《上市公司盈利分析外文资料翻译.doc》由会员分享，可在线阅读，更多相关《上市公司盈利分析外文资料翻译.doc（24页珍藏版）》请在三一办公上搜索。
1、The path-to-profitability of Internet IPO firmsBharat; Narayanan; OmeshAbstractExtant empirical evidence indicates that the proportion of firms going public prior to achieving profitability has been increasing over time. This phenomenon is largely driven by an increase in the proportion of technolog
2、y firms going public. Since there is considerable uncertainty regarding the long-term economic viability of these firms at the time of going public, identifying factors that influence their ability to attain key post-IPO milestones such as achieving profitability represents an important area of rese
3、arch. We employ a theoretical framework built around agency and signaling considerations to identify factors that influence the probability and timing of post-IPO profitability of Internet IPO firms. We estimate Cox Proportional Hazards models to test whether factors identified by our theoretical fr
4、amework significantly impact the probability of post-IPO profitability as a function of time. We find that the probability of post- IPO profitability increases with pre-IPO investor demand and change in ownership at the IPO of the top officers and directors. On the other hand, the probability of pos
5、t-IPO profitability decreases with the venture capital participation, proportion of outsiders on the board, and pre-market valuation uncertainty.Keywords:Initial public offerings, Internet firms, Path-to-profitability, Hazard models, Survival1. Executive summaryThere has been an increasing tendency
6、for firms to go public on the basis of a promise of profitability rather than actual profitability. Further, this phenomenon is largely driven by the increase in the proportion of technology firms going public. The risk of post-IPO failureis particularly high for unprofitable firms as shifts in inve
7、stor sentiment leading to negative market perceptions regarding their prospects or unfavorable financing environments could lead to a shutdown of external financing sources thereby imperiling firm survival. Therefore, the actual accomplishment of post-IPO profitability represents an important milest
8、one in the companys evolution since it signals the long-term economic viability of the firm. While the extant research in entrepreneurship has focused on factors influencing the ability of entrepreneurial firms to attain important milestones prior to or at the time of going public, relatively little
9、 is known regarding the timing or ability of firms to achieve critical post-IPO milestones. In this study, we construct a theoretical framework anchored on agency and signaling theories to understand the impact of pre-IPO factors such as governance and ownership structure, management quality, instit
10、utional investor demand, and third party certification on firms post-IPO path-to-profitability. We attempt to validate the testable implications arising from our theoretical framework using the Internet industry as our setting. Achieving post-issue profitability in a timely manner is of particular i
11、nterest for Internet IPO firms since they are predominantly unprofitable at the time of going public and are typically characterized by high cash burn rates thereby raising questions regarding their long-term economic viability. Since there is a repeated tendency for high technology firms in various
12、 emerging sectors of the economy to go public in waves amid investor optimism followed by disappointing performance, insights gained from a study of factors that influence the path-to-profitability of Internet IPO firms will help increase our understanding of the development path and long-term econo
13、mic viability of entrepreneurial firms in emerging, high technology industries.2. IntroductionThe past few decades have witnessed the formation and development of several vitally important technologically oriented emerging industries such as disk drive, biotechnology, and most recently the Internet
14、industry. Entrepreneurial firms in such knowledge intensive industries are increasingly going public earlier in their life cycle while there is still a great deal of uncertainty and information asymmetry regarding their future prospects (Janey and Folta, 2006). A natural consequence of the rapid tra
15、nsition from founding stage firms to public corporations is an increasing tendency for firms to go public on the basis of a promise of profitability rather than actual profitability.3 Although sustained profitability is no longer a requirement for firms in order to go public, actual accomplishment o
16、f post-IPO profitability represents an important milestone in the firms evolution since it reduces uncertainty regarding the long-term economic viability of the firm. In this paper, we focus on identifying observable factors at the time of going public that have the ability to influence the likeliho
17、od and timing of attaining post-IPO profitability by Internet firms. We restrict our study to the Internet industry since it represents a natural setting to study the long-term economic viability of an emerging industry where firms tend to go public when they are predominantly unprofitable and where
18、 there is considerably uncertainty and information asymmetry regarding their future prospects.4The attainment of post-IPO profitability assumes significance since the IPO event does not provide the same level of legitimizing differentiation that it did in the past as sustained profitability is no lo
19、nger a prerequisite to go public particularly in periods where the market is favorably inclined towards investments rather than demonstration of profitability (Stuartet al., 1999; Janey and Folta, 2006). During the Internet boom, investors readily accepted the mantra of “growth at all costs” and ent
20、husiastically bid up the post-IPO offering prices to irrational levels (Lange et al., 2001). In fact, investor focus on the promise of growth rather than profitability resulted in Internet start-ups being viewed differently from typical new ventures in that they were able to marshal substantial reso
21、urces virtually independent of performance benchmarks (Mudambi and Treichel, 2005).Since the Internet bubble burst in April 2000, venture capital funds dried up and many firms that had successful IPOs went bankrupt or faced severe liquidity problems (Chang, 2004). Consequently, investors attention s
22、hifted from their previously singular focus ongrowth prospects to the question of profitability with their new mantra being “path-to- profitability.” As such, market participants focused on not just whether the IPO firm wouldbe able to achieve profitability but also “when” or “how soon.” IPO firms u
23、nable to credibly demonstrate a clear path-to-profitability were swiftly punished with steeply lower valuations and consequently faced significantly higher financing constraints. Since cash flow negative firms are not yet self sufficient and, therefore, dependent on external financing to continue to
24、 operate, the inability to raise additional capital results in a vicious cycle of events that can quickly lead to delisting and even bankruptcy.5 Therefore, the actual attainment of post-IPO profitability represents an important milestone in the evolution of an IPO firm providing it with legitimacy
25、and signaling its ability to remain economically viable through the ups and downs associated with changing capital market conditions. The theoretical framework supporting our analysis draws from signaling and agency theories as they relate to IPO firms. In our study, signaling theory provides the th
26、eoretical basis to evaluate the signaling impact of factors such as management quality, third party certification, institutional investor demand, and pre-IPO valuation uncertainty on the path-to-profitability. Similarly, agency theory provides the theoretical foundations to allow us to examine the i
27、mpact of governance structure and change in top management ownership at the time of going public on the probability of achieving the post-IPO profitability milestone. Our empirical analysis is based on the hazard analysis methodology to identify the determinants of the probability of becoming profit
28、able as a function of time for a sample of 160 Internet IPOs issued during the period 19962000.Our study makes several contributions. First, we construct a theoretical framework based on agency and signaling theories to identify factors that may influence the path-to- profitability of IPO firms. Sec
29、ond, we provide empirical evidence on the economic viability of newly public firms (path-to-profitability and firm survival) in the Internet industry. Third, we add to the theoretical and empirical entrepreneurship literature that has focused on factors influencing the ability of entrepreneurial fir
30、ms to achieve critical milestones during the transition from private to public ownership. While previous studies have focused on milestones during the private phase of firm development such as receipt of VC funding and successful completion of a public offering (Chang, 2004; Dimov and Shepherd, 2005
31、; Beckman et al., 2007), our study extends this literature by focusing on post-IPO milestones. Finally, extant empirical evidence indicates that the phenomenon of young, early stage firms belonging to relatively new industries being taken public amid a wave of investor optimism fueled by the promise
32、 of growth rather than profitability tends to repeat itself over time.6 However, profitability tends to remain elusive and takes much longer than anticipated which results in investor disillusionment and consequently high failure rate among firms in such sectors. 7 Therefore, our study is likely to
33、provide useful lessons to investors when applying valuations to IPO firms when this phenomenon starts to repeat itself.This articles proceeds as follows. First, using agency and signaling theories, we develop our hypotheses. Second, we describe our sample selection procedures and present descriptive
34、 statistics. Third, we describe our research methods and present our results. Finally, we discuss our results and end the article with our concluding remarks.3. Theory and hypothesesSignaling models and agency theory have been extensively applied in the financial economics, management, and strategy
35、literatures to analyze a wide range of economic phenomena that revolve around problems associated with information asymmetry, moral hazard, and adverse selection. Signaling theory in particular has been widely applied in the IPO market as a framework to analyze mechanisms that are potentially effect
36、ive in resolving the adverse selection problem that arises as a result of information asymmetry between various market participants (Baron, 1982; Rock, 1986; Welch, 1989). In this study, signaling theory provides the framework to evaluate the impact of pre-IPO factors such as management quality, thi
37、rd party certification, and institutional investor demand on the path-to-profitability of Internet IPO firms.The IPO market provides a particularly fertile setting to explore the consequences of separation of ownership and control and potential remedies for the resulting agency problems since the in
38、terests of pre-IPO and post-IPO shareholders can diverge. In the context of the IPO market, agency and signaling effects are also related to the extent that insider actions such as increasing the percentage of the firm sold at the IPO, percentage of management stock holdings liquidated at the IPO, o
39、r percentage of VC holdings liquidated at the IPO can accentuate agency problems with outside investors and, as a consequence, signal poor performance (Mudambi and Treichel, 2005). We, therefore, apply agency theory to evaluate the impact of board structure and the change in pre-to-post IPO ownershi
40、p of top management on the path-to-profitability of Internet IPO firms.3.1. Governance structureIn the context of IPO firms, there are at least two different agency problems (Mudambi and Treichel, 2005). The first problem arises as a result of opportunistic behavior of agents to increase their share
41、 of the wealth at the expense of principals. The introduction of effective monitoring and control systems can help mitigate or eliminate this type of behavior and its negative impact on post-issue performance. The extant corporate governance literature has argued that the effectiveness of monitoring
42、 and control functions depends to a large extent on the composition of the board of directors. We, therefore, examine the relationship between board composition and the likelihood and timing of post-IPO profitability.The second type of agency problem that arises in the IPO market is due to uncertain
43、ty regarding whether insiders seek to use the IPO as an exit mechanism to cash out or whether they use the IPO to raise capital to invest in positive NPV projects. The extent of insider selling their shares at the time of the IPO can provide an effective signal regarding which of the above two motiv
44、ations is the likely reason for the IPO. We, therefore, examine the impact of the change in ownership of officers and directors around the IPO on the likelihood and timing of attaining post-issue profitability.3.2. Management qualityAn extensive body of research has examined the impact of to managem
45、ent team (TMT) characteristics on firm outcomes for established firms as well as for new ventures by drawing from human capital and demography theories. For instance, researchers drawing from human capital theories study the impact of characteristics such as type and amount of experience of TMTs on
46、performance (Cooper et al., 1994; Gimeno et al., 1997; Burton et al., 2002; Baum and Silverman, 2004). Additionally, Beckman et al. (2007) argue that demographic arguments are distinct from human capital arguments in that they examine team composition and diversity in addition to experience. The aut
47、hors consequently examine the impact of characteristics such as background affiliation, composition, and turnover of TMT members on the likelihood of firms completing an IPO. Overall, researchers have generally found evidence to support arguments that human capital and demographic characteristics of
48、 TMT members influence firm outcomes.Drawing from signaling theory, we argue that the quality of the TMT of IPO firms can serve as a signal of the ability of a firm to attain post-IPO profitability. Since management quality is costly to acquire, signaling theory implies that by hiring higher quality management, high value firms can signal their superior prospects and separate themselves from low value firms with less capable managers. The beneficial impact of management quality in the IPO market i
