Supercharged IPOs: Rent Extraction or Signal of Future Firm Performance?

Alexander Edwards Rotman School of Management

University of Toronto alex.edwards@rotman.utoronto.ca

Michelle Hutchens College of Business University of Illinois mlh80@illinois.edu

Sonja Olhoft Rego*

Kelley School of Business Indiana University

sorego@indiana.edu

September 2016

Keywords: Initial public offering; IPO; deferred tax assets; supercharged; up-C; tax receivable

agreement JEL Codes: G14, G32, G34, H25

* Corresponding author. All authors gratefully acknowledge helpful comments from Anne Beatty, Sam Bonsall, Dave Guenther, Jeff Hoopes, Linda Krull, Steve Matsunaga, Kyle Peterson, Gregg Polasky, Gord Richardson, Steven Savoy, Andy Van Buskirk, Jaron Wilde, Ryan Wilson, Wuyang Zhao, seminar participants at Ohio State University, the University of Oregon, the University of Toronto, and the University of Texas at Austin Tax Readings Group. Edwards acknowledges the financial support of the Social Sciences and Humanities Research Council of Canada and the Rotman School of Management. Hutchens is thankful for financial support from the Kelley School of Business and the University of Illinois, College of Business. Rego appreciates financial support from the Kelley School of Business and the Deloitte Foundation.

 

  

Supercharged IPOs: Rent Extraction or Signal of Future Firm Performance?

Abstract

This study examines a new form of initial public offerings colloquially referred to as “Supercharged IPOs.” In a supercharged IPO, a series of transactions are performed as part of the IPO process that eventually generate new tax assets (i.e., greater future tax deductions) for the corporation. Unlike traditional IPOs, the creation of new tax assets also creates a tax liability for the pre-IPO owners. The benefits (i.e., future tax deductions) from the new tax assets are then split between the pre-IPO owners and the new IPO investors, who enter into a tax receivable agreement based on those assets. The net result of the transaction to the pre-IPO owners is the assumption of a certain tax liability in exchange for a contingent future benefit. As a result, we hypothesize, and find evidence consistent with, the decision to “supercharge” an IPO providing a signal regarding the future prospects of the firm. We document higher final offer prices and greater future financial performance for supercharged IPO firms compared to traditional IPO firms. We also examine future stock returns and do not find significant differences between traditional and supercharged IPO firms, consistent with the higher offer price for supercharged IPO firms not reversing. Our results contrast critics’ claims that tax receivable agreements allow pre-IPO owners and advisors to extract rents from new IPO investors.

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1. Introduction

This study examines the motivations for and implications of a new structure for initial

public offerings (IPOs) that has become more popular in recent years, colloquially referred to as

“supercharged IPOs.”1 In a traditional IPO, a private firm “goes public” by issuing new shares

of capital stock in exchange for cash from new investors on the open market. In a supercharged

IPO, a series of complex transactions are performed as part of the IPO process, which eventually

generates new tax assets for the firm (e.g., larger future tax deductions) but, unlike a traditional

IPO, the creation of the new tax assets also creates a concurrent tax liability for the pre-IPO

owners.2 The future tax benefits generated by the new tax assets are then split between the new

IPO investors and the pre-IPO owners based on a contract, typically referred to as a “tax

receivable agreement” (TRA). These arrangements allow pre-IPO owners to retain some portion

of difficult-to-value assets (i.e., future tax benefits), which were created under their ownership

and may otherwise be discounted by potential IPO investors.

There is currently a debate about the relative costs and benefits of supercharged IPOs.

Proponents have argued that supercharging an initial public offering creates benefits for both the

new IPO investors (by increasing the tax basis of firm assets and consequently, the amount of

future tax deductions) and pre-IPO owners (through the tax receivable agreement). Critics have

argued that the complex transactions allow sophisticated pre-IPO owners and their advisors to

take advantage of uninformed new investors during the IPO process.3 They also argue that

supercharging an IPO obfuscates the economic details of the transaction. This obfuscation

                                                            1 We use this term to capture IPOs where pre-IPO owners enter into a tax receivable agreement (TRA) with the IPO firm and the adjusted tax basis of the assets of the firm are “stepped-up” to fair market value. These IPOs can take several different legal forms, the most common of which are “Up-Cs.” See section 2 for further discussion. 2 Examples of tax assets created in supercharged IPOs include the increase in adjusted tax basis of depreciable or intangible assets whose fair market values are greater than their adjusted tax bases prior to IPO. The increase in adjusted tax basis increases the amount of depreciation or amortization recognized for tax purposes in the future. 3 See “Squeezing Out Cash Long After the IPO”; Browning, New York Times, March 13, 2013.

 

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enables pre-IPO owners to unfairly benefit at the expense of the new investors in the IPO, since

85 to 90 percent of the newly created tax benefits are typically allocated to pre-IPO owners

through the tax receivable agreement.

This study seeks to provide evidence on which parties benefit from the financial

innovation of supercharged IPOs. Fleischer and Staudt (2014) argue that both the pre-IPO

owners and the new investors who participate in supercharged IPOs benefit from this innovative

deal structure and the only party potentially harmed is the tax collector. This conclusion is

driven largely by the fact that supercharged IPOs provide a tax arbitrage opportunity.4 However,

if there is differential offer pricing for supercharged IPOs as compared to traditional IPOs, then

the scenario outlined by Fleischer and Staudt (2014) is incomplete. The net effect of a

“supercharged” transaction to pre-IPO owners is the assumption of a certain tax liability

(triggered by the step-up in asset basis) in exchange for a contingent benefit (i.e., the TRA). For

pre-IPO owners to realize a net benefit (or break-even) from supercharging the IPO, the firm

must have sufficient future taxable income to realize the future tax benefits and make payments

to the pre-IPO owners pursuant to the TRA. As a result, the decision to supercharge an IPO

potentially provides a signal of the informed, pre-IPO owners’ expectations for the future

prospects of the firm. If this signal is valid, we expect higher offer prices (and less IPO

underpricing on the first day of trading) for supercharged IPOs compared to traditional IPOs.

However, if the market does not distinguish between supercharged and traditional IPOs, then we

expect no differences in offer pricing.

We begin our empirical analyses by examining the determinants of supercharged IPOs

                                                            4 The tax arbitrage opportunity exists because supercharging an IPO creates tax deductions for the IPO firm that are usually subject to a 35 percent federal tax rate, while the gains recognized by pre-IPO owners are typically taxed at lower capital gains tax rates (approximately 20 percent depending on the year and circumstances).

 

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and find that the likelihood of supercharging an IPO is increasing in pretax income, leverage, net

deferred tax assets, the number of book-runners, the proportion of shares being issued publically,

and for IPO firms that are investment banks. Given the potentially endogenous nature of the

decision to supercharge an IPO, we use these findings to create covariate balanced samples of

supercharged and traditional IPO firms through an econometric technique called entropy

balancing, which controls for observable characteristics that may influence the relation being

studied. All of our remaining multivariate tests are based on entropy balanced samples.5

Next, we investigate the signaling implications of supercharging an IPO and examine the

IPO offer prices and the percentage change in stock price on the first day of trading (i.e., IPO

underpricing) for supercharged IPOs compared to traditional IPOs. Our analyses reveal

significantly higher offer prices for supercharged IPOs, consistent with TRAs providing a

positive signal of future firm performance and thus leading to higher offer prices.6 This finding

is robust to the inclusion of a broad set of control variables from prior research and net deferred

tax assets, which we include as a proxy for the potential step-up in asset basis that would occur if

the IPO were supercharged. Overall, these results indicate that supercharged IPO firms issue

stock at higher offer prices than traditional IPO firms. We perform a similar set of analyses

examining IPO underpricing on the first day of trading but fail to observe a significant

association between supercharging and the amount of IPO underpricing.

Prior research generally documents poor financial performance in the period following

traditional IPOs (see for example Ritter 1991). Thus far, our results are consistent with pre-IPO

                                                            5 In robustness tests we confirm results are similar using a propensity score matched sample. 6 In supplemental analyses we estimate the value of the step-up in asset basis for new IPO investors and compare this amount to the incremental offer price for supercharged IPO firms. We observe that for the majority of our sample firms the incremental offer price is greater than the estimated value of step-up allocated to new IPO investors. This result is consistent with the step-up in asset basis and the positive signal of future firm performance both contributing to the higher offer price for supercharged IPO firms compared to traditional IPO firms.

 

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owners possessing private information about future firm performance, which leads them to

supercharge their IPOs. If this private information is correct and supercharging is not merely a

means of extracting value from new IPO investors, then we expect the realized future

performance of supercharged IPO firms to be superior to the realized future performance of

traditional IPO firms. We empirically test this expectation and document higher future sales and

earnings for supercharged IPO firms. We also find that supercharged IPO firms enjoy lower

future effective tax rates (ETRs) than traditional IPO firms. Overall, our findings provide

evidence consistent with firms that undergo a supercharged IPO exhibiting superior firm

performance in the post-IPO time period.

We next examine the future stock performance of supercharged IPO firms relative to

traditional IPO firms. Given that we observe higher offer prices for firms that supercharge their

IPOs, we would expect lower future stock returns if supercharging is merely a means of rent

extraction by pre-IPO owners. Alternatively, if supercharging provides a signal of superior

future performance that is not fully incorporated into the offer price, we would expect higher

future stock returns for supercharged IPO firms. However, if the signal of superior future

performance is correctly impounded into offer prices, we expect future stock returns for

supercharged IPO firms to not differ from those of traditional IPO firms. Consistent with the

final interpretation, we find that supercharged IPOs experience six-month, one-, and two-year

stock returns that are not statistically different from those of traditional IPO firms. We caution

readers that this evidence is merely suggestive, as we are hesitant to accept the null hypothesis.

In our final set of analyses we examine the impact of disclosure quality on the relations

described above. Commentators have argued that supercharged IPOs obfuscate actual financial

outcomes through a complex series of transactions, which allow sophisticated pre-IPO owners

 

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and their advisors to take advantage of uninformed new investors. We examine this conjecture

by repeating our earlier analyses and documenting the effects for firms that provide higher or

lower quality disclosure in the Form S-1 regarding the details of the tax receivable agreement.

For the initial pricing and future performance tests, our evidence is consistent with tax receivable

agreements providing a signal to new IPO investors regarding future firm prospects, and this

signal is stronger for firms with higher disclosure quality.

Researchers, regulators, private firm owners, and investors should find our results

intriguing for several reasons. First, supercharged IPOs are a relatively new but growing

transaction structure that many private firm owners are likely to consider when deciding whether

to raise capital via IPO. In fact, some have argued the supercharged IPO transaction structure

and the LLC organizational form will jointly alter business taxation in the U.S. (e.g., Polsky and

Rosenzweig 2015). Given the negative press associated with these transactions, the motivations

for and consequences of supercharging an IPO should be of interest to both investors in and

regulators of these transactions. Our results suggest that supercharging an IPO does not simply

shift value from new IPO investors to pre-IPO investors, but instead provides a signal of superior

future firm performance compared to similar, traditional IPO firms.

Second, the existing academic literature on supercharged IPOs is relatively scarce.

Fleischer and Staudt (2014) examine the determinants of supercharged IPOs and find they are

most common when there is a tax arbitrage opportunity and when an elite lawyer from New

York is involved in the process; however, they do not examine other implications or

consequences. We fill this void in the literature through our examination of the initial pricing,

underpricing, and future performance of supercharged IPO transactions as compared to

traditional IPOs. As a result, we also contribute to the broader literature on traditional IPOs.

 

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Finally, our study contributes to the stream of research that examines the effects of taxes

on transaction structures and deal execution. A number of prior studies document that taxes

impact the structure and pricing of mergers and acquisitions (M&A) and divestitures (e.g.,

Weaver 2000; Ayers, Lefanowicz, and Robinson 2003, 2004; Erickson and Wang 2007) and the

profitability of cross-border M&A transactions (Hanlon, Lester, and Verdi 2015; Edwards,

Kravet, and Wilson 2016). Our research is also related to Guenther and Willenborg (1999) and

Li, Lin, and Robinson (2015), which provide evidence that capital gains taxes affect IPO offer

pricing. Most closely related to our study, Allen (2012) examines the deferred tax assets

generated by net operating loss (NOL) carryforwards of venture capital-backed IPOs. He finds

that approximately 80 percent of venture capital-backed IPO firms write-off the deferred tax

assets through a valuation allowance, an action consistent with expected poor future

performance. In contrast to Allen (2012), we examine the deferred tax assets created by a

discretionary choice of pre-IPO owners to supercharge an IPO. These assets provide a positive

signal of future firm performance and thus, have direct implications for IPO pricing.

The remainder of this paper is organized as follows. In Section 2, we provide background

information on supercharged IPOs and motivate and develop the hypotheses. Section 3 describes

the sample selection procedures and research design. Section 4 presents results and discusses the

significance of our findings. Section 5 presents supplemental tests that consider the quality of

disclosures in Form S-1 regarding supercharged IPO transactions. Finally, Section 6 concludes.

2. Background & Hypothesis Development

2.1 Supercharged IPOs

 

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The decision to become a publicly-traded company represents a major step in the life of a

firm. In a traditional IPO, a private firm that is going-public issues new shares of capital stock in

exchange for cash from new investors. This transaction structure has no direct tax consequences

for pre-IPO owners, unless they decide to sell any of their pre-IPO shares. In a supercharged

IPO, a series of transactions are performed as part of the IPO process, which eventually step-up

the adjusted tax basis of firm assets (e.g., goodwill) and thus creates larger future tax deductions

(e.g., amortization). However, this step-up in asset basis also creates a concurrent tax liability

for the pre-IPO owners. As a result, the step-up in asset basis often occurs over an extended

period of time, essentially deferring tax payments by pre-IPO owners to the future. In this

respect, supercharged IPOs are similar to traditional IPOs, where pre-IPO owners avoid direct

tax consequences until they sell their pre-IPO shares.7

Supercharged IPOs can take one of three different legal forms: 1) Section 338(h)(10)

IPO, 2) umbrella partnership corporation (Up-C) IPO, or 3) publicly-traded partnership (PTP)

IPO. Of these three legal forms, Up-C transactions are far more common (Shobe 2016), and thus

are featured in Figure 1, which describes the series of transactions that underlie most

supercharged IPOs. Up-C transactions require pre-IPO firms to be organized as partnerships or

LLCs, which explains why a relatively small proportion of all IPOs are supercharged (since

many pre-IPO firms are organized as corporations).8 Proponents of supercharged IPOs contend

the transaction structure generates net benefits for both new IPO investors (by generating larger

future tax deductions for the IPO firm) and pre-IPO owners [through tax receivable agreements

                                                            7 Based on the Form S-1s for our sample of supercharged IPO firms, most supercharged IPO firms report some step-up in asset basis at the time of IPO, consistent with pre-IPOs owners incurring some tax liabilities upon IPO. 8 Section 338(h)(10) IPO transactions are relatively rare because they impose an immediate tax liability on the pre-IPO owners at the time of IPO, regardless of whether they exchange shares of stock in the pre-IPO corporation for shares in the new IPO corporation. In contrast, both Up-C and PTP IPOs allow deferral of tax costs to the future.

 

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(TRAs), which allocate future tax benefits between the new IPO investors (10-15 percent) and

the pre-IPO owners (85-90 percent)]. Some proponents also assert TRAs align pre-IPO owners’

incentives with those of new IPO investors, since TRAs only generate cash payments to pre-IPO

owners if the IPO firm is profitable in the future (e.g., Bilsky and Goodman 2015).9

Critics of supercharged IPOs have primarily focused their attention on the TRAs that

underlie these complex transactions. They argue that the allocation of future tax benefits to pre-

IPO owners constitutes an opportunistic transfer of IPO firm value from new IPO investors to

pre-IPO owners, since the value of TRAs is typically material and economically significant. In

our sample of supercharged IPO firms, the mean (median) amount of TRA value (contingent on

an amount being disclosed) is $146 million ($64 million), which constitutes 60 (13) percent of

pre-IPO total assets.10 Other critics characterize supercharged IPOs as opportunistic tax

arbitrage that takes advantage of differences in tax rates for pre-IPO owners and IPO firms and

thus, in net reduces government tax revenues (e.g., Shobe 2016).

Figure 2 compares the financial outcomes of traditional and supercharged IPOs based on

a variety of assumptions, including the possibility that supercharged IPOs essentially shift IPO

firm value from new IPO investors to pre-IPO owners.11 As a baseline, column (1) summarizes

the effects of a traditional IPO where the goodwill of the IPO firm has a $100 fair market value

and 10 shares of the firm are issued for $10 each. In this case total proceeds from the IPO are

$100, there are no immediate tax costs for pre-IPO owners, and the net value of the transaction

                                                            9 Some aspects of supercharged IPOs resemble earnout arrangements related to sales of companies. Specifically, in a supercharged IPO the future TRA payments to pre-IPO owners are similar to the future payments to prior owners of companies that are sold with earnout arrangements, where a portion of the total sales price is paid over time as specific contractual financial targets are met (rather than having all proceeds paid at the time of sale). Prior research suggests that earnout arrangements align the seller’s interests with those of the buyer (Bilsky and Goodman 2015) and minimize the costs of valuation uncertainty and moral hazard in acquisition negotiations (e.g., Cain, Denis, and Denis 2010). 10 38 of the 49 supercharging firms in our sample disclose an estimated value for the TRA. 11 The example is an expansion of one utilized by Fleisher and Staudt (2014).

 

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for pre-IPO owners is $100. Column (2) summarizes the effects of supercharging an IPO

assuming the offer price remains $10 per share, the step-up in asset basis occurs at the time of

IPO, and the new tax assets are fully realized in the future. In a supercharged IPO, the firm’s

assets are deemed sold for tax purposes at fair market value, which “steps-up” the adjusted tax

basis of the firm’s assets, in this case by the amount of goodwill (i.e., $100). Thus, in column (2)

the total proceeds from the IPO remain $100 but there is a $35 deferred tax asset (DTA) created

($100 goodwill × 35% tax rate), which has a present value of $24.22 (r = 5%; n = 15 years).

Using the typical 85/15 split of deferred tax assets in a TRA, column (2) allocates $20.59 (i.e., 85

percent) of the present value of the DTAs to the pre-IPO owners and $3.63 (i.e., 15 percent) to

the new IPO investors. The transaction also triggers a tax cost to the pre-IPO owners of $18.09

[($100 + $20.59) x 15%], resulting in net transaction value to the pre-IPO owners of $102.50

($100 + $20.59 – $18.09). In summary, compared to a traditional IPO the net effect of

supercharging creates additional value for new IPO investors of $3.63 (i.e., their share of the

present value of the DTAs) and additional value for the pre-IPO owners of $2.50 (i.e., $102.50

net value of supercharged IPO less the $100 net value of a traditional IPO in column 1). Thus,

both parties are better off by supercharging the IPO.

In column (3) we summarize the effects of a supercharged IPO again assuming the offer

price remains $10 per share, but now the benefits of the new tax assets are not realized in the

future (e.g., amortization is never deducted on the tax return). In this case total proceeds from

the IPO remain $100, a $35 deferred tax asset (DTA) is again created but the present value is $0

(since it will not be realized). The transaction will still trigger a tax cost to the pre-IPO owners

of $15 ($100 x 15%), resulting in a net transaction value to the pre-IPO owners of $85 ($100 –

$15). The value for the new IPO investors will be the same as in a traditional IPO since they pay

 

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the same price for the IPO shares and do not benefit from any step-up in tax basis. Thus, if

deferred tax assets are not realized in the future, pre-IPO owners are strictly worse off in a

supercharged IPO (net value = $85) than in a traditional IPO (net value = $100) due to the tax

costs associated with supercharging IPOs.

Column (4) summarizes the effects of supercharging an IPO assuming the new tax assets

are fully realized in the future, but the offer price is now $12.40 per share. This higher price

essentially shifts IPO firm value from the new IPO investors to the pre-IPO owners by requiring

the new investors to pay for all of the deferred tax assets on the IPO date, in addition to when the

tax assets are realized in the future and payments are made to pre-IPO owners based on the TRA.

In this case the pre-IPO owners are better off with $122.9 of net value post-IPO, while new IPO

investors are worse off with $20.37 less value post-IPO compared to a traditional IPO. Most

critics of supercharged IPOs contend that the financial outcomes illustrated in column (4) are

descriptive on average.

Lastly, column (5) summarizes the effects of supercharging an IPO assuming the new tax

assets are fully realized in the future, but now the offer is priced to make the new investors

indifferent about the supercharging (i.e., the additional value of the transaction to new IPO

investors is $0 relative to a traditional IPO). In this case, the offer price is now $10.36 per share,

which generates $18.69 of tax costs and $105.90 of net transaction value for the pre-IPO owners.

While the new IPO investors are indifferent to the supercharged transaction structure, the pre-

IPO owners are better off by $5.90 compared to the traditional IPO outcome.

In this study we seek to uncover evidence as to which assumptions about supercharged

IPOs appear to hold on average. That is, are supercharged IPOs priced to split new tax benefits

between new IPO investors and pre-IPO owners [as in column (2)]? Or do pre-IPO owners use

 

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TRAs to shift IPO firm value from new IPO investors to themselves [as in column (4)]? Or is

the truth somewhere in between [e.g., column (5)]?

The first supercharged IPO occurred in 1993 but evidence of multiple supercharged IPOs

in a given year did not appear until 2004 (Elliot 2011). Because this IPO transaction structure is

a relatively new and infrequent phenomenon, there is little academic research on this topic.

Several articles describe the technical aspects of supercharged IPOs and then argue they impose

net costs (e.g., Shobe 2016) or net benefits (Polsky and Rosenzweig 2015) on new IPO investors.

The only archival research study on supercharged IPOs is Fleischer and Staudt (2014), which

provides evidence that supercharged IPOs are more common when there is a tax arbitrage

opportunity and when an elite lawyer from New York is involved in the process. We extend

Fleischer and Staudt (2014) by examining the pricing, underpricing, and future performance

implications of supercharged IPOs relative to traditional IPOs. While the existing literature on

supercharged IPOs is limited, a large literature examines the broader topic of IPOs and the IPO

process. More relevant for our study is research on IPO pricing and post-IPO firm performance.

We discuss each of these literatures below as we develop hypotheses.

2.2 IPO Pricing and Underpricing

A significant body of research examines the pricing of IPOs and many studies provide

evidence on IPO underpricing (e.g., see Ritter and Welch 2002 for a comprehensive review and

Brau and Fawcett 2006 for recent survey evidence). IPO underpricing is typically calculated as

the difference between the offer price and the closing price on the first day of trading (e.g.,

Loughran and McDonald 2013). Prior research develops a number of potential theories to

explain why underpricing occurs and why firms do not set offer prices closer to the price

investors are expected to pay for the firm’s stock. For example, Rock (1986) shows analytically

 

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that if informed and uninformed investors exist in the market, IPO firms must price shares at a

discount so that uninformed investors will participate in IPOs (i.e., if shares are priced at their

expected values informed investors will only participate in “good” IPOs and crowd out

uninformed investors). Tinic (1988) provides evidence that underpricing serves as a form of

insurance against legal liability and reputational damage to investment bankers. Booth and Chua

(1996) argue that underpricing allows for broad initial ownership, creating greater secondary-

market liquidity. Many of these theories of IPO underpricing rely on underpricing being driven

by information asymmetry in the market (Benveniste and Spindt 1989). If information

asymmetry can be reduced, then IPO offer prices should be set higher, resulting in less IPO

underpricing.

As discussed above, in a supercharged IPO a series of transactions are performed during

the IPO process that eventually generate new tax assets for the IPO firm. The new tax assets

benefit the firm by reducing future corporate tax payments. During the supercharging process a

portion of these tax benefits, usually 85 to 90 percent, are allocated to the pre-IPO owners

through a TRA, which requires the IPO firm to make payments to the pre-IPO owners as the new

tax assets are realized (e.g., reduce future tax liabilities). In contrast to traditional IPOs,

supercharged IPOs impose a tax liability on pre-IPO owners concurrent with the step-up in asset

basis. Thus, the net effect of a supercharged IPO for a pre-IPO owner is the assumption of a

certain tax liability (i.e., at the time of tax asset creation) in exchange for a contingent tax benefit

(i.e., the TRA). In order for pre-IPO owners to realize a net benefit (or break-even) from

supercharging, the firm must have sufficient future taxable income to realize the future tax

benefits and make payments on the TRA. As a result, pre-IPO owners should not engage in

supercharged IPOs unless they expect the firm’s future income to be sufficiently high to realize

 

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the new tax assets (via tax deductions). Thus, the decision to supercharge an IPO potentially

provides a signal from the informed pre-IPO owners regarding the future prospects of the firm.

If this signal is credible and reduces information asymmetry, we expect higher offer prices and

less underpricing (on the first day of trading) for supercharged IPOs compared to traditional

IPOs. However, if the market does not distinguish between supercharged and traditional IPOs

then we would expect no differences in offer pricing between the two transaction types, which

leads to the following hypotheses (stated in the alternative):

H1A: The IPO offer price is higher for supercharged IPO firms than for traditional IPO

firms.

H1B: The amount of IPO underpricing is lower for supercharged IPO firms than for

traditional IPO firms.

Prior research documents only a modest association between accounting information and

IPO pricing (e.g., Kim and Ritter 1999). In addition to the signaling story described above, tax

receivable agreements could reduce information asymmetry between pre-IPO owners and new

IPO investors in at least two ways. First, by stripping tax assets from the IPO firm, tax

receivable agreements eliminate assets that are often deeply discounted by new IPO investors

(e.g., Bilsky and Goodman 2015). Second, IPO firms are required to disclose in Form S-1

additional information about the deferred tax assets and tax receivable agreements that underlie

supercharged IPOs, which could further reduce information asymmetry and also influence IPO

pricing. Alternatively, critics argue Form S-1 disclosures are so complex they actually increase

information asymmetry;12 thus, it is not clear a priori whether the Form S-1 disclosures are

helpful or harmful to information processing by new IPO investors.

                                                            12 “Squeezing Out Cash Long after the IPO”; Browning, New York Times, March 13, 2013.

 

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2.3 Future Firm Performance

Prior studies that examine post-IPO performance generally document poor accounting

and stock market performance following an IPO and have provided various explanations for

these findings (e.g., Ritter 1991; Jain and Kini 1994; Loughran and Ritter 1995; Mikkelson,

Partch, and Shah 1997). We motivate H1A and H1B by arguing that supercharging an IPO

reduces the level of information asymmetry between pre-IPO owners and new IPO investors and

potentially provides an (unintentional) ex ante signal to new IPO investors regarding the future

prospects of the firm. Recall that in Figure 2 pre-IPO owners are worse off in supercharged IPO

transactions compared to traditional IPOs if the new tax assets are never realized [see column

(3)]. In this case, the pre-IPO owners incur a tax cost in conjunction with the supercharging

process but enjoy no tax benefits. Thus, for pre-IPO owners to be willing to incur the tax costs at

the time of step-up in asset basis in a supercharged IPO, they must have relatively high

expectations for future firm performance. In this case, the realized post-IPO performance of

supercharged IPO firms should be superior to the post-IPO performance of firms that undergo

traditional IPOs.

Alternatively, as argued by critics of supercharged IPOs, TRAs could merely be one

method of transferring IPO firm value from new IPO investors to pre-IPO owners [consistent

with Figure 2, column (4)]. Such a transfer of value would be achieved through TRAs that

obfuscate information about tax and non-tax attributes of the IPO firm, leading to higher offer

prices (consistent with H1A and H1B) but weaker future performance of supercharged IPO firms

compared to traditional IPO firms. Thus, we also investigate the following hypothesis (stated in

the alternative) regarding the future performance of supercharged IPO firms:

 

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H2: The future performance of supercharged IPO firms is superior to the future

performance of traditional IPO firms.

 

3. Research Design and Sample Selection

3.1 Sample Selection

Table 1 describes our sample selection procedures, which start with all U.S. firms that

undergo initial public offerings during the period 2004 - 2014. Consistent with Fleischer and

Staudt (2014), we begin our sample period in 2004 because supercharged IPOs gained popularity

in the mid-2000s. We obtain our initial sample of IPO observations from the SDC Platinum

database. We require annual financial statement data from the Compustat North America

database; as such, all observations must report a ticker in SDC and Compustat to match firms in

both databases. To identify firms that supercharge their IPO, we use the Lexis Nexus

Knowledge Mosaic Database to identify firms that make reference to a “tax receivable

agreement” in their Form S-1/S-1A filings with the Securities and Exchange Commission (SEC).

We require that all observations report total assets for the fiscal year ending immediately before

and immediately after the IPO. In order to evaluate the propensity to engage in a supercharged

IPO, we require that firms report basic financial data including leverage, pre-tax income, net

deferred tax assets, intangibles, and goodwill for the fiscal year immediately prior to the IPO.

Lastly, we require that all observations report the offer price, total proceeds, shares, and gross

spread for the IPO transaction. These requirements result in a primary sample of 1,096 firms

engaging in a traditional IPO and 49 firms engaging in a supercharged IPO.

Our sample includes at least one supercharged IPO transaction for each year of our

sample period. Consistent with supercharged transactions becoming more common in recent

years, the number of supercharged IPOs increases throughout the sample period. Figure 3 plots

 

16  

of the number of supercharged IPO transactions for each year of our sample period.

3.2 Determinants of Supercharged IPOs

We begin our empirical tests by examining the characteristics associated with

supercharged IPOs. Specifically, we utilize the following model to investigate the factors

associated with an increased likelihood of a firm engaging in a supercharged, as opposed to

traditional, IPO:

SCIPO = 0 + 1SIZEPRE + 2PTIPRE + 3LEVPRE + 4NetDTAPRE + 5#LEAD

+ 6#RUN + 7SPREAD + 8VC_BACKED + 9PE_BACKED + 10BIGN

+ 11BIGLAW + 12%SHARES + 13OFFER_PRICE + 14PROCEEDS

+ 15I-BANK + (1)

The dependent variable, SCIPO, is an indicator variable set to one (zero) for firms that engaged

in supercharged (traditional) IPOs. The factors that likely influence the decision to engage in a

supercharged IPO include firm characteristics as measured at fiscal year-end immediately prior

to the IPO, such as total assets (SIZEPRE), pretax income (PTIPRE), leverage (LEVPRE), and net

deferred tax assets (NetDTAPRE). We expect larger, more profitable, private firms with greater

access to capital markets to be more likely to supercharge an IPO. Net deferred tax assets could

capture the potential for step-up in the adjusted tax basis of assets at supercharged IPO firms;

alternatively, net deferred tax assets could capture tax exhaustion (i.e., unused net operating loss

carryforwards).

In addition to firm characteristics, we also include attributes of securities issuances that

may be associated with the propensity to engage in supercharged IPOs, including the number of

lead underwriters (#LEAD), the number of book-runners (#RUN), and indicator variables for

whether the IPO firm is backed by venture capital (VC_BACKED) or has private equity

 

17  

ownership (PE_BACKED). Additionally, Fleischer and Staudt (2014) provide evidence that

supercharged IPOs are concentrated in and around New York City and among companies using

elite law firms. As such, we include indicator variables set to one if the issuing firm used a law

firm with a significant IPO presence (BIGLAW) or a “Big 4” accounting firm (BIGN) during the

IPO process. We also include variables that capture the size of the IPO including the percentage

of shares included in the offer (%SHARES), the offer price (OFFER_PRICE), and the total

proceeds from the offering (PROCEEDS). Lastly, we note that a significantly larger proportion

of companies classified by SDC as investment firms engaged in supercharged, as opposed to

traditional IPOs. Thus, we include an indicator variable set to one if the company was classified

as an investment firm (I-BANK).

Given that firms choose to supercharge their IPOs, we are concerned that self-selection

could bias any findings of differential pricing or future financial performance for firms that

engage in supercharged vs. traditional IPOs. Given this potential for biased regressors, we

conduct all analyses using an entropy balanced sample. Similar to propensity score matching,

the goal of entropy balancing is to control for observable characteristics that may influence the

relation being studied. However, instead of matching supercharged IPO firms with traditional

IPO firms, entropy balancing reweights the observations in the control sample such that the

control sample data becomes more similar to the treatment sample data. This reweighting of

control sample observations achieves covariate balance and reduces model dependency for

subsequent analyses of treatment effects (Hainmueller and Xu 2013; McMullin and Schonberger

2015).13 We balance our treatment (i.e., supercharged IPO firms) and control (i.e., traditional

                                                            13 Similar to the more familiar propensity score matching (Rosenbaum and Rubin 1983), the goal of entropy balancing is to achieve a control sample that mirrors the treatment sample on observable covariates (Hainmueller 2011). With propensity score matching, a propensity score is typically computed using a probit or logit regression.

 

18  

IPO firms) sample observations based on all variables in equation (1) that are significant

determinates of supercharged IPOs. In addition, although not significant in equation (1), we also

include firm size and total offer proceeds as covariates in the entropy balancing model.

3.3 Initial Pricing of Supercharged IPOs

Next, we turn to our tests of hypothesis 1A, evaluating the extent to which there is

differential pricing of supercharged IPOs, relative to traditional IPOs. To do so we estimate the

following regression model:

OFFER_PRICE = 0 + 1SCIPO + 2BVPSPRE + 3EPSPRE + 4LEVPRE + 5SPREAD +

6PROCEEDS + 7%SHARES + β8IPOTOT + β9IPORET +

β10VW_RETURN + 11VC_BACKED + 12PE_BACKED + 13BIGN +

14BIGLAW + (2)

In all primary analyses we utilize the entropy balanced sample of traditional and supercharged

IPO firms.14 The dependent variable, OFFER_PRICE, is the natural log of the final offer price

immediately prior to the IPO. The primary variable of interest is an indictor variable (SCIPO)

that is set to one for firms that “supercharge” their IPO, and zero otherwise. Consistent with

firms that engage in supercharged IPOs reducing information asymmetry and providing a

positive signal about the future prospects of the firm, we expect a positive and significant

coefficient on SCIPO.

                                                            This score is then used to match treatment and control observations using a nearest neighbor(s) technique. Alternatively, with entropy balancing the algorithm identifies weights for the observations in the control group that create a “balanced” sample on the selected observable covariates (McMullin 2016). The benefits of entropy balancing relative to propensity score matching include: 1) entropy balancing does not limit the control sample to be a one-to-one (or one-to-multiple) observation match but instead uses a greater number of control firms with appropriate weighting to achieve sample balance (McMullin and Schonberger 2015); 2) entropy balancing generates less approximation error (Hainmueller 2011); and 3) while mis-specified propensity scores can lead to bias for subsequent analysis of the treatment effect (Diamond and Sekhon 2013), an entropy balanced sample is no worse than that of an unmatched sample (Hainmueller 2011). 14 In untabulated analyses we also estimate equation (2) via a propensity matching score procedure. See Section 5.4 for further discussion of these robustness tests.

 

19  

We rely primarily on the offer pricing model in Li, Lin, and Robinson (2015) and the

underpricing literature to identify control variables for our tests of differential pricing. However,

we also include controls for firm characteristics measured for the fiscal year ending immediately

prior to the public offering, scaled by the number of shares where appropriate. These firm

measures include book value (BVPSpre), pretax earnings (EPSpre), and leverage (LEVpre). In

addition, following prior research we include controls for: (1) characteristics of the initial public

offering, including the total fees or “gross spread” of the IPO (SPREAD), the total proceeds for

the IPO (PROCEEDS), and the percentage of shares sold at IPO (%SHARES), e.g., Cliff and

Denis (2004), Lowry and Murphy (2007), Li et al. (2015); (2) value-weighted market returns for

the two months prior to IPO (VW_RETURN), e.g., Lowry (2003), Li et al. (2015); (3) momentum

in the IPO market, including the total number of IPOs in the two calendar months preceding the

IPO (IPOTOT) and the average initial day return for all IPOs in the two calendar months

preceding the IPO (IPORET); (4) historic ownership of the IPO firm with indicator variables for

whether the firm is backed by venture capital (VC_BACKED) or private equity (PE_BACKED),

e.g., Loughran and Ritter (2004), Li et al. (2015); and (5) and the use of a large law firm

(BIGLAW) or Big 4 accounting firm (BIGN); e.g., Fleisher and Staudt (2014), Li et al. (2015).

We estimate two specifications of equation (2), both of which include industry fixed

effects and robust standard errors.15 We first estimate the primary specification shown above.

We also estimate a model that includes NetDTAPRE as a proxy for the potential step-up in asset

basis that would occur if the IPO were supercharged, but also because of the importance of this

                                                            15 We do not include year fixed effects in equation (2) because IPOTOT and IPORET essentially control for time effects. This research design choice is also consistent with Li et al. (2015). 

 

20  

difficult-to-value asset to our research question.16

3.4 Underpricing of Supercharged IPOs

In addition to examining initial offer prices of supercharged vs. traditional IPOs (H1A),

we also investigate the amount of IPO underpricing on the first day of trading for supercharged

vs. traditional IPOs (H1B). Specifically, we utilize the following regression model:

UNDERPRICING = 0 + 1SCIPO + 2BVPSPRE + 3EPSPRE + 4LEVPRE +

5OFFER_PRICE + 6REVISION + 7SPREAD + 8PROCEEDS +

9%SHARES + β10IPOTOT + β11IPORET + β12VW_RETURN +

13VC_BACKED + 14PE_BACKED + 15BIGN + 16BIGLAW + (3)

Where UNDERPRICING is measured as the percentage change in offer price on the first day of

trading and SCIPO is as defined in the equations above. The UNDERPRICING model (equation

3) includes all of the control variables included in the OFFER_PRICE model (equation 2).

However, it also controls for the offer price just prior to IPO (OFFER PRICE), as the amount of

underpricing should be a function of the offer price. Additionally, Hanley (1993) provides

evidence that underpricing is associated with the extent of revisions made to the offer price

during the book building process. Thus, we control for the change in offer price from the initial

offer price to the final offer price just prior to IPO (REVISION).

Similar to our tests of IPO offer price discussed above, we analyze two specifications of

equation (3), both of which include industry fixed effects and robust standard errors. We first

estimate the primary specification shown above, which excludes a control for net deferred tax

assets (NetDTAPRE). We then estimate a specification that includes NetDTAPRE.

                                                            16 NetDTAPRE could capture the potential step-up in asset basis in two ways. First, some Form S-1s indicate the TRA’s tax benefits include net operating loss (NOL) carryforwards from the pre-IPO firm. Second, deferred tax assets from the pre-IPO firm could be correlated with assets having adjusted tax bases that are systematically lower than their fair market values (e.g., firms with self-created intangibles).

 

21  

3.5 Future Performance of Firms that Supercharge IPOs

Finally, we examine H2 and test whether there is differential future performance between

supercharged and traditional IPO firms based on the following regression model:

FUT_PERFORM = 0 + 1SCIPO + 2LAG_PERFORM + 3NetDTAPRE + 4SIZEPRE +

5LEVPRE + 6INTANGIBLES + 7PROCEEDS + 8OFFER_PRICE +

β9MTB + (4)

where future firm performance (FUT_PERFORM) is measured at the close of the fiscal year that

follows the IPO. The measures of firm performance include sales (SALESPOST), cash flows from

operations (CFOPOST), and earnings (ROAPOST), all scaled by total assets. We also examine the

association between supercharged IPOs and future GAAP effective tax rates (ETRPOST) as a

proxy for tax planning effectiveness in the year following IPO.17

Equation (4) includes the firm performance variable for the year prior to IPO

(LAG_PERFORM), to control for serial correlation in firm performance. We also include

financial characteristics measured at fiscal year-end just prior to IPO, including net deferred tax

assets (NetDTAPRE), total assets (SIZEPRE), leverage (LEVPRE), and the amount of intangible

assets (INTANGIBLEPRE), in case future performance systematically varies based on firm size,

leverage, or the amount of intangible assets. We control for deal characteristics that could

influence future performance, including total offer proceeds (PROCEEDS) and the IPO offer

price (OFFER_PRICE). Lastly, we control for the market-to-book ratio (MTBpost) measured at

the close of the fiscal year that follows the IPO to capture variation in future growth

opportunities. We estimate equation (4) with year and industry fixed effects and robust standard

                                                            17 In supplemental analysis we also measure future firm performance based on cumulative stock returns post-IPO, measured six months, one year, and two years following the IPO. If the initial pricing of supercharged IPOs correctly incorporates the signal of future performance we do not expect significant differences in stock returns. 

 

22  

errors. All variables, for all equations, are defined in Appendix A.

4. Results & Analysis

4.1 Descriptive Statistics and Correlations

Table 2 presents descriptive statistics for our sample of traditional and supercharged

IPOs. Providing univariate support for hypothesis 1A, supercharged IPOs exhibit significantly

higher mean offer prices (mean OFFER_PRICE of 2.89 for supercharged IPOs vs. 2.58 for

traditional IPOs, p-value < 0.01; the pre-logarithm values are 18.85 and 14.31, respectively).

Consistent with hypothesis 1B, supercharged IPOs exhibit less underpricing, although not at

conventional significance levels (mean UNDERPRICING of 0.09 for supercharged IPOs versus

0.14 for traditional IPOs, p-value = 0.13). Consistent with hypothesis 2, supercharged IPOs

exhibit greater future performance as measured by sales (mean SALESPOST of 1.53 for

supercharged IPOs versus 1.23 for traditional IPOs, p-value <0.05), cash flow from operations

(mean CFOPOST of 0.10 for supercharged IPOs versus -0.48 for traditional IPOs, p-value <0.05),

and return on assets (mean ROAPOST of 0.04 for supercharged IPOs versus -0.50 for traditional

IPOs, p-value 0.12). Supercharged IPOs also exhibit significantly lower future GAAP ETRs

(mean ETRPOST of -0.03 for supercharged IPOs versus 0.12 for traditional IPOs, p-value <0.01).

Many of the control variables are also significantly different between the two types of IPO firms.

For example, supercharged IPO firms are larger (SIZEPRE), more profitable (PTIPRE), more highly

levered (LEVPRE), have lower market-to-book ratios (MTBPOST), higher rates of private equity

firm ownership (PE_BACKED) but less venture capture backing (VC_BACKED). These

differences highlight the need to control for these firm characteristics, as well as the need to

entropy balance the supercharged IPO (i.e., treatment) and traditional IPO (i.e., control) samples

 

23  

to more closely resemble each other.

Table 3 presents Pearson correlations among the test variables. Consistent with

hypothesis 1A, the supercharged IPO indicator variable, SCIPO, is positively correlated with the

initial pricing of the IPO, OFFER_PRICE ( = 0.1615). In contrast, SCIPO is not significantly

correlated with the amount of IPO underpricing on the first day of trading (UNDERPRICING).

With respect to the association (if any) between supercharged IPOs and future firm performance,

the results in Table 3 indicate that SCIPO is positively correlated with all proxies for future

performance (two at traditionally significant levels), as predicted under H2. Thus, preliminary

evidence suggests that the tax receivable agreements included in supercharged IPOs provide a

credible signal of superior future performance, relative to traditional IPOs.

4.2 Probability of Utilizing a Supercharged IPO

We begin our multivariate analyses by examining the determinants of supercharged IPOs.

Table 4, Panel A presents the results for the estimation of equation (1). We obtain positive and

significant coefficients on PTIPRE (coefficient = 0.5617, p-value < 0.10), LEVPRE (coefficient =

0.3454, p-value < 0.05), NetDTAPRE (coefficient = 3.3079, p-value < 0.10), #RUN (coefficient =

0.1667, p-value < 0.01), %SHARES (coefficient = 2.4958, p-value < 0.01), and I-BANK

(coefficient = 1.667, p-value < 0.01). Given the potentially endogenous nature of the decision to

supercharge an IPO, we conduct our subsequent analyses using an entropy balanced sample.18

We include all variables with significant coefficients in Table 4 in the entropy balancing

procedure. We also include firm size (SIZEPRE) in the entropy balancing model given the

significant univariate differences in firm size between supercharged and traditional IPOs. We

also include total offer proceeds (PROCEEDS) in the entropy balancing model to capture the

                                                            18 Similar to propensity score matching, the goal of entropy balancing is to control for observable characteristics that may influence the relation being studied. See Section 3.2 for a description of entropy balancing.

 

24  

magnitude of the IPO.

Table 4, Panel B presents separate descriptive statistics for the variables on which we

entropy balance our samples of supercharged and traditional IPOs. Columns (1) and (2) report

sample means for the two subgroups before entropy balancing, while columns (3) and (4) report

sample means after the entropy balancing procedures.19 The first two columns reveal a number

of significant differences between the two groups, including firm size, pretax income, leverage,

the number of book runners, the proportion of shares issued in the public offering, and the

frequency with which the IPO firm is an investment firm. However, after the entropy balancing

procedures, the results in columns (3) and (4) indicate that the mean values for all variables on

which the entropy balancing is based are no longer statistically (or visually) different. As a

result, our samples of supercharged and traditional IPO firms have achieved covariate balance,

reducing concerns for self-selection bias.

Table 4, Panel C presents separate descriptive statistics for the dependent variables for

our samples of supercharged and traditional IPOs. Columns (1) and (2) report sample means for

the two subgroups before entropy balancing, while columns (3) and (4) report sample means

after the entropy balancing procedures. In contrast to the results in Panel B, the mean values for

the dependent variables differ as predicted between the supercharged and traditional IPO sub-

samples, both before and after the entropy balancing procedures.20

4.3 The Initial Pricing of Supercharged IPOs

Column (1) of Table 5 presents the results for equation (2), which examines the relation

                                                            19 Specifically, we employ entropy balancing procedures that balance the treatment (i.e., supercharged IPO) and control (i.e., traditional IPO) observations on the first moment (i.e., mean) of the distributions for all variables included in Table 4, Panel B. 20 Note: Due to the nature of the entropy balancing procedure, we cannot statistically test for differences in mean values between the supercharged and traditional IPO sub-samples.

 

25  

between supercharging an IPO and the initial offer price. If tax receivable agreements provide a

positive signal to new IPO investors regarding the future prospects of the firm (or reduces

information asymmetry), then we expect the coefficient on SCIPO to be positive and significant.

In support of H1A, we observe a significant positive coefficient on SCIPO (coefficient of 0.116,

p-value < 0.05). This coefficient indicates that supercharged IPOs have offer prices that are on

average 12.3 percent than those for traditional IPOs.

In addition to the baseline model presented in column (1), we estimate an additional

specification of equation (2) including net deferred to assets measured just prior to IPO

(DTAPSPRE) to the regression model. Recall that NetDTAPRE controls for this difficult-to-value

asset and also proxies for the potential step-up in asset basis that would occur if the IPO were

supercharged. After the inclusion of DTAPSPRE in the model, inferences from Table 5, column

(1) continue to hold as the coefficient on SCIPO remains positive and significant (coefficient of

0.089, p-value < 0.10). In addition, the coefficient on DTAPSPRE suggests investors place a

positive weight on deferred tax assets when determining the IPO offer price they are willing to

pay (regardless of the type of IPO). Overall, these results are consistent with supercharged IPO

firms issuing stock at higher offer prices than traditional IPO firms.

4.4 Underpricing of Supercharged IPOs

Column (1) of Table 6 presents the results for the estimation of equation (3), which

examines the association between supercharged IPOs and IPO underpricing. If TRAs provide a

signal to new IPO investors regarding a firm’s future prospects, then we expect the coefficient on

SCIPO to be negative and significant, consistent with less IPO underpricing for supercharged

IPO firms relative to traditional IPO firms. In column (1) we fail to find support for H1B, as the

coefficient on the supercharged IPO indicator variable (SCIPO) is negative but not statistically

 

26  

significant. In column (2) we add our proxy for the potential step up in asset basis, DTAPSpre

and continue to observe a negative but insignificant coefficient on SCIPO. However, we do

observe a significant positive coefficient on DTAPSpre (coefficient of 2.692, p-value < 0.01),

consistent with greater underpricing of deferred tax assets, in general.

Taken together the results in Tables 5 and 6 are consistent with supercharged IPO firms

issuing stock for higher initial prices than traditional IPO firms but not experiencing a significant

difference in IPO underpricing on the first day of trading. Failure to observe a significant result

for the underpricing test (H1B) does not invalidate our prediction that supercharging an IPO

provides a signal to the market about future firm prospects and thus, reduces information

asymmetry. In supplemental analyses we explore whether supercharged IPO firms with higher

quality disclosures regarding the tax receivable agreement experience less IPO underpricing than

other firms, consistent with a reduction in information asymmetry driving the results in Table 5.

4.5 Future Performance of Supercharged vs. Traditional IPO Firms

Table 7 presents results for estimations of equation (4), which compares the future

performance of supercharged and traditional IPO firms. Hypothesis 2 predicts that supercharged

IPO firms exhibit superior future performance compared to similar traditional IPO firms.

Column (1) examines the future performance of IPO firms, as measured by sales (SALESPOST).

Consistent with H2, we observe higher future sales for supercharged IPO firms compared to

traditional IPO firms. The coefficient on SCIPO is positive and significant (coefficient = 0.175,

p-value < 0.10).

Column (2) compares the future performance of supercharged and traditional IPO firms

as measured by cash flows from operations, CFOPOST. Consistent with H2, we observe higher

future operating cash flows for supercharged IPO firms; however, the coefficient on SCIPO is

 

27  

not significant at conventional levels (coefficient of 0.070, p-value < 0.13). We also use future

accounting earnings (ROAPOST) as a proxy for firm performance and in this specification, we find

the coefficient on SCIPO to be positive and significant (coefficient = 0.067, p-value < 0.10).

Finally, we compare the future effective tax rates (ETRPOST) of supercharged and traditional IPO

firms in column (5). Although future realizations of deferred tax assets do not directly affect

ETRs (because lower current tax expense is offset by an increase in deferred tax expense), if

supercharged IPO firms are more effective tax planners than traditional IPO firms, then they

would exhibit lower future ETRs than traditional IPO firms. Consistent with this conjecture, we

observe a negative and significant coefficient on SCIPO (coefficient of -0.144, p-value < 0.10).

Overall, the results in Table 7 provide some evidence that supercharged IPO firms exhibit

superior future performance post-IPO (compared to traditional IPO firms), consistent with TRAs

providing a signal of pre-IPO owners’ expectations for future firm performance.

5. Supplemental Analyses

In this section we perform a number of additional analyses to provide further evidence on

whether supercharging an IPO provides a signal on a firm’s future prospects. First we examine

the future stock performance of supercharged and traditional IPOs. We then estimate the value

of future tax benefits generated by supercharging an IPO and compare those estimates to the

incremental offer price. Lastly, we consider the impact of disclosure quality on our hypothesized

relations to provide evidence that supercharging is not merely a means of shifting value from

new IPO investors to pre-IPO owners.

5.1. Future Stock Performance

We now examine the future stock performance of supercharged IPO firms to determine if

 

28  

the future stock returns of supercharged IPO firms are lower, higher, or similar to those of

traditional IPO firms. Since we document higher offer prices for firms that supercharge their

IPOs, documenting lower future stock returns for supercharging firms would be consistent with

supercharging merely serving as a means of rent extraction by pre-IPO owners (i.e., offer prices

of supercharged IPO firms are artificially high and then fall, relative to traditional IPO firms

following the IPO). Alternatively, higher future stock returns for supercharged IPO firms would

be consistent with supercharging providing a signal of superior future firm performance that is

not fully incorporated into the offer price (i.e., superior firm performance is revealed and

incorporated into stock price through time, resulting in higher future returns). In contrast, similar

future stock returns for supercharged and traditional IPO firms would be consistent with the

signal of superior future firm performance being correctly impounded in the offer price (i.e.,

supercharged IPOs are not more overpriced or underpriced than traditional IPO firms over a

longer period of time).

Table 8 presents results from tests that regress abnormal stock returns on the

supercharged IPO indicator and control variables. Consistent with the third scenario described in

the preceding paragraph, we find that supercharged IPO firms experience six-month, one-year,

and two-year stock returns that are not statistically different from those of the control group of

traditional IPO firms. Thus, we cautiously conclude that the offer prices for supercharged IPO

firms correctly incorporate the signal of superior future firm performance from pre-IPO owners.

5.2. Value of Future Tax Benefits Compared to Incremental Offer Prices 

As discussed above, Figure 2 illustrates the potential financial outcomes of traditional

and supercharged IPOs based on a variety of assumptions. One potential scenario, presented in

column (5), is that investors could pay more for supercharged IPOs not because of the signal of

future performance but merely due to the increased expected future cash flows directly from the

 

29  

step-up in tax asset basis. In this scenario, the higher price paid by investors for supercharged

IPOs is not due to a reduction in information asymmetry, but a lower present value of future tax

payments. In order to rule out this alternative explanation, we calculate the estimated present

value of the future tax savings from step-up in asset basis and compare this amount to the

incremental offer price investors pay for supercharged IPOs. Unfortunately, not all of the firms

in our sample disclose the dollar value of the step-up in asset basis and none of the sample firms

disclose the timing of expected realization of the tax assets. As a result, we base our estimates

on the subsample of firms that disclose either the deferred tax assets related to step-up or the

related party payable.21 For the 40 firms that disclose sufficient information, the mean (median)

undiscounted value of step-up attributable to new IPO investors is $2.09 ($1.24) per share. We

compare these amounts to the estimated incremental offer price for supercharged IPO firms

(relative to traditional IPO firms) of $1.98 per share.22 Although the mean undiscounted tax

asset step-up is greater than the estimated incremental offer price per share (by $0.11), the

median estimated step-up is substantially lower (by $0.74). In fact, when examining the

estimates on a firm-by-firm basis, the incremental offer price is greater than the undiscounted

step-up for 73 percent of the disclosing firms. Since these estimates of the value of step-up are

almost certainly too high (i.e., all of the newly created tax assets would need to be realized

immediately to attain this value), this comparison provides comfort that at least some of the

incremental offer price of supercharged IPO firms is due to the signal of superior future

performance.

                                                            21 If the value of step-up is disclosed, we estimate the value to new IPO investors as 15 percent of this amount (since the pre-IPO investors will capture the benefit of the other 85 percent of step-up). If only the related-party payable (i.e., the TRA) is disclosed, we estimate the value to new IPO investors as the amount of the related-party payable grossed-up to its full amount, multiplied by 15% [i.e., (TRA / 0.85) × 0.15]. 22 The incremental offer price is calculated as [(Euler’s number to the power of the coefficient on SCIPO in column (1) of Table 5 – 1) × mean offer price for traditional IPOs for the entropy balanced sample] = (e^0.116-1) × $16.12. 

 

30  

To obtain a potentially more realistic estimate of the value of the step-up attributable to

new IPO investors, we assume the same realization pattern for the newly created deferred tax

assets as we used in Figure 1 (i.e., tax assets are realized evenly over 15 years and the value is

discounted at 5%). These estimates are still relatively optimistic as they assume: i) a relatively

low discount rate of 5%, and ii) firms will generate sufficient taxable income to realize all of the

newly created tax assets. Based on these assumptions, the mean (median) value of the step-up

attributable to new IPO investors is $1.44 ($0.86) per share. Using these discounted values, for

the mean disclosing firm in our sample, approximately three-quarters of the incremental offer

price is attributable to step-up ($1.44 / $1.98) and one-quarter is attributable to the value of the

signal of superior future performance ($0.54 / $1.98). Overall, these estimates and analyses

provide some comfort that the documented increase in share prices for supercharged IPO firms is

at least partially attributable to the signal of future performance.

5.3. Disclosure Quality

The analysis above provides evidence that supercharging an IPO provides a signal

regarding the future prospects of the firm, which helps reduce information asymmetry between

pre-IPO owners and potential investors. In contrast, several commentators have argued that

supercharged IPOs include a complex set of transactions that allow sophisticated pre-IPO owners

and their advisors to take advantage of uninformed new investors and extract additional value

from the investing public.23 If this conjecture is correct, we would expect firms to attempt to

obfuscate the details of the supercharging transactions and provide lower quality disclosure in

Form S-1 regarding the step-up in asset basis and other details of the tax receivable agreement.

To examine this conjecture, we repeat our primary analyses while incorporating a measure of the

                                                            23 See “Squeezing Out Cash Long After the IPO”; Browning, New York Times, March 13, 2013.

 

31  

quality of Form S-1 disclosures.

To supplement our primary analysis and to better understand the potential mechanisms

through which supercharged IPOs achieve a higher offer price, we separate the sample of

supercharged IPOs into those with high and low Form S-1 disclosure quality. For each

supercharged IPO firm we review the Form S-1 or Form S-1/A filed immediately prior to the

offering. We observe significant variation in the extent to which firms discuss the tax receivable

agreement and the amount of information disclosed regarding estimates of the step-up in asset

basis and future payments to pre-IPO owners. Our review of Forms S-1 and S-1/A indicates that

firms discuss tax receivable agreements, newly created deferred tax assets, and associated related

party payables: (1) in the pro forma financial statements and footnotes, (2) in the summary of

risk factors section of the Form S-1/A, (3) in both (1) and (2), or (4) in neither (1) nor (2).

Additionally, we find variation in the extent to which firm disclose estimated values.24

Based on this variation in disclosure practices, we create two indicator variables that are

designed to capture the quality of disclosures regarding supercharged transactions, particularly

the TRA. SCIPO_HIGHDIS is coded as one if a supercharged IPO firm has high disclosure

quality, as evidenced by the firm reporting a related party payable (associated with the TRA) on

the pro forma balance sheet included in the Form S-1, and zero otherwise. SCIPO_LOWDIS is

coded as 1 for all other supercharged IPOs, and zero otherwise. We include both variables in

equations (2) - (4) to examine the effect of disclosure quality on the hypothesized relations.25

Table 9 presents a summary of results for tests of H1A, H1B, and H2, where

supercharged IPO firms are partitioned into sub-samples with low vs. high disclosure quality.

                                                            24 We caution readers from drawing strong inferences from this test as it is possible that our disclosure quality measure also captures firms for which larger (i.e., material) tax assets are created through the supercharging process. 25 Note: SCIPO_LOWDIS and SCIPO_HIGHDIS are both coded as 0 for traditional IPO firms.

 

32  

Column (1) contains results for the estimation of equation (2), where OFFER_PRICE is the

dependent variable. The coefficient on SCIPO_LOWDIS, for the low disclosure quality

supercharged IPO group, is not significant, while the coefficient on SCIPO_HIGHDIS, for the

high disclosure quality supercharged IPO group, is positive and significant (coefficient = 0.130,

p-value < 0.05). These results suggest that relative to other IPO firms, the TRAs for high

disclosure quality supercharged IPO firms provide a positive signal to new IPO investors

regarding the firms’ future prospects, leading to higher IPO offer prices. Column (2) contains

results for the estimation of equation (3), where UNDERPRICING is the dependent variable.

The coefficient on SCIPO_LOWDIS is negative and significant (coefficient = -0.085, p-value <

0.05), while the coefficient on SCIPO_HIGHDIS is not significant. These results indicate that

compared to other IPO firms, supercharged IPO firms with lower quality Form S-1 disclosures

experience less IPO underpricing on the first day of trading, i.e., the stock prices of low

disclosure quality supercharged IPO firms increase less on the first day of trading. Based on

these tests it is not clear why firms with SCIPO_LOWDIS = 1 experience less underpricing on

the first day of trading.

Finally, columns (3) – (6) contain a summary of results for estimations of equation (4),

where SALESPOST, CFOPOST, ROAPOST, and ETRPOST are the dependent variables. Consistent with

high disclosure quality supercharged IPO firms driving the superior future performance of

supercharged IPO firms as compared to traditional IPO firms in Table 7, the coefficients on

SCIPO_LOWDIS are generally not significant while the coefficients on SCIPO_HIGHDIS are

significant in the predicted direction in three of the four specification (the exception being the

coefficient on CFOPOST, which is not significantly different from zero). Specifically, the

coefficients on SCIPO_HIGHDIS suggest that compared to other IPO firms, high disclosure

 

33  

quality supercharged IPO firms report higher sales and accounting earnings, and lower ETRs in

the year following IPO. Overall, the results from our supplemental tests suggest that Form S-1

disclosures play a critical role in reducing information asymmetry between pre-IPO owners and

new IPO investors, influencing IPO pricing for supercharged as compared to traditional IPO

firms in a predictable manner.

5.4. Other Robustness Tests

In untabulated robustness tests, we repeat our primary analyses considering alternative

model specifications and estimation procedures for examining equations (2) – (4). First, given

that we entropy balance our samples of supercharged and traditional IPO firms on several

variables that are also included in equations (2) – (4), we re-estimate our primary analyses but

exclude any variables on which we entropy balance (i.e., LEVPRE, %SHARES, PROCEEDS, and

I-BANK). The results for these untabulated analyses are qualitatively similar to those presented

in Tables 5-7.

Second, to assuage concerns that our findings are driven by the entropy balancing

procedure, we also performed a propensity score matching (PSM) procedure. In the first stage of

the PSM procedure we regressed the supercharged IPO indicator variable (SCIPO) on the same

variables included in Table 4, Panel B. We used the results from this first stage regression to

calculate propensity scores for each IPO observation, and then (whenever possible) matched

each supercharged IPO observation to the traditional IPO observation with the closest propensity

score. We then re-estimated equations (2) – (4) based on this much smaller propensity score

matched sample of 98 IPO firm observations. The results for the offer price and underpricing

regressions are largely similar to those shown in Tables 5 and 6; however, the coefficients on the

supercharged indicator variable in the future firm performance regressions (Table 7) are no

 

34  

longer significance. It is unclear whether this lack of significance is driven by the substantially

smaller sample sizes (approximately 80 observations due to the inclusion of LAG_PERFORM) or

a true lack of difference in future performance for traditional vs. supercharged IPO firms.

6. Conclusion

This study examines the motivations for, and implications of, a new structure for initial

public offerings (IPOs) that has become more popular in recent years, colloquially referred to as

“supercharged IPOs.” This IPO structure imposes incremental tax costs on pre-IPO owners, but

also generates future tax benefits for the firm, typically in the form of future depreciation and

amortization tax deductions. Tax receivable agreements (TRA) between the pre-IPO owners and

the IPO firm split the uncertain future tax benefits between the pre-IPO owners and new IPO

investors. Critics have argued that TRAs allow pre-IPO owners to take advantage of uninformed

IPO investors and essentially shift IPO firm value back into the hands of pre-IPO owners. We

examine the credibility of these accusations by comparing the offer prices, underpricing on the

first day of trading, and future firm performance of traditional vs. supercharged IPOs.

Because pre-IPO owners essentially exchange a tax liability at the time of step-up for an

uncertain future tax benefit, we contend the TRAs that underlie supercharged IPOs could act as a

signal to new IPO investors regarding future firm prospects. We provide evidence that is

consistent with our predictions by documenting higher offer prices and greater future financial

performance for supercharged IPO firms. We interpret these results as consistent with TRAs

providing a signal to new IPO investors of superior future performance, instead of acting as a

mechanism for shifting IPO firm value from new IPO investors to pre-IPO owners.

 

35  

In supplemental analyses we directly test our assertion that our results are driven (at least

in part) by a reduction in information asymmetry. Specifically, we partition our sample of

supercharged IPO firms into those with high vs. low quality disclosures in Form S-1 or S-1A.

We demonstrate that indeed, it is the supercharged IPO firms with high disclosure quality that

exhibit higher final offer prices and superior future financial performance, compared to both

traditional IPO firms and the low disclosure quality supercharged IPO firms.

Our results are of potential interest to researchers, regulators, and private firm owners for

several reasons. First, supercharged IPOs are a relatively new but growing phenomena. The

existing academic literature in this area is relatively scarce. Fleischer and Staudt (2014) examine

the determinants of supercharged IPOs and find that supercharged IPOs are most common when

there is a tax arbitrage opportunity and when an elite lawyer from New York is involved in the

process; however, they do not examine other implications or consequences. We fill this void in

the literature by examining the IPO pricing, underpricing, and future performance of these firms.

Second, critics assert the supercharged IPO transaction structure shifts IPO firm value from new

IPO investors to pre-IPO owners. Our results suggest the higher offer prices of supercharged

IPO firms (relative to traditional IPO firms) are on average justified by their superior future

financial performance.

36  

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39  

APPENDIX A Variable Definitions

1 YR RETURNS = The percentage change in the share price during the first year following the

IPO.

2 YR RETURNS = The percentage change in the share price during the two years following the IPO.

6 MO RETURNS = The percentage change in the share price during the six months following the IPO.

BIGLAW = Indicator variable set to 1 if the legal counsel utilized for the IPO, as reported on the Form S-1 filing, holds a 3% or greater share of the IPO market during the sample period.

BIGN = Indicator variable set to 1 if the accounting firm including in the Form S-1 filing was a "Big 4" accounting firm.

BVPSPRE = Total Equity as of the fiscal year end prior to the IPO (AT-LT), divided by total shares outstanding immediately following the IPO.

CFOPOST = Cash flow from operations (OANCF) for the fiscal year ending immediately following the IPO, scaled by total assets.

DTAPSPRE = Net deferred tax assets (TXNDB) as of the fiscal year end prior to the IPO, divided by total shares outstanding immediately following the IPO.

EPSPRE = Pre-tax income for the fiscal year ending prior to the IPO, divided by total shares outstanding immediately following the IPO.

ETRPOST = The effective tax rate for the fiscal year ending immediately following the IPO (TXT/PI).

I-BANK = Indicator variable set to 1 if the firm is designated as an investment firm by SDC.

INTANGIBLESPRE = Total intangible assets (INTAN) as of the fiscal year end prior to the IPO, scaled by total assets.

IPORET = The average first day return on IPOs for the two calendar months prior to the firm’s IPO month.

IPOTOT = The total number of IPOs for the two calendar months prior to the firm’s IPO month.

#LEAD = The number of lead and co-lead underwriters for the IPO.

LEVPRE = Total liabilities (LT) divided by total assets (AT) as of the fiscal year end prior to the IPO.

MTBPOST = The market value of equity divided by total book value, as of the fiscal year ending immediately following the IPO.

NetDTAPRE = Net deferred tax assets (TXNDB) as of the fiscal year end prior to the IPO, scaled by total assets.

OFFER_PRICE = The log of the final offer price per share for the initial public offering.

PE_BACKED = Indicator variable set to 1 if a pre-IPO owner was a private equity firm.

 

40  

PROCEEDS = The total proceeds from the IPO, scaled by total assets as of the fiscal year end prior to the IPO.

PTIPRE = Pre-tax income for the fiscal year ending prior to the IPO, scaled by total assets.

REVISION = The percentage change in the price from the initial filing price per share (or midpoint of the initial filing range) to the final offer price per share.

ROAPOST = Income before extraordinary items (IB) for the fiscal year ending immediately following the IPO, scaled by total assets.

#RUN = The number of book runners for the IPO.

SALESPOST = Total Sales (SALE) for the fiscal year ending immediately following the IPO, scaled by total assets.

SCIPO = An indicator variable set to 1 if the IPO included a tax receivable agreement. The tax receivable agreement requires that the firm provide between 85-90% of the tax benefits associated with the deferred tax assets (existing and/or newly created in conjunction with the IPO) to the pre-IPO owners when the benefits are recognized.

SCIPO_HIGHDIS = An indicator variable set to 1 if the SCIPO disclosed an estimate of the related party payable associated with the tax receivable agreement in the pro forma financials provided in the Form S-1.

SCIPO_LOWDIS = An indicator variable set to 1 if the SCIPO did not disclose an estimate of the related party payable associated with the tax receivable agreement in the pro forma financials provided in the Form S-1.

%SHARES = The percentage of total shares that are included in the initial public offering.

SIZEPRE = Logged value of total assets (AT) as of the fiscal year end prior to the IPO.

SPREAD = The gross spread on the IPO, total fees (underwriting fee, management fee, and selling concession) divided by total shares offered.

UNDERPRICING = The percentage change in the share price during the first trading day of the IPO.

VC_BACKED = Indicator variable set to 1 if the IPO was backed by venture capital.

VW_RETURN = Value weighted market return for the two calendar months prior to the firm’s IPO month.

41  

Figure 1 Diagrams of Transactions Underlying the Up-C Type of Supercharged IPO

Panel A: Formation of Umbrella Partnership Corporation (Up-C) and TRA

Notes: This figure is based on Exhibit 2 in Bilsky and Goodman (2015). In an Up-C type of supercharged IPO transaction, a C corporation (XYZ Up-C, Inc.) is formed to raise capital on the public market via an IPO. The C corporation then contributes the capital generated from the IPO to the operating partnership (XYZ LLC) in exchange for ownership interests in the partnership. In other words, the new IPO investors become indirect owners in the operating partnership through their shares in the public holding company (XYZ Up-C, Inc.). This distribution of ownership interests to the new public holding company dilutes the pre-IPO owners’ ownership interests. In conjunction with the IPO, a tax receivable agreement is established between the pre-IPO owners and the public holding company, XYZ Up-C, Inc.

   

Tax receivable Agreement (TRA)

Stock Cash

Partnership Interests

Cash

Pre-IPO Owners

XYZ LLC (Operating

Partnership)

XYZ Up-C, Inc.

New IPO Investors

At Time of IPO:

 

42  

Panel B: Exchange of LLC Units for Up-C Stock by Pre-IPO Owners

Notes: This figure is based on Exhibit 3 in Bilsky and Goodman (2015). Once the IPO has been completed the pre-IPO owners can exchange existing ownership units in the operating partnership (XYZ LLC) for shares of the public holding company, XYZ Up-C, Inc. This exchange of partnership units for corporate stock is treated as a taxable exchange of assets for federal income tax purposes, regardless of whether the pre-IPO owners sell their newly acquired public company shares. Thus, pre-IPO owners typically do not exchange their partnership units for corporate stock until they are ready to terminate their ownership interest entirely. While some exchanges occur shortly after IPO, others occur one or more years following IPO. Although exchanges of partnership units for corporate stock impose tax costs on pre-IPO owners, they also generate step-up in the adjusted tax basis of the partnership’s assets under Section 743(b). The step-up is frequently allocated to depreciable or amortizable assets, but could also be related to net operating loss (NOL) carryforwards. Regardless, basis adjustments under Section 743(b) are the focus of tax receivable agreements.

   

Exchange of LLC Units for Stock

(or Cash)

Sec. 743(b) Step-Up in Asset Basis

Pre-IPO Owners

XYZ LLC (Operating

Partnership)

XYZ Up-C, Inc.

New IPO Investors

At Time of IPO and in Subsequent Years:

 

43  

Panel C: Transfer of TRA Payments to Pre-IPO Owners

Notes: This figure is based on Exhibit 4 in Bilsky and Goodman (2015). As the public holding company, XYZ Up-C, Inc., realizes the tax benefits generated by the Section 743(b) basis adjustments (e.g., deductions for amortization expense on federal tax return), cash payments will be made by the public holding company to the pre-IPO owners based on the tax receivable agreement (TRA). Most TRAs allocate 85 or 90 percent of the tax benefits to the pre-IPO owners. These cash payments generate additional taxable gains to the pre-IPO owners, which create additional basis adjustments under Section 743(b), provided the Section 754 election is still in effect. These additional taxable gains create additional step-up for the public holding company, and so forth, in an iterative process.

Cash TRA Payment

Amortization / Depreciation Tax Deductions and

Additional Sec. 743(b) Basis Adjustments

Pre-IPO Owners

XYZ LLC (Operating

Partnership)

XYZ Up-C, Inc.

New IPO Investors

In Future Years:

44  

Figure 2 Comparisons of Financial Outcomes for Traditional and Supercharged IPOs under Different Assumptions

(1) (2) (3) (4) (5)

Traditional IPO: No Step-Up in

Asset Tax Basis

Supercharged IPO: Tax Benefits Split between

New Investors and Pre-IPO Owners

Supercharged IPO: DTAs Never

Realized

Supercharged IPO: Value Shifted from New Investors to Pre-IPO Owners

Supercharged IPO:

New Investors Indifferent to

Supercharging

(1) Goodwill at FMV $100.00 $100.00 $100.00 $100.00 $100.00

(2) Deferred Tax Asset (DTA) (35% tax rate)

$0 $35.00 $35.00 $35.00 $35.00

(3) Present Value of DTA (r = 5%; n = 15)

$0 $24.22 $0 $24.22 $24.22

(4) DTA to Pre-IPO Owner (85%) $20.59 $0 $20.59 $20.59

(5) DTA to New Investor (15%) $3.63 $0 $3.63 $3.63

(6) # of IPO Shares 10 10 10 10 10

(7) IPO Price Per Share $10 $10 $10 $12.40 $10.36

(8) IPO Total Proceeds $100 $100 $100 $124.00 $103.63

(9) Tax Costs to Pre-IPO Owner = 15% × [(1) + (4)]*

* $18.09 $15.00 $21.69 $18.69

(8) + (4) – (9) = Net IPO Value to Pre-IPO Owners

$100 $102.50 $85.00 $122.90 $105.90

$100 – (8) – (5) = Net IPO Value to New Investors

$3.63 $0 ($20.37) $0

* In a traditional IPO, the pre-IPO owners experience no direct tax costs until they sell some or all of their pre-IPO shares. In a supercharged IPO, the step-up in asset basis triggers a concurrent tax liability for pre-IPO owners, regardless of whether they sell shares in the IPO firm. As a result, the tax costs to pre-IPO owners differ primarily due to differences in the timing of taxation. This example assumes that all of the Goodwill (1) is generated at the time of the IPO; however, in practice the step-up often occurs over several years, as pre-IPO owners exchange their partnership units for stock in the Up-C (see Figure 1). In this case the present value of the DTA (3) and the tax costs to pre-IPO owner (9) should be discounted for the time value of money, but with offsetting effects. This example also ignores the additional step-up in asset basis that is generated whenever the pre-IPO owners receive a TRA payment in the future.

45  

Figure 3 Number of Supercharged IPOs by Year

 

46  

TABLE 1 Sample Selection Procedures

Traditional

IPOs Supercharged

IPOs Number of observations reported in SDC with an issue date

during 2004-2014. Following their initial public offerings, all observations are traded on a U.S. stock exchange and all observations are domiciled in the U.S.

2,206 59

Less: Observations missing total assets for the fiscal year ending just prior to the IPO or the fiscal year following the IPO. (852) (3)

Less: Observations missing leverage, pre-tax income, net deferred tax assets, or intangibles assets in Compustat for the fiscal year ending just prior to the IPO.

(138) (1)

Less: Observations missing deal information from SDC, including the offer price, total proceeds, shares, or gross spread. (120) (6)

Primary Sample 1,096 49

47  

TABLE 2 Descriptive Statistics for Traditional and Supercharged IPO Firms

Traditional IPO Firms (N = 1,096) Supercharged IPO Firms (N = 49) Test for Differences in Variable Mean Median St Dev. Mean Median St Dev. Mean t-value

OFFER_PRICE 2.58 2.64 0.43 2.89 2.89 0.32 -0.31 -5.01 ***

UNDERPRICING 0.14 0.07 0.24 0.09 0.02 0.21 0.05 1.52

SALESPOST 1.23 0.88 1.28 1.53 1.06 1.57 -0.30 -2.25 **

CFOPOST -0.48 0.01 1.67 0.10 0.03 0.45 -0.58 -2.40 **

ROAPOST -0.50 0.00 1.66 0.04 0.01 0.27 -0.54 -1.57

ETRPOST 0.12 0.00 0.40 -0.03 0.02 0.40 0.15 2.59 ***

6 MO RETURNS 0.04 0.01 0.24 0.01 0.02 0.18 0.02 1.72

1 YR RETURNS 0.17 0.01 1.19 0.01 -0.05 0.57 0.16 0.92

2 YR RETURNS 0.26 -0.06 1.74 -0.13 -0.33 0.61 0.39 1.30

SIZEPRE 4.86 4.65 2.01 6.52 6.27 2.15 -1.65 -5.61 ***

BVPSPRE 2.56 1.09 5.37 11.38 3.18 18.89 -8.82 -9.26 ***

PTIPRE -0.27 0.00 0.82 0.03 0.07 0.83 -0.30 -2.50 **

LEVPRE 0.45 0.39 0.32 0.71 0.67 0.41 -0.26 -5.61 ***

EPSPRE -0.02 0.00 0.06 0.00 0.00 0.06 -0.02 -1.77 *

DTAPSPRE -0.06 0.00 0.90 1.87 0.77 2.46 -1.93 -13.05 ***

NetDTAPRE 0.00 0.00 0.05 0.01 0.00 0.04 -0.01 -1.28

INTANGIBLESPRE 0.22 0.03 0.44 0.20 0.03 0.29 0.02 0.29

MTBPOST 2.71 1.96 2.56 1.03 0.63 1.14 1.68 4.35 ***

#LEAD 5.65 5 3.75 9.31 8 4.51 -3.66 -6.63 ***

#RUN 2.41 2 1.67 3.84 3 2.15 -1.43 -5.78 ***

SPREAD 6.69 7.00 0.72 6.12 6.18 0.77 0.57 5.39 ***

VC_BACKED 0.43 0 0.49 0.06 0 0.24 0.36 5.12 ***

 

48  

PE_BACKED 0.28 0 0.45 0.47 0 0.50 -0.19 -2.80 ***

BIGLAW 0.32 0 0.47 0.43 0 0.50 -0.11 -1.57

BIGN 0.78 1 0.41 0.84 1 0.37 -0.06 -0.95

%SHARES 0.29 0.25 0.16 0.53 0.49 0.31 -0.24 -9.80 ***

PROCEEDS 2.26 0.90 6.07 0.92 0.40 1.44 1.35 1.55

I-BANK 0.02 0 0.13 0.29 0 0.46 -0.27 -11.61 ***

REVISION 0.00 0 0.08 0.00 0 0.00 0.00 -0.07

IPOTOT 39.47 40 13.04 41 44 12.75 -1.53 -0.80

IPORET 0.68 0.28 2.39 1.20 0.34 3.48 -0.52 -1.44

VW_RETURN 0.03 0.03 0.04 0.03 0.03 0.03 -0.00 -0.48

Notes: *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided tests. Variables are defined in Appendix A.

49  

TABLE 3 Pearson Correlations between Supercharged IPO Indicator Variable and

IPO Pricing and Future Performance Measures

SCIPO OFFER_ PRICE

UNDER_ PRICING

EBITPOST CFOPOST ROAPOST ETRPOST

SCIPO 1

OFFER_PRICE 0.1615* 1

UNDER_PRICING -0.0448 0.2480* 1

SALESPOST 0.0465 0.0800* 0.1881* 1

CFOPOST 0.0708* 0.2704* 0.0787* 0.2082* 1

ROAPOST 0.0665* 0.2648* 0.0772* 0.2001* 0.9979* 1

ETRPOST -0.0765* 0.0896* -0.0031 0.0163 0.1066* 0.0908* 1

Notes: This table presents Pearson correlation coefficients in the lower diagonal. * indicates the correlation coefficients are significant at the 5% level or better. All variables are as defined in Appendix A.

50  

TABLE 4 Results for Determinants of Supercharged IPO Regression and Entropy Balancing Procedure

Panel A: Results for Regression where Dependent Variable Is Supercharged IPO Indicator

Variable (SCIPO) Coefficient Z-Statistic

SIZEPRE 0.0979 1.10

PTIPRE 0.5617 1.93 *

LEVPRE 0.3454 2.49 **

NetDTAPRE 3.3079 1.80 *

#LEAD 0.0042 0.15

#RUN 0.1667 2.80 ***

SPREAD 0.1205 0.74

VC_BACKED -0.1437 -0.43

PE_BACKED 0.2217 1.12

BIGN -0.2717 -1.13

BIGLAW 0.1446 0.77

%SHARES 2.4958 6.56 ***

OFFER_PRICE 0.0305 1.6

PROCEEDS -0.0273 -0.42

I-BANK 1.6671 5.73 ***

Intercept -5.3655 -3.50 ***

# of Obs 1,145 Pseudo R2 38.70% Notes: *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided tests. Variables are defined in Appendix A. Panel B: Descriptive Statistics after Entropy Balancing – Covariate Variables Mean Values

Before Entropy Balancing Mean Values

After Entropy Balancing SCIPO = 1 SCIPO = 0 SCIPO = 1 SCIPO = 0

SIZEPRE 6.518 4.864 *** 6.518 6.516 PTIPRE 0.034 -0.267 ** 0.034 0.033 LEVPRE 0.988 0.861 *** 0.988 0.990 NetDTAPRE 0.008 -0.001 0.008 0.008 #RUN 3.837 2.405 *** 3.837 3.836 %SHARES 0.527 0.288 *** 0.527 0.527 PROCEEDS 0.917 2.263 0.917 0.922 I-BANK 0.286 0.017 *** 0.286 0.286 Notes: Statistically significant differences in mean values (before entropy balancing) are noted with *,**,***, indicating significance at the 10, 5, and 1 percent levels. Due to the nature of the entropy balancing procedure, we cannot statistically test for differences in mean values post-entropy balancing. For the entropy balancing procedure: Treated units = 49, weighted as 49. Control units = 1,096, weighted as 49.

 

51  

Panel C: Descriptive Statistics after Entropy Balancing – Dependent Variables Mean Values

Before Entropy Balancing Mean Values

After Entropy Balancing SCIPO = 1 SCIPO = 0 SCIPO = 1 SCIPO = 0

OFFER_PRICE 2.89 2.58 *** 2.89 2.78 UNDERPRICING 0.09 0.14 0.09 0.11 SALESPOST 1.53 1.23 ** 1.53 1.17 CFOPOST 0.10 -0.48 ** 0.10 0.03 ROAPOST 0.04 -0.50 0.04 0.00 ETRPOST -0.03 0.12 *** -0.03 0.16 6 MO RETURNS 0.01 0.04 0.01 0.00 1 YR RETURNS 0.01 0.17 0.01 0.01 2 YR RETURNS -0.13 0.26 -0.13 0.01 Notes: Statistically significant differences in mean values (before entropy balancing) are noted with *,**,***, indicating significance at the 10, 5, and 1 percent levels. Due to the nature of the entropy balancing procedure, we cannot statistically test for differences in mean values post-entropy balancing. For the entropy balancing procedure: Treated units = 49, weighted as 49. Control units = 1,096, weighted as 49.

   

 

52  

TABLE 5 Results for OLS Regressions of IPO Offer Price (OFFER_PRICE) on Supercharged IPO

Indicator and Control Variables based on Entropy Balanced Samples

(1) (2)

Coefficient t-stat Coefficient t-stat

SCIPO 0.116 2.22** 0.089 1.82*

DTAPSPRE 0.044 3.88***

BVPSPRE 0.004 1.70* 0.002 0.90

EPSPRE 0.030 0.02 -0.188 -0.16

LEVPRE -0.044 -0.79 -0.060 -1.16

SPREAD -0.129 -5.09*** -0.127 -4.86***

PROCEEDS 0.026 1.63 0.009 0.62

%SHARES -0.123 -1.11 -0.257 -2.27**

IPOTOT 0.000 -0.18 0.000 -0.23

IPORET 0.002 0.33 0.003 0.58

VW_RETURN 0.180 0.26 0.062 0.09

VC_BACKED -0.033 -0.34 -0.067 -0.73

PE_BACKED -0.033 -0.62 -0.052 -1.02

BIGN 0.194 2.79*** 0.119 1.81*

BIGLAW -0.018 -0.35 -0.017 -0.33

Intercept 3.327 12.20*** 3.488 13.59***

Industry Fixed Effects? Yes Yes

# of Obs 1,145 1,134

Adjusted R2 0.4093 0.455 Notes: All regressions include industry and year fixed effects and robust standard errors. *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided t-tests. Variables are defined in Appendix A.

53  

TABLE 6 Results for OLS Regressions of the Percentage Change in Stock Price on the First Day of Trading

(UNDERPRICING) on the Supercharged IPO Indicator and Control Variables based on Entropy Balanced Samples

(1) (2)

Coefficient t-stat Coefficient t-stat

SCIPO -0.026 -0.87 -0.036 -1.18

DTAPSPRE 0.023 2.62***

BVPSPRE -0.001 -0.71 -0.002 -1.35

EPSPRE -0.240 -0.50 -0.373 -0.83

LEVPRE -0.036 -1.50 -0.047 -1.98**

OFFER_PRICE 0.176 3.07*** 0.137 2.48**

REVISION -0.038 -0.41 -0.049 -0.59

SPREAD 0.032 1.49 0.028 1.32

PROCEEDS 0.009 0.79 0.001 0.08

%SHARES -0.065 -0.92 -0.139 -1.66*

IPOTOT 0.001 0.45 0.000 0.39

IPORET -0.002 -0.39 -0.001 -0.26

VW_RETURN 0.672 1.55 0.627 1.39

VC_BACKED 0.124 2.65*** 0.103 1.98**

PE_BACKED 0.040 1.32 0.028 0.92

BIGN -0.056 -0.74 -0.088 -1.17

BIGLAW 0.010 0.38 0.009 0.37

Intercept -0.426 -1.70* -0.213 -0.83

Industry Fixed Effects? Yes Yes

# of Obs 1,145 1,134

Adjusted R2 0.1569 0.1925 Notes: All regressions include industry and year fixed effects and robust standard errors. *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided t-tests. Variables are defined in Appendix A.

54  

TABLE 7 Results for OLS Regressions of Measures of Future Performance on the Supercharged IPO Indicator and Control Variables based on

Entropy-Balanced Samples

(1)

Dependent Var (DV) = SALESPOST

(2) Dependent Var (DV) =

CFOPOST

(4) Dependent Var (DV) =

ROAPOST

(4) Dependent Var (DV) =

ETRPOST

Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat

SCIPO 0.175 1.80* 0.070 1.52 0.067 1.85* -0.144 -1.93*

LAG_DV 0.674 11.94*** 0.154 1.56 0.200 2.81*** 0.000 1.49

NetDTAPRE 0.936 0.91 0.413 0.60 -0.457 -1.19 0.337 0.70

SIZEPRE -0.004 -0.09 0.011 0.33 -0.005 -0.23 -0.009 -0.45

LEVPRE -0.066 -0.78 -0.340 -3.49*** -0.246 -3.05*** -0.045 -2.98***

INTANGIBLESPRE 0.356 1.71* -0.124 -1.01 -0.064 -1.01 0.095 0.81

PROCEEDS 0.045 1.23 0.009 0.10 -0.075 -1.15 0.037 2.00**

OFFER_PRICE -0.004 -0.35 0.004 0.55 0.004 0.8 0.007 1.01

MTBpost 0.039 1.33 0.060 1.88* 0.073 3.45*** -0.006 -0.43

Intercept 0.637 2.23** 0.289 1.43 0.293 1.90* 0.217 2.14**

Year and Industry Fixed Effects?

Yes Yes Yes Yes

# of Obs 1,003 1,003 1,003 1,101

# of SCIPO Obs 42 42 42 43

Adjusted R2 0.8662 0.6104 0.6469 0.1805 Notes: All regressions include industry (Fama French 5) and year fixed effects and robust standard errors. *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided t-tests. Variables are defined in Appendix A.

55  

TABLE 8 Results for OLS Regressions of the Measures of Future Stock Performance on an Indicator for Supercharged IPOs and Controls

(1) (2) (3)

Dependent Var = 6 MO RETURNS

Dependent Var = 1 YR RETURNS

Dependent Var = 2 YR RETURNS

Coeff t-stat Coeff t-stat Coeff t-stat

SCIPO -0.049 -1.29 0.080 0.83 -0.093 -0.90

NetDTAPRE 0.007 0.01 0.945 1.04 0.928 0.78

SIZEPRE 0.039 2.66*** 0.050 1.54 0.015 0.44

LEVPRE -0.034 -1.61 -0.062 -0.88 0.051 0.89

INTANGIBLESPRE 0.383 4.56*** 0.585 3.43*** 0.573 3.48***

PROCEEDS 0.019 1.08 -0.006 -0.14 -0.029 -1.15

OFFER_PRICE -0.008 -1.66* -0.015 -1.32 -0.006 -0.67

MTBpost 0.053 3.18*** 0.085 2.25*** 0.105 2.44**

Intercept -0.115 -1.15 -0.127 -0.59 -0.064 -0.26

Year and Industry Fixed Effects?

Yes Yes Yes

# of Obs 1,096 1,082 853

# of SCIPO Obs 43 43 28

Adjusted R2 0.3238 0.3267 0.4498 Notes: All regressions include industry (Fama French 5) and year fixed effects and robust standard errors. *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided t-tests. Variables are defined in Appendix A.

56  

TABLE 9 Summary of Results for Regressions Examining the Impact of Form S-1 Disclosures on

IPO Pricing, Underpricing, and Future Performance

(1)

Dependent Var = OFFER_PRICE

(2) Dependent Var = UNDERPRICING

(3) Dependent Var =

SALESPOST

(4) Dependent Var

= CFOPOST

(5) Dependent Var

= ROAPOST

(6) Dependent Var =

ETRPOST

SCIPO_LOWDIS 0.039 0.58 -0.085 -1.96** 0.104 0.78 0.078 1.21 0.027 0.78 -0.078 -1.28

SCIPO_HIGHDIS 0.130 2.29** 0.012 0.26 0.247 2.32** 0.062 0.77 0.108 2.00** -0.200 -2.13**

DTAPSPRE 0.038 3.38*** 0.018 2.46** 1.034 1.07 0.401 0.60 -0.398 -1.08 0.291 0.62

Intercept 3.469 13.9*** 0.053 0.23 0.672 2.33** 0.285 1.45 0.313 1.98** 0.181 1.72*

Other Controls? Yes Yes Yes Yes Yes Yes

Fixed Effects? Industry Industry Industry & Year Industry & Year Industry & Year Industry & Year

# of Obs 1,133 1,133 1,002 1,003 1,003 1,101

# of SCIPO Obs 49 49 42 42 42 43

Adjusted R2 0.4602 0.1977 0.864 0.6101 0.6403 0.1909

Notes: All regressions include year fixed effects and robust standard errors. *, **, *** indicate statistical significance at the 10, 5, and 1 percent levels, respectively, based on two-sided t-tests. Variables are defined in Appendix A.