6.00
-1.29
-2.22
-3.09
-0.20
-0.87
-3.54
Continued on next page.
56
Panel B: with VC financing prior to the IPO
N
Pct
Variable
LEVPF
LEV
LEVSL
EBITDA/A
PPE/A
INV/A
CAPX/A
RD/A
PROCEEDS
RET1
Log(SALE)
TECH
AGE
MB(SIC3 pre-IPO)
Dollar burn rate (DBR)
Cash burn rate
DBR / Cash
NO PREF
WITH PREF
TOTAL
357
25.7
1032
74.3
1389
100.0
NO PREF
WITH PREF
TSTAT
59.77
59.77
27.91
15.05
23.05
22.66
10.86
11.80
51.16
12.48
3.53
0.58
10.34
2.56
3.12
1.90
-18.14
153.17
53.22
20.14
-6.76
19.24
30.72
9.52
21.21
67.96
28.67
3.07
0.69
7.79
3.00
7.99
13.78
35.75
-18.78
3.49
5.65
11.12
3.69
-6.95
2.21
-8.69
-4.22
-5.88
4.92
-3.84
5.49
-6.49
-2.71
-1.45
-5.47
57
Table A3
Logistic regression estimates relating firm characteristics to preferred share financing
The dependent variable is a dummy variable for whether a firm has preferred shares. In the case of IPO firms, the
incidence of preferred shares is measured in the year prior to the IPO. In the case of public firms, the incidence of
preferred shares is measured in the third year the firm appears in COMPUSTAT with non-missing market values of
equity. The third column reports p-values for the difference in coefficients across IPO and public firms.
Heteroskedasticity robust t-statistics are reported in parentheses. Independent variables are defined in Table 1.
LEVSL
EBITDA/A
PPE/A
CAPX/A
RD/A
Dummy: missing RD
Log(SALE)
MB
Pseudo Rsq.
N
IPO firms
Coeff./(t-stat)
(1)
Public firms
Coeff./(t-stat)
(2)
IPO vs. Public
P-value
(3)
-0.01
(-2.97)
-0.03
(-14.70)
-0.003
(-1.21)
0.000
(0.10)
0.03
(7.85)
-0.16
(-1.80)
0.18
(6.55)
0.04
(1.75)
0.02
(13.20)
-0.02
(-12.59)
0.004
(3.36)
-0.02
(-5.18)
-0.02
(-3.26)
0.18
(3.15)
0.18
(11.90)
-0.02
(-0.86)
0.00
0.146
3777
0.054
13784
58
0.00
0.01
0.00
0.00
0.00
0.95
0.07
Table A4
Loan characteristics around the IPO
This table reports OLS regressions of the determinants of the number of covenants and loan maturity for loan
packages that contain term loans. Loan information is obtained from Dealscan. The sample consists of loan
packages initiated 12 months prior to 24 months after the IPO from 1994 to 2009. N.Covenants is the number of
covenants. Maturity(months) is the maturity of the longest facility (usually a term loan) in the loan package.
Log(amount) is the logarithm of the principal amount at the package level. The other independent variables are
defined in Table 1. T-statistics are in parentheses; they are based on standard errors that are clustered at the firm
level and robust to heteroskedasticity.
Dummy: PREF>0
R&D/SALE(t-1)
Dummy: missing R&D
EBITDA/A(t-1)
PPE/A(t-1)
LEV(t-1)
Log(SALE)(t-1)
Log(amount)
Constant
N
ARsq
N. Covenants
Maturity(months)
0.34
(2.74)
-0.01
(-3.34)
0.23
(1.88)
0.00
(0.92)
0.00
(-0.83)
0.00
(0.70)
-0.18
(-2.44)
0.26
(4.13)
2.30
(8.33)
-3.75
(-1.95)
0.02
(0.56)
-1.70
(-0.85)
0.16
(2.19)
(-0.01)
(-0.24)
0.06
(1.52)
-2.99
(-3.03)
8.08
(9.26)
42.87
(8.08)
443
0.144
633
0.238
59