Download why polish companies go public

MSc in Finance & International Business
Author: Aleksandra Jargot
Academic Advisor: Jan Bartholdy
WHY POLISH COMPANIES GO PUBLIC:
AN ANALYSIS OF DETERMINANTS AND CONSEQUENCES OF
THE INITIAL PUBLIC OFFERING.
Aarhus School of Business
August 2006
Abstract
Initial public offering (IPO) is one of the most important moments in a firm’s
lifecycle in that it has serious consequences on the company’s ownership structure,
capital structure and the size of its operations. Such a serious decision should be made
based on an in-depth investigation of the company’s needs and anticipated effects of
an IPO because advantages of being a public company come at substantial cost. The
purpose of this thesis is to discover the determinants that influence the decision of
Polish companies to go public and the consequences that an IPO may have on the
company’s performance in the long-run.
The study examines the IPOs that took place in Poland during the period of 1997 2004. The research combines the analysis of ex ante (probit model) and ex post
characteristics (fixed-effects model) of IPO companies to cast more light on the still
clearly unaddressed question of what drives the companies to issue equity. Access to
the AMADEUS database allows conducting a study of Polish public companies as
compared to a sample of private companies.
Some of the findings are consistent with prior empirical studies in other counties. The
likelihood of an IPO increases as the company’s size and market-to-book ratio
increase. However, contrary to the results obtained on other European markets, this
analysis found that increasing leverage of a Polish firm has a positive effect on the
probability to go public while increasing profitability negatively influences the
likelihood of going public. The results of ex post analysis revealed, in accordance
with prior evidence of various international markets, that financing needs are not the
major motivation influencing the decision to issue equity. Moreover, this study
reveals that in the long run the level of investments in fixed and intangible assets
decreases, as does the profitability of a company. Polish companies appear to go
public in order to diversify risk and obtain financing to reduce the level of leverage in
the short term, and time the issue in order to take advantage of “windows of
opportunity” created by investors who are overoptimistic about the company’s
development opportunities.
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Table of contents
Introduction ..................................................................................................................4
Chapter 1 Literature Overview ..................................................................................9
1.1
Theory ...........................................................................................................9
1.1.1 Motives for going public ...........................................................................10
1.1.2 Motives for staying private.......................................................................15
1.2 Empirical evidence ...........................................................................................18
Chapter 2 Characteristics of the Polish IPO market ..............................................27
2.1 Initial Public Offerings at the Warsaw Stock Exchange ..............................27
2.2 The Warsaw Stock Exchange vs. other European stock markets ...............34
2.3 Polish IPOs survey results ...............................................................................36
2.3.1 Polish issuers’ motivation for going public .............................................36
2.3.2 Concerns about going public....................................................................38
2.3.3 Motives for staying private.......................................................................40
Chapter 3 Methodology and data description .........................................................43
3.1 Ex ante analysis ................................................................................................43
3.1.1 Binomial choice models.............................................................................44
3.1.2 Probit model and the explanatory variables...........................................49
3.2 Ex post analysis.................................................................................................55
3.3 Data sources and sample characteristics........................................................58
3.3.1. Data sources ..............................................................................................58
3.3.2. The sample ................................................................................................59
3.3.3 Summary statistics ....................................................................................63
Chapter 4 Results and Discussion.............................................................................69
4.1. Results of the ex ante analysis ........................................................................69
5.2. Results of the ex post analysis ........................................................................77
Chapter 5.....................................................................................................................81
Conclusions, limitations and suggestions for further research ..............................81
Appendices ..................................................................................................................84
List of tables................................................................................................................97
List of graphs ..............................................................................................................97
References ...................................................................................................................98
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Introduction
The Polish capital market is now witnessing the second biggest wave of IPOs since
the reopening of the Warsaw Stack Exchange (WSE) in April 1991. Over the past two
years the number of new issues increased dramatically as compared to the “cold
market” period of 2000-2003. The recent IPOs boom attracts a lot of media attention
not only in Poland but also abroad as WSE is currently among the leading European
stock markets in terms of the number of new listings. However, not much attention is
devoted to the question of why the number of IPOs differs so much in different
periods, what makes companies go public and what influences the decision of the
majority of Polish companies to stay private.
Most empirical studies dedicated to IPO issues focus on three puzzling regularities:
“hot markets” characterised by both high initial returns and the number of IPOs
coming to the market at some periods (Ibbotson and Jaffe, 1975; Ritter, 1984), shortterm underpricing which is a systematic increase from the offer price to the first day
closing price (Ibbotson, 1975; Ritter, 1991; Brav, Geczy and Gompers, 2000) and the
stock price underperformance of IPO firms in the years after the offering (Ritter 1991;
Loughran and Ritter, 1995; Gompers, and Lerner, 2003) accompanied by poor postIPO financial and operating performance relative to pre-IPO performance (Jain and
Kini, 1994; Mikkelson, Partch, and Shah, 1997). Surprisingly, the empirical evidence
on the motives to go public and the determinants that influence the decision to seek
for external financing is still very scarce.
In theory there are many determinants that may have an impact on a firm’s decision to
go public. A lot of articles discuss theoretical aspects of the decision to go public. IPO
is often perceived as a natural stage in the growth of a company. Fast growing
companies search for capital to finance their investments and further development
(Loughran, Ritter and Rydqvist, 1994; Subramanyam and Titman, 1999). However,
the company’s growth is not the only reason that influences the decision to go public
but is one of possible strategic choices that a company may consider. IPO may be a
method of selling a firm (Zingales, 1995; Black and Gilson, 1998), increasing a
company’s value and its credibility, especially in the eyes of clients and banks
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(Maksimovic and Pichler, 2001). What is more, IPO may serve as a process of
disclosing the true value of a company (Mello and Parsons, 1998) and a signal
instrument where informed insiders sell uninformed investors a small fraction of
shares as a signal for firms’ good prospects and high value (Leland and Pyle, 1977).
However, IPO is also associated with costs: administrative costs (e.g. listing and
registration fees), costs related to separation of ownership and control, as well as costs
of disclosure of inside information that may reduce the competitive advantage of a
company (Benninga, Helmantel and Sarig, 2005). Thus, the decision to go public is
always associated with multiple trade-offs between costs and benefits.
Despite the increasing interest in the decision to go public, the empirical evidence has
been quite scarce, especially regarding companies from the Central Eastern European
(CEE) region. The major reason for why empirical literature on this decision is
underdeveloped is the difficulty in obtaining financial information about private
companies as they are not required to disclose their financial reports. There are only a
few empirical papers that investigate the factors influencing the decision to go public
at the Western European markets and they include a database of public and private
companies. Pagano, Paleta and Zingales (1998) were first to empirically test various
hypotheses using a large set of IPO and private companies in Italy. In Europe their
study was partially replicated by Fisher (2000), who investigated determinants of
going public of companies that had gone public in Germany; Boehmar and Ljungqvist
(2004) have analyzed German firms which had announced their intention to go public
to see the pattern of subsequent sale of equity to outside investors; Pannemans (2002)
took a closer look at Belgian IPOs and Gill de Albornoz and Pope (2004) empirically
tested various hypotheses about the motives to go public on the UK market. While
there are few studies that investigate the non-European markets, such as those of
Helvege and Packer (2003) and Chemmanur, He and Nandy (2005), who focused on
the US market, and Chun and Smith (2002), who have replicated the Pagano et al.
(1998) study on the Korean market, I am not aware of any study conducted at a
Central Eastern European (CEE) market that would compare private and public
companies to discover the determinants of the decision to go public.
However, not only motives for going public but also effects of an IPO are worth
investigating. Since the decision to go public is made taking account of the firm’s
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aims and anticipated effects, the motives for going public should correspond to the
effects of the IPO in the long-run. However, several researchers document a
significant decline in operating performance subsequent to the initial offering (Jain
and Kini, 1994; Mikkelson et al., 1997; Teoh, Welch, and Wong 1998; Wang, 2005)
that cast doubt on the ability of IPO firms to achieve their pre-IPO goals. For
example, Pagano et al. (1998) find evidence that Italian companies who are financed
mainly by bank credits before an IPO substantially decrease the level of leverage after
an IPO and at the same time decrease investments. This indicates that funds gathered
at the IPO are not spent in compliance with the initial intentions, which is to finance
future growth and development.
The significant cross-country differences in the companies’ propensity to seek
external financing and IPO firms’ characteristics have been found by Roell (1996) and
Pagano et al. (1998). Therefore, whether the prior evidence on the determinants of the
decisions to go public can be generalized to include CEE countries is still an open
question. Thus, the aim of this study is to test the existing theories by conducting an
empirical analysis of a single, CEE country in order to discover the motives of Polish
companies to go public and the consequences of such a decision on their operating
performance in the long-run.
The Polish capital market is interesting for several reasons. Firstly, WSE is now
witnessing the second biggest wave of IPOs in its history. The first “hot period” dates
back to 1997-1998 when 102 companies went public (that is over 50 percent of the
total number of companies traded at that time). In 2005 and 2004 there were 36 and
35 IPOs, respectively. Bearing in mind that the period 2000 – 2003 was very poor
with the total number of 32 IPOs, the question arises why and when companies make
a decision to go public. Secondly, the Polish stock market is definitely the most
developed stock market among other CEE markets. Moreover, the WSE is ranked on
one of top positions among the biggest European stock exchanges in terms of the
number and the value of IPOs. Finally, the empirical literature that tests hypotheses
about the motives of Polish companies to go public is still underdeveloped. So far,
studies of the Polish stock market have investigated short and long-run stock
performance of IPO with a special focus on companies that went public as part of
privatization programme (Aussenegg, 1999; Aussenegg, 2001; Jelic, Briston, and
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Aussenegg, 2003; Jelic and Briston 2003) and on the long-run operating performance,
and differences in performance between private and privatization IPOs (PIPOs). The
only direct research that focuses on the determinants that influence the Polish
companies’ decision to go public is found in Dudko-Kopczewska (2004), who
investigates Polish private companies that went public during the period of 19922001. Unfortunately, her sample of investigated firms consists only of IPO companies
and is not compared with a reference sample of privately held companies. The
analysis is conducted in such a way that firms before the IPO are used as a control for
themselves after the IPO. Although such an approach eliminates the problem of
unavailable information about private companies, it makes a serious sample selection
bias. Since there is no data on private firms that did not go public it is not possible to
draw clear inferences about the determinants that encourage Polish firms to issue
stock. One may rather investigate at what stage of its lifecycle a company decided to
go public.
The data on private firms obtained from the AMADEUS database allows me to
contribute to the Dudko-Kopczewska (2004) study on Polish IPOs and enables me to
compare the results with international literature on this topic. To my knowledge, it is
the first study that tests the determinants and the consequences of decision to go
public and that compares the characteristics of the Polish firms that chose to go public
with the firms that remained private. Firstly, the existing theories of going public
decision are tested. It is expected that the going public decision is influenced by a
firm’s financing needs, its profitability and size as well as the market mood per
industry. Additionally, I test the hypothesis that macroeconomic conditions of the
country have an impact on the IPO decisions in Poland. Next, I conduct an ex post
analysis to find out if IPO firms’ motivations to go public are consistent with the
actual effects in the long-run.
The rest of the paper is organised as follows. Chapter 1 reviews the existing theories
on the benefits and costs of the going public decision, as well as the related empirical
evidence found in prior studies. Chapter 2 characterises the Warsaw Stock Exchange
and companies that decided to issue stock there with a summary of surveys conducted
among these companies that reveals the stated motives for an IPO, perceived effects,
concerns before an IPO and motives for staying private. Chapter 3 describes the
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methodology used in the analysis, sources of data as well as construction and
characteristics of IPO and non-IPO firms’ samples that are used in the empirical
analyses. Chapter 4 discusses the results of the ex post and ex ante analysis using a
probit estimation and a fixed-effects model. Section 5 contains the conclusions,
limitations and suggestions for further research.
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Chapter 1 Literature Overview
Literature Overview
This chapter presents various theories about the possible reasons for going public,
multiple trade-offs that an entrepreneur has to face when making a decision about an
IPO, results of prior studies that empirically test some of the theories, and
international findings about the characteristics of IPO firms after an issue.
1.1 Theory
The decision about going public is one of the most important choices that a company
faces in its lifecycle. First of all, this decision defines a new capital structure of the
firm. According to the pecking order theory of Myers (1984) and Myers and Majluf
(1984), a firm, whenever possible, would choose internal rather than external
financing of its projects. This results from (1) the information asymmetries between
the original owner and the investors as insiders know more about their firm than
investors, and (2) the adverse selection problem (Ackerlof, 1970) that arises form the
inability of traders to assess the true quality of the firm. Thus, when a firm is making a
decision about the source of financing it will first make use of the retained earnings
which is perceived as the cheapest source, not associated with the adverse selection
problem. When external funds are necessary, a firm will choose debt and only when
the cheapest sources are exhausted it will decide to issue equity. This is again due to
lower information costs associated with debt issues. Scott (1976) and Modigliani and
Miller (1963) argue that firms go public when external equity helps them minimize
their cost of capital and in this way maximize the value of the company. Thus,
managers conduct an IPO when the firm has reached the point in the life cycle where
external equity helps obtain an optimal capital structure.
IPO also defines a new ownership structure of the company. The large volume of new
shares sold to new owners shapes the firm’s ownership structure and thereby
influences the firm’s value (Mello and Parsons, 1998). According to the life cycle
theory of the firm, at some stages of the firm’s development it is optimal to keep the
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company private, but as the firm goes through different stages of its life cycle, the
optimal ownership structure also changes (Maug, 2001).
Bearing in mind the serious consequences for a company and its initial owners to go
public, in order to address the fundamental question “to go or not to go public”, the
entrepreneur has to carefully consider all costs and benefits associated with an issue
and all alternatives to the initial public offering.
1.1.1 Motives for going public
“To obtain financing for future growth”
One of the most frequent reasons declared by firms’ original owners in prospectuses is
to obtain financing for further development and growth (Rindqvist and Hogholm,
1995; Roell, 1996). The large group of investors reached thorough the equity market
helps a firm to raise capital needed to finance its various projects. It is a very
important advantage of stock financing as money obtained at the bank has to be spent
in accordance with its allocation defined in the credit application. Thus, raising
external equity offers an opportunity to obtain low cost direct financing without the
intervention of financial intermediaries, such as banks or venture capitalists
(Holmstrom and Tirole, 1993). Of course, selling shares to a large group of small
investors as opposed to financing through bank credit or private equity is not free of
costs. I will refer to this later in the chapter. IPO also facilitates rising of new finance
also in the long term. Firstly, after an IPO the equity base is strengthened and leverage
is reduced, mitigating the problem of debt overhang in the future (Roell, 1996). It is
possible because the sale of the company’s stock increases its net worth and decreases
its debt-to-equity ratio enabling the company to increase its borrowings and obtain
terms more favourable than before the offering. Secondly, as Rajan (1992) argues, an
increase in dissemination of information to investors through an IPO helps a company
diversify its sources of financing, increases its bargaining power with banks and
decreases the cost of credit. Finally, if the company and its stock have performed well,
the company can return to the market at a later time and make subsequent public
offerings of equity and other corporate securities.
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Clementi (2002) notices that the decision to go public may be triggered by the
productivity shock. In his model based on the life cycle theory of the firm, a firm
operates at a suboptimal level of its production scale because of the borrowing
constrains that it faces. However, at some stage of a firm’s life cycle it experiences a
sudden and persistent increase in the firm’s total factor productivity that results in a
new set of positive NPV projects available to the firm. This makes the difference
between the actual and the most efficient level of operations more visible and
facilitates the decision to go public despite the costs of going public. The money
obtained through the IPO facilitates the company’s growth.
“To sell a company”
Another motivation for going public is to facilitate the sale of a company by its
original owners. Zingales (1995) has developed a model in which the decision of a
firm to go public is made in the context of the optimal method of selling the company.
The decision to go public is driven by the original owner’s desire to sell the
company’s shares to dispersed shareholders in such a way that enables the owner to
capture the surplus associated with the buyer’s increased cash flow. Moreover,
Zingales (1995) argues that IPO is the first step, fully conscious, and the
entrepreneur’s value maximizing oriented, for a company to be acquired. The initial
owner is able to sell a publicly quoted company for a higher price than he/she would
bet in a direct sale. Likewise, Mello and Parsons (1998) argue that the IPO market
allows a series of steps that eventually lead to the sale of the firm, and that an active
secondary market maximizes the price received by an owner. According to Black and
Gilson (1998), IPO is also an attractive and common exit strategy for venture
capitalists.
“To buy a company”
However, firms may also go public not only to become targets of a takeover but also
to become acquirers (Gleason, Madura and Wiggenhorn, 2006). Newly listed
companies are able to use equity gained at the IPO to pay for acquisitions of other
companies of a similar profile. The economies of scale achieved by the acquisition
allow the newly public firms to grow and become more competitive.
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Liquidity and diversification
The diversification of risk is another benefit of going public that is frequently brought
up (Pagano, 1993; Zingales, 1995; Stoughton and Zechner, 1998; and Chemmanur
and Fulghieri, 1999). Increased liquidity of shares and dispersed ownership achieved
by an IPO means that risk is shared among a large number of diversified investors.
Moreover, Fischer (2000) points out that the diversification incentive to go public is
higher for firms from riskier industries. As Pagano et al. (1998) suggest,
diversification can be achieved directly by divesting from the company and
reinvesting in other assets, or indirectly, when a company raises new capital after the
IPO and acquires stakes in other already well diversified companies.
The dispersed ownership achieved by an IPO brings with it also liquidity benefits for
investors as liquidity facilitates trading and lowers the cost of capital (Bhide, 1993;
Coffee 1991). The common stock of a privately held corporation is generally an asset
without a readily available market or an easily determinable value. Thus, in general,
the stock in a private firm is less liquid than the stock in a private company. By going
public, a company creates a market for its stock. Liquidity gains are created not only
for owners but also for the various types of investors who are able to buy and sell
stocks more readily.
Valuation of the company
Undoubtedly, stock prices incorporate information about a firm and signal its market
value. Thus, by going public the firm’s owner receives valuable information from
dispersed investors and uses share prices to infer investor valuations of his firm (Dow
and Gorton 1997; Mello and Parsons, 1998; Maug 2001). Thanks to an external
assessment, managers of a firm are able to benchmark the company against its
competitors and based on the comparison they may draw appropriate conclusions.
Also reports prepared by brokerage houses and investment banks may be helpful as
they allow insiders to look at the company from the market perspective. In this line
Subramanyam and Titman (1999) argue that stakeholders have an ability to make
discoveries about a firm by accident, which means that they may acquire information
about a public firm that insiders do not have (e.g. information about the demand for a
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firm’s products can be obtained in this way). The investors’ ability to uncover
“serendipitous information” at low costs leads to a more precise valuation of the
firm’s shares. What is more, as Leland and Pyle (1977) argue, entrepreneurs gain by
going public because diversified investors value the firm’s shares more than
undiversified entrepreneurs do. Stoughton, Wong and Zechner (2001) suggest that the
decision to go public is also a signal of the firm’s quality as the firm opens itself to the
scrutiny of outside analysts who have incentives to investigate the firm properly and
critically.
Motivating and monitoring
According to Jensen and Meckling (1976), as managers' stakes decrease and
ownership becomes more dispersed after an IPO, interests of managers and other
stockholders become less closely aligned and this may have a negative impact on the
company’s performance. Yet, as Holmstrom and Tirole (1993) and Bolton and
Thadden (1998) point out, since stock prices reflect investor valuations of the firm,
the stock value may serve as a monitor of managerial performance and may help, to
some extent, align the interests of the managers and the owners. The mechanism is
quite simple as a poorly performing firm becomes a target of a takeover and the threat
of losing a job in the case of a takeover is believed to be an effective way to control
the managers’ behaviour (Laffont and Tirole, 1988; Stein, 1989). What is more, the
managers’ behaviour may also be managed by incentive contracts, such as linking the
managers’ salaries to the firm’s stock prices or giving them stock options (Jensen and
Murphy, 1990). Sometimes this may cause the problem of over-monitoring, but, as,
Panago and Roel (1998) suggest, companies may be overmonitored also when they
are private. It is because shareholders with a large stake in the company have a greater
incentive to play an active role in corporate decisions because they also benefit from
their monitoring effort. Thus, going public may in some cases reduce the interest of
large shareholders to overmonitor the company. But companies go public not only to
motivate managers but also other employees. IPO companies often admit that it may
be easier to recruit qualified personnel once the firm is publicly traded and when
employees may become shareholders (Rydqvist and Hogholm, 1995).
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Marketing and publicity
The Warsaw Stock Exchange guide “On the way to go public” stresses that the
process of going public is a perfect occasion to promote the company and obtain
every day mass media attention as being public is perceived as almost costless
advertising. Many companies indeed perceive an IPO as an advertisement for the
company and a way to gain publicity and promotion (Rindqvist and Hogholm, 1995).
Public companies are also considered more attractive for employees. However, Roell
(1996) doubts that the publicity surrounding an IPO really has a significant lasting
benefit in raising the visibility of a company and its products.
“To be the first firm to go public in the industry or follow competitors”
According to Stoughton et al. (2001), being the first firm in the industry to go public
may convey strategic advantages above rival firms. IPO enables a firm to expand
early in the product market by using the capital raised at the public market. However,
being the pioneering firm comes at a cost of revealing confidential information about
the company (Bhattacharya and Ritter, 1983). Because of these costs some companies
consciously decide to stay private or observe firms which have already gone public
and only then do they make a decision to issue stock as well. Although companies
hardly ever admit that they have gone public because their competitors are already
present on the stock market, it is not surprising. According to Maksimovic and
Pichler’s (1998) theory in industries that are undergoing technological changes, new
entrants make inferences from the pioneering firms’ experience and theirs financing
decisions. Benveniste, Busaba and Wilhelm (1997) suggest that firms which go public
later are able to free ride on the costly information generated by those companies in
the industry that have gone public before them. Moreover, announcing an IPO is bad
news for competitors since this signals a higher product quality to consumers
(Stoughton et al., 2001) and this may have a negative impact on competitors’ product
prices and revenues.
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Windows of opportunity
There is a growing literature that suggests that entrepreneurs time their decision to go
public, depending on the state of the market. The “windows of opportunity” theory
developed by Ritter (1991) predicts a low equity issuance when stock prices are low.
Companies time their issues and go public in periods when other companies in the
industry are overvalued, meaning that overoptimistic investors price shares higher
than the fundamental value would indicate. The “hot issue” markets observed by
Ibbotson and Jaffe (1975) and Ritter (1984) characterized by unusually high volume
of offerings, severe underpricing, frequent oversubscription of offerings and clusters
of firms in particular industries result from the companies’ tactic to take advantage of
the windows of opportunity. Ritter and Welch (2002) argue that a high IPO activity
may follow high underpricing because underwriters encourage more firms to go
public when public valuations turn out to be higher than expected and because
underwriters discourage firms from filing or proceeding with an offering when public
valuations turn out to be lower than expected. This is in line with Lucas and
McDonald’s (1990) asymmetric information model where firms postpone their
decision to go public if they know that they are currently undervalued. Pastor and
Veronesi (2003) also study the timing of IPOs but they highlight the importance of
changes in valuations captured by returns rather than valuation levels (a high marketto-book ratio in the industry). They argue that the number of firms going public
changes over time in response to variations in market conditions. According to their
model of an optimal IPO timing, IPO waves are caused by declines in the expected
market return, increases in expected aggregate profitability, or increases in prior
uncertainty about the average future profitability of IPOs. Likewise, a recent first-day
stock performance of firms going public encourages other firms to go public (Lowry
and Schwert, 2002). It is also believed that firms prefer to go public when other good
firms are currently issuing (Choe, Masulis, and Nanda, 1993).
1.1.2 Motives for staying private
Benninga, Hermantel and Saring (2005) stress that being private entails “private
benefits of control”. These benefits are any costs saved by a firm that is not traded
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publicly, such as administrative costs, costs of separating ownership from control, a
lost autonomy when making decisions about a company, and costs of increased
disclosure of confidential information that might reduce the competitive advantages of
the company. Thus, the owner of a company who considers public financing is always
facing a trade-off between benefits that he hopes to achieve by an IPO and inevitable
costs that she/he will bear.
Fixed administrative costs
IPO is related to initial, rather fixed and high administrative costs, such as listing and
registration fees, legal and auditing fees, the costs of preparing the registration
statement, as well as ongoing costs of reporting to the government regulators and the
public about the financial condition of a company and about any important events
(Ritter, 1987). When the company is convinced that going public is the best possible
step, it has no choice but to bear all these costs and hope that expected benefits of
being a public company will outbalance the costs. However, before the decision is
made, other, indirect costs of going public have to be considered as well. Ritter (1998)
points out that indirect costs include the management time and effort devoted to
conducting the offering, and the dilution of ownership associated with selling shares
at an offering price that is, on average, below the first day aftermarket price.
Moreover, a risk of an unsuccessful IPO must be also taken into account, as any delay
or IPO failure have an impact on the growth plans of the company. If unsuccessful, all
IPO costs could jeopardize the company and, in the extreme case, lead to the
bankruptcy.1
Adverse selection costs
One of the trade-offs that the owner of a company has to make when deciding whether
to raise external financing by selling shares to a small number of large investors (e.g.
venture capitalists) or to many small investors has been modelled by Chemmanur and
Fulghieri (1999). The key element when considering a public issue is the cost of
information dispersion about the real value of a company. In general, investors are
1
For example, the Polish company Arena.pl has suspended its operations after an unsuccessful IPO.
Source: Polish Press Agency PAP, 30 August 2001: www.dziennik.pap.pl.
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less informed about the true value of a company than the company owners, and this
information asymmetry adversely affects the average quality of companies that go
public and also negatively affects the price at which their shares can be sold (Leland
and Pyle, 1997). This is why obtaining capital by selling shares to a small number of
venture capitalists is connected with lower costs of information production. However,
in such a case venture capitalists obtain a significant bargaining power against the
owner and require higher rates of return in exchange for reduced diversification. On
the other hand, selling shares to a large number of small investors means that
investors are fully diversified and have almost no bargaining power. However, this
means that now managers of a firm have to convince a much larger group of investors
that the company’s projects are worth investing in. Thus, financing by an IPO is
associated with the investor’s duplicative costs of learning about a company. These
costs are actually born by a firm as in order to attract investors it has to lower the offer
price at the IPO. Chemmanur and Fulghieri (1999) argue that firms decide to go
public when information gathering costs are low or when the appropriate amount of
information has accumulated in the public domain. Thus, firms with a longer track
record will clearly have lower costs information acquisition for outsiders. Likewise,
Subramanyam and Titman (1999) conclude that a firm decides to go public when
outsiders can at low costs uncover useful information about a company, but they also
notice that consumers, suppliers and workers are able to obtain costless information
when dealing with the firm. That information becomes incorporated in the stock price
and makes it an efficient source of firm valuation.
Lost autonomy and control
According to Boot, Gopalan and Tharkor (2005), the entrepreneur choice of
ownership structure is a matter of a trade-off between the cost of capital and the
degree of autonomy he/she has when making decisions that are in his/her opinion the
firm’s value maximizing. Private ownership gives an entrepreneur a greater “elbow
room” but at the expense of higher cost of capital. On the other hand, the manager of a
public company gains from greater liquidity and lower costs of capital but faces the
risks of investors’ disagreements about the decision the entrepreneur makes. The loss
of control over the company is also a very serious concern of managers who consider
an IPO. According to Brennan and Franks (1997), IPO firms’ managers
17
opportunistically implement anti-takeover defence because they want to maintain their
private benefits of control after taking the company public.
Disclosure of confidential information
Bhattacharya and Ritter (1983) and Maksimovic and Pichler (1998) point out one
more trade-off that the company is facing when considering an IPO. Public financing
is related with the disclosure of a firm’s confidential information, such as inside
technological information that is very important to uninformed market participants,
especially to competitors. On the other hand, early financing and investment decisions
help the company to gain an advantage over its competitors in the product market.
Thus, a firm faces a trade-off between raising financing at better terms in the public
equity market and disclosing confidential information to competitors. In the fast
changing technology industries where there is a constant race for new patents and fear
of being replaced by more technologically advanced patents or rivals, any
unconsidered leak of information should not happen. Yosha (1995) notes that firms
for which it is crucial to conceal information from competitors eventually choose to
stay private. He concludes that high-tech firms consciously reject the stock market
and choose private sources of financing, such as bank loans or private equity
investors.
1.2 Empirical evidence
The going public decision has generated considerable theoretical attention in recent
years, however it is still one of the least empirically studied issues in corporate
finance. The main reason is that it is difficult to obtain information about privately
held firms as they are not required to report their financial results.
Do firms go public to finance their future growth?
Pagano et al. (1998) are one of the first researchers who have managed to empirically
test various hypotheses using a large set of IPO and private companies that went
public in Italy during the period of 1982 – 1992. Their results indicate that obtaining
18
financing is not the main motivation for companies to go public. It turned out that
companies go public not to finance future investments as it is commonly believed but
rather to rebalance accounts after a period of rapid growth and high investments
preceding the IPO. Similarly the results of Fischer’s (2000) analysis suggest that
variables that measure firms’ financing needs are not the primary factors influencing
the decision to issue equity in Germany. What is more, the decision to go public
turned out to have a negative impact on the post IPO investment growth rate of
Korean companies (Chun and Smith, 2002). Pannemans’ (2002) study of Belgian
companies that went public during 1996-2000 has also revealed that the need for
funds is not a primary motivation for going public but, contrary to Pagano et al.
(1998), money raised at the IPO is indeed used to finance future investment projects
of the company. Gill de Albornoz and Pope (2004) also argue that on average
financing needs are not a major factor for UK companies to go public but raising
external funds to finance large investments underlies the going public decision for
firms that survive IPOs ex post. Still, Mikkelson et al. (1997) find evidence that US
IPOs are generally followed by a large growth in assets and this may support the view
that firms go public to raise public equity capital that is used to finance growth. Thus,
international evidence does not find support for the view that the main motivation for
firms to go public is to finance their future growth.
Do firms go public to overcome borrowing constraints?
It is generally believed that firms go public because other sources of financing are
exhausted and when further increases of leverage increase also a bankruptcy risk.
Contrary to Myers’ (1977) view that highly leveraged firms with investment
opportunities should be more likely to go public, Pagano et al. (1998) find that
leverage has a negative impact on the likelihood of an IPO, although this effect is not
statistically significant. Also Fischer’s (2000) study of German firms that went public
on other than the Neuer Markt stock exchange segments, shows that increasing
leverage reduces the probability of an IPO. Pagano et al. (1998) suggest that
companies that face higher interest rates and have more concentrated credit sources
are more likely to go public. However, neither the cost nor the availability of credit
turns out to have a statistically significant impact on the decision to go public.
Helwege and Packer (2001) observe similar levels of leverage in US private bond
19
issuers attempting an IPO and in those that did not want to go public concluding that
leverage is neither a deterrent nor an incentive to go public.
Do firms go public to diversify risk?
The diversification incentive to go public was a special focus of Fisher’s (2000) study.
His aim was to identify determinants that had an impact on the decision to go public
by comparing privately held German firms with companies that went public on the
Neuer Markt and in other stock market segments of the Frankfurt Stock Exchange
during the period of 1997 – 1999. Firms belonging to riskier industries were expected
to have a strong diversification incentive to go public. It is worth noting that the
Neuer Markt was created with the intention to serve as the German equivalent to the
technology-laden NASDAQ market in the United States. The Neuer Markt, opened in
1997, was designed for the initial public offerings of nascent German technology
companies. The empirical analysis revealed that for the IPOs on the Neuer Markt the
likelihood of going public increased with a company’s risk measured by intangible
assets and R&D intensity. These findings are not surprising and confirm that Neuer
Markt has indeed attracted high-risk technology firms. The huge importance of
current investments measured by CAPEX indicate that companies that have gone
public may have been in financial need, however it does not explain why German
technology firms have chosen to finance themselves publicly instead of establishing
bilateral financing agreements with banks or venture capitalists that, according to
Yosha (1995), guarantee private information safety, so crucial for all high-tech
companies.
Do firms go public to become targets or acquirers?
Rydqvist and Hogholm (1995) report that 35 percent of companies that have gone
public in Sweden are sold within five years after the IPO. This is in line with the
Zingales (1995) and Mello and Parsons (1998) theory that initial owners decide to
make a firm public as the first step to sell the company in the future. Helwege and
Packer (2001) have found evidence that companies are more likely to go public if they
have private equity investors, which is in line with Black and Gilson’s (1998) view
that IPO serves as an exit strategy for venture capitalists. Yet, Helwege and Packer’s
20
(2001) sample of private firms that file with the US Securities and Exchange
Commission because they have issued public bonds is biased as it means that these
private companies already made a decision regarding the financing sources some time
ago and chose other than equity sources of financing including venture capital.
Brau, Francis and Kohers (2003) point out that a firm may decide not only between
going public and staying private, but it may also agree to be taken over by a publicly
traded company. Using a sample of over 9,500 US privately held firms they examine
the determinants of the decision to go public versus the decision to be acquired by a
publicly traded firm. Their results indicate that the concentration of the industry, the
high-tech status of the private firm, the current cost of debt, the "hotness" of the IPO
market in relation to the takeover market, the percentage of insider ownership, and the
size of the firm, are all positively related to the probability that a firm will conduct an
IPO. In contrast, private companies in high market-to-book industries, firms in
financial service sectors, firms in highly leveraged industries, and deals involving
greater liquidity for selling insiders, show a stronger likelihood for takeovers.
Unfortunately, Brau et al. (2003) do not investigate whether a firm’s decision to
undertake an IPO may be part of a larger plan to sell the firm to an acquirer later.
However, Brau et al. (2003) study indicates that public companies issue stock not only
to become targets but also to finance acquisitions of other companies. For example,
Mr. James Kelly, UPS’ chairman and chief executive, at the time of UPS’ IPO in
1999 said: “It really hasn’t been about the money. It’s been about positioning our
company for the future and giving us the currency for acquisitions” (Isidore, 1999).
The same view has been expressed recently by Mr. Konrad Kosierkiewicz, the
president of a Polish IT company Unima 2000, who states that the main reason for
taking the company public is to obtain financing for growth that will be achieved by
an acquisition of one or two companies of similar profile2. Likewise, Brau and
Fawcett (2006) have found in a sample of US firms that went public during 2000 and
2002 that IPO firms were acquirers 141 times and targets only 18 times. Moreover, it
was found that IPOs are acquirers more often than benchmark private firms are
acquirers and that IPOs are targets more often than benchmark private firms are
2
Interview for Polish Press Agency PAP available at: www.unima2000.com.pl
21
targets. This suggests that initial owners of IPO companies are aware of both possible
results of an IPO and they consciously choose one of the scenarios. What is more,
Gleason et al. (2006) find that newly public firms experience favourable valuation
effects in response to announcements of their acquisitions, contrary to many studies
on acquisitions that find a decline in the acquirer’s value. The findings support the
hypothesis that companies go public to finance growth and development.
Do firms take advantage of “windows of opportunity”?
Several empirical studies find evidence that companies go public to use the
opportunity to capture the investors’ high valuation of an industry. For example,
Pagano et al. (1998) find that the likelihood of a company to finance through public
sale of shares increases significantly with the industry market-to-book (MTB) ratio of
existing public firms. What is more, the MTB ratio has been found as the most
important factor influencing the decision of Italian firms to go public. This may
indicate an entrepreneur’s choice to go public to benefit from a very good market
mood. On the other hand, the high market-to-book ratio may be interpreted as higher
investments needs and higher growth opportunities in the sector. The market-to-book
ratio has turned out to be the most important determinant for going public also for
Belgian (Pannemans, 2002) and Korean (Chun and Smith, 2002) companies.
Likewise, Gill de Albornoz and Pope (2004) conclude that UK firms go public to take
advantage of windows of opportunity. Also in Poland the MTB ratio has been found
as the main factor influencing the timing of IPO (Dudko-Kopczewska, 2004).
However, because the analysis was conducted without comparing the sample of IPO
firms with the firms that stayed private, one cannot conclude that Polish companies go
public only for opportunistic reasons.
Is the firms’ going public decision driven by the product market competition?
According to Maksimovic and Pichler (2001), in industries undergoing a rapid
technological change, the optimal timing, pricing, and success of a securities offering
depend not only on the individual firm, but also on the product market competition
between innovative private firms in that industry. Chemmmanur, He and Nandy
(2005) in a study of private manufacturing companies and those that went public
22
during 1972 - 2000 in the US, find evidence that private firms’ product market
characteristics have a significant impact on the decision to go public. Firms with a
higher market share, operating in less competitive and more capital intensive
industries and characterized by riskier cash flows appeared to be more likely to go
public.
Do adverse selection costs matter?
The adverse selection costs resulting from the information asymmetry between the
insiders and the outsiders increase the cost of information dispersion about the true
value of a firm. Chemmmanur et al. (2005), consistent with Chemmanur and Fulghieri
(1999), find evidence that private firms that suffer less information asymmetry and
those with projects that are cheaper for outsiders to evaluate are more likely to go
public. The information asymmetry between the firm insiders and outsiders was
measured by the averages of various proxies of information asymmetry for firms
already listed in that industry, such as standard deviation of analyst forecasts and
analyst forecast error.
Are insiders worried about losing autonomy and control after an IPO?
In the case the company goes public for other reasons than facilitating its sale in the
future, a threat of a takeover is very serious. Field and Karpoff (2002) find that
owners of newly public firms attempt to stop potential acquirers and try to retain
control by maintaining a large ownership stake or adopt anti-takeover measures.
Although Zingales (1995) and Mello and Parsons (1998) suggest that a takeover
defence may increase the expected takeover premium when the firm is eventually
acquired, Field and Karpoff (2002) find evidence that supports Brennan and Franks’s
(1997) view that IPO firms’ managers implement defence because they want to
maintain their private benefits of control after taking the company public.
Do costs of confidential information disclosure matter?
According to the theory of Bhattacharya and Ritter (1983) and Maksimovic and
Pichler (2000), the costs of revealing important information about technological
23
developments to competitors in the IPO process discourage firms from going public.
Chemmmanur et al. (2005) have tested empirically the confidential information
disclosure theory. They expected that firms operating in industries where the value of
confidentiality is greater, for example high technology firms, should be less likely to
go public. However, the empirical results have revealed that the probability of going
public is significantly higher for those firms which operate in high-tech industries.
One possible explanation for such a result may be that the sample of high-tech
industries includes only firms from the manufacturing sector, without the service
oriented companies, such as computer software and that is why the sample of high
technology firms may not be representative. Thus, there is no clear empirical evidence
whether the costs of confidential information disclosure have an important on the
decision to stay private.
Are firms better off after the IPO in the long run?
Several papers examine ex post characteristics of formerly private firms in order to
check the theory and find out whether the motives that stay behind the decision to go
public have their consequences in a firm’s characteristics and performance after the
IPO. One of the earliest studies documenting the changes in operating performance of
companies that have gone public was conducted by Jain and Kini (1994). They have
discovered a puzzling decline in operation performance as the company made a
transition from private to public. In their sample of 2,125 firms that went public in the
US during the period of 1976 – 1988, they found that IPO firms substantially
underperform in the long-run (three years post issue observations) comparing to its
pre-IPO levels. This result holds when performance is based on companies’ operating
return on assets and on operating cash flows.
Jain and Kini (1994) findings were replicated on other markets and confirm the
general post IPO operating underperformance. For example, Mikkelson et al. (1997)
have investigated the operating performance of 283 initial public offerings in the US
in the years 1980 -1983 up to ten years after going public. They document that the
median operation performance of these firms in the year before the IPO exceeds the
performance of industry matched firms; however the performance of IPO firms
declines during the first ten years much more than the performance of matched firms.
24
A closer investigation revealed that the poor post-IPO performance is associated with
rather small and young companies. The performance of larger and more established
firms declined from high to a normal level as compared to industry matched firms.
The long run operating underperformance has also been found outside the US.
Khurshed, Paleari and Vismara (2003) and Coakley, Hadass and Wood (2004) have
found a significant decline in the post-issue operating performance of UK IPOs. Cai
and Wei (1997) and Kutsuna, Okamura and Cowling (2002) find evidence of poor
aftermarket performance of Japanese IPOs while Wang (2005) documents a similar
performance pattern in China.
Pagano et al. (1998) who have analysed determinants of the decision to go public have
also conducted an ex post analysis of IPO firms and compared the IPO firms post
issue performance with the performance of private firms. They find evidence that
profitability declines after the IPO and the deterioration increases starting from the
first year after the IPO to the third year after an issue. Moreover they find that IPO has
a negative impact on capital expenditures (except from one year after the IPO),
financial investments and a poorer than expected impact on firms’ sales growth.
Likewise, Chun and Smith (2002) find that profitability of Korean firms declines
monotonically following the IPO and leverage decreases. Furthermore, it was found
that the decision to go public has a negative impact on the investment growth rate and
on the growth rate of total assets. The results support the hypothesis that after the IPO
firms substitute their source of funds from debt to equity in order to deleverage. Both
Panano et al. (1998), and Chun and Smith (2002) conclude that ex post characteristics
of IPO firms indicate that firms go public not to fund future increases investments, but
there is substantial evidence that they go public to take advantage of windows of
opportunity. The analysis conducted by Chemmmanur et al. (2005) of pre- and postIPO total factor productivity also confirms the existence of an underperformance
pattern subsequent to the IPO. Their research reveals that the total factor productivity
increases steadily during the five years before an issue, reaches a peak in the IPO year
and declines in the years after the issue. The similar inverted-U shape pattern is
observed in the sales growth.
The long run performance of Polish IPOs has been investigated by Aussenegg and
Jelic (2002), but their analysis focused on privatization initial public offerings
25
(PIPOs), as compared to private IPOs, without comparing them to companies that
stayed private. It was found that Polish PIPOs, as opposed to PIPOs in developed and
other developing countries3, did not manage to increase profitability and significantly
reduced efficiency and output in the post-privatization period. Moreover, it was found
that private sector IPOs underperformed their privatization counterparts in terms of
profitability, efficiency, capital investments, and output. In order to discover the postIPO operating performance of Polish companies, further empirical investigation is
needed that would include a reference sample of companies that have decided to stay
private. However, before the analysis of Polish IPO firms is conducted, a closer look
at the characteristics of the Warsaw Stock Exchange and companies that decided to
issue stock there is necessary to discuss market and economic conditions that
accompanied Polish companies on their way to stock market and may have had an
impact on the decision to go public an on the number of companies that made this
important decision.
3
The analysis of post issue operation performance of PIPOs has been conducted for example by
D’Souza and Megginson (1999) and Boubakri and Cosset (1998).
26
Chapter 2 Characteristics of the Polish IPO market
Characteristics of the Polish IPO market
This chapter characterises the market and economic conditions that accompanied
Polish companies on their way to the stock market. Moreover, a summary of surveys
conducted among the Polish IPOs reveals official motives for public issue, concerns
before an IPO its anticipated effects, as well as motives for staying private.
2.1 Initial Public Offerings at the Warsaw Stock Exchange
The Warsaw Stock Exchange has gone a long way from the nine companies traded in
1991, with the total turnover value of PLN 30 million (EUR 7.7 million)4 and market
capitalization of PLN 161 thousand (EUR 41.2 thousand), to 238 companies in 2005
with the total turnover value of PLN 191 million (EUR 48.9 million) and market
capitalization of PLN 308 million (EUR 78.9 million) as shown on graph 1.
Graph 1 Number of companies listed at the WSE and market capitalization
(PLN million)
400
300
238
350
213
205 209
199
300
182
250
213
186
200
250
200
150
83
100
65
100
50
150
127
44
9
16
50
22
0
Market capitalization
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
Number of companies
Source: Warsaw Stock Exchange statistics
4
According to National Bank of Poland EUR 1 = PLN 3.9, as of 1 August 2006.
27
It is noticeable that during the 15 years of the Warsaw Stock Exchange’s operations,
its life cycle has changed several times. Graph 2 presents the time distribution of 317
IPOs since the reopening of the Warsaw Stock Exchange in 1991 till the end of 2005,
sub-sampled each year according to a company’s origin.
Graph 2 Initial Public Offerings at the WSE between 1991 and 2005
60
50
40
30
20
10
State companies
Mixed ownership
Private companies with state origins
Private from the beginning
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
National Investment Funds
Source: Warsaw Stock Exchange Fact Book 2006
During the years 1991-1994 it was mainly state companies that entered the equity
market as part of the privatization programme. The first whiff of the bull market
appeared in spring 2003. Polish companies attracted the attention of foreign pension
funds that become investing on the WSE. With every month the WSE was becoming
more and more popular with individual investors and the stock prices soared rapidly.
It turned out very soon that the demand for new shares exceeded the supply because
the State Treasury did not manage to prepare more state companies to go public while
private companies did not rush to go public.
Since 1994, private companies have begun shyly entering the stock market. In April
1994 the bear market became visible at the WSE for the first time. The WIG index
that in 1993 increased by over 1000 percent comparing to 1992, in 1994 decreased by
almost 40 percent comparing to 1993 (graph 3). Investors were selling out and stock
28
prices went down by more than 10 percent. Fortunately, it did not last long and did
not manage to discourage companies from entering the stock market and that year the
number of IPOs reached 22. The years 1995 and 1996 were not much worse with 21
and 18 new listings respectively.
Graph 3 Total turnover value and WIG changes (y-o-y) during 1991-2005.
1 100
250 000
900
200 000
700
150 000
500
100 000
300
50 000
100
WIG (% change)
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0
1991
-100
Total turnover value (PLN million)
Source: Warsaw Stock Exchange statistics
The period 1997-1998 is believed to be the most dynamic ever at the WSE. In 1997,
46 firms went public, increasing the number of the traded companies from 83 to 129,
which was an over 55 percent increase. 1998 was a record-breaking year for initial
public offerings in Poland with the formidable number of 57 companies. The mass
privatisation programme (MPP) that started in 1995 should be held partially
responsible for the large number of companies that went public that year. The trading
of the 15 National Investment Funds (NIF) shares began on 12 June 1997. The MPP
helped raise the awareness and knowledge about the functioning of the stock
exchange among Polish citizens as more than 91% of the 28 million Poles eligible for
the MPP took part in it and had to make a decision whether to sell the certificate at the
aftermarket or convert them into NIF shares. The investors’ interest in the stock
market was increasing and so was the firms’ interest in going public. The improving
economic conditions also had a positive impact on the investors’ and entrepreneurs’
valuations (table 1).
29
In comparison to previous two years, in 1999 significantly fewer companies decided
to go public. Among the 28 IPOs there were 24 private companies. However, it was
the privatisation of the Polish Oil Corporation (PKN) that attracted the most attention
as it was the only company offered by the State Treasury that year. Three companies
were delisted; two others deleted from the WSE on account of their mergers with
other listed companies (graph 4).
Table 1 Development of the WSE vs. GDP growth
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total
Total number
of IPOs
9
7
6
22
21
18
46
57
28
13
8
5
6
36
35
317
WSE
capitalisation
(% of GDP)
0,2
0,3
3,1
3,2
4,2
5,9
9,0
15,1
18,6
19,9
14,8
14,3
17,9
29,3
not available
GDP growth
(%)
Lagged GDP
growth (%)
-7,0
2,6
3,8
5,2
7,0
6,0
6,8
4,8
4,1
4,0
4,0
1,3
3,8
5,2
3,2
-11,6
-7,0
2,6
3,8
5,2
7,0
6,0
6,8
4,8
4,1
4,0
4,0
1,3
3,8
5,2
Source: WSE Fact Book 2006, The Central Statistical Office (GUS)
At the end of 1999 the fashion in dotcom investments arrived in Poland. However, at
that time there was only one IT company listed at the WSE, namely Optimus. The
investors were extremely interested in any IT company that traded in hardware or
software. A company that would announce an interest in investments or operations in
the IT sector immediately became an investment hit. As a result, the number of
Internet companies or those that declared operations in this sector increased
immediately. That year such IT companies went public as: ComArch, Szeptel and
Ster-Projekt. Companies operating in traditional, sectors such as production or
services lost on popularity. At the beginning of February 2000, as a result of the
“internet bubble”, WIG index reached the record 21.224 points.
30
However the dotcom bubble blew up very soon, first in the USA and than in Europe,
also affecting the WSE. In April 2000, investors’ optimism about Internet firms
crashed and only at the beginning of 2001 investors’ evaluations of that sector slightly
improved, allowing another IT company, Interia.pl, to complete the IPO without a
loss.
Graph 4 Number on new listings and delistings at the WSE during 1991-2005.
70
60
50
40
30
20
10
0
-10
-20
-30 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Number of IPOs
Number of delistings
Source: Warsaw Stock Exchange statistics
The period between 2000 and 2003 was the worst ever at the WSE in terms of the
number of new listings. The main reason was a lasting recession that discouraged
investors and entrepreneurs as they would have to offer much lower offer prices at the
IPO. In order to make a decision about equity financing and at least partially lose
control over the company the entrepreneurs had to have an idea of how to spend the
money raised at the IPO. However, during a recession it is difficult to find interesting,
positive NPV projects. Moreover, during the period of a recession a lot of foreign
strategic investors decided to delist their Polish subsidiaries. In 2000 nine companies
were delisted, in 2001 four, while the number of delistings both in 2002 and 2003
reached nineteen. What is more, at the turn of 2000 and 2001 three companies did not
manage to complete an IPO successfully. All these companies represented the IT
sector. These unsuccessful IPOs made it more difficult for other companies to raise
equity. As a result only five companies went public in 2002 and six in 2003.
31
The overall situation at the Warsaw Stock Exchange started to improve slightly as
early as the end of 2003. After a few years of the bear market that began when the
dotcom bubble had blown up in spring 2000, investors regained their optimism. The
stock prices on the mature, Western stock markets began to increase and this fact was
reflected at the CEE stock markets such as those in Warsaw, Budapest and Prague.
Foreign investors were attracted to Warsaw by the accelerating economy. The GDP
and industry production increase made investors expect that Polish companies would
improve their financial and operational results very quickly. Indeed, the state of Polish
companies was improving at that time, especially after the corporate income tax (CIT)
was decreased to 19 percent.
Graph 5 Relation between GDP growth and stock market capitalisation
35
8
30
6
25
4
2
20
0
15
-2
Capitalization (% of GDP)
2004
2003
2002
2001
2000
1999
1998
1997
1996
-8
1995
0
1994
-6
1993
5
1992
-4
1991
10
GDP growth (%)
Source: Warsaw Stock Exchange statistics
Furthermore, in 2003 new corporate governance rules were introduced to the WSE
that improved relations between shareholders, the board of directors, and the
supervisory board. Moreover, huge money transfers to pension funds (OFEs)
strengthened OFEs’ position as institutional investors (by the end of 2003 the
accumulated assets of OFEs reached PLN 45.4 billion, which was 27 percent of the
capitalization of the WSE as of that year and 5.9 percent of the Polish GDP in 2002).5
5
Author’s calculations based on the data from the internet portal devoted to pension issues
http://emerytury.wp.pl, WSE statistics www.gpw.com.pl and the Central Statistical Office
www.stat.gov.pl.
32
Apart from institutional investors, also individual investors regained their interest in
stocks as they were attracted by the privatization IPOs of large state companies, such
as PKO BP, WSiP, PGNiG and Polmos Bialystok. Also investors who had entrusted
their money to investment funds recorded gains, substantially larger than the gains
from the risk free bank deposits. As shown on graph 5, the economic conditions and
the overall situation at the stock market were improving and probably encouraged
private companies to go public the following year.
In 2004, the year when Poland joined the European Union, the bull market at the WSE
gained momentum with the second biggest wave of IPOs, with 36 new companies.
While the first IPO wave consisted mainly of state companies, in 2004 it was mostly
private companies that decided to issue equity. The WSE, after a few years of the bear
market, was witnessing again a huge interest in IPO among both private and state
companies. The supply side met the demand as also investors were extremely
interested in investing in new companies, encouraged by huge short term profits on
newly listed companies (e.g. ATM gained 25 percent at the first trading day, Redan
gained 20 percent, while Sniezka almost 30 percent). For the first time in three years,
the number of IPOs surpassed the number of delisted companies. The demand for new
investments in IPO companies was increasing alongside the increasing assets of
pension and investment funds.
The large number of newly listed companies in 2005 (35 IPOs) ought to be interpreted
with caution. Although the macroeconomic conditions and the overall good market
mood may explain the large number of IPOs, many companies were simply in a hurry
to issue equity before 1 July 2005. That day new prospectus regulations came into
force aimed at standardization of prospectuses within the European Union. Polish
issuers were very concerned about these changes and were doing their best to go
public or at least hand in the prospectus to the Polish Securities and Exchange
Commission before the new EU regulations came into force.
33
2.2 The Warsaw Stock Exchange vs. other European stock markets
The Warsaw Stock Exchange is the largest stock market in the Central Eastern
European (CEE) countries in terms of the number of stocks listed. Moreover, it is also
among the leading European stock exchanges in terms of the number of new listings.
Only the London Stock Exchange, which is at the heart of global financial markets,
Euronext and Deutsche Borse have more IPOs than WSE, where the total of 238
companies were listed in 2005, while at the Prague Stock Exchange only 38 and 43
companies at the Budapest Stock Exchange (graph 6). The number of stocks listed at
the WSE continually increased since the beginning of its operations, while it has
tended to stagnate or even decrease in other CEE countries (table 2).
Graph 6 Number of companies listed in 2005 on various European stock
markets.
300
238
200
109
113
38
43
Budapest
23
Prague
100
Bratislava
Ljubljana
Vienna
Warsaw
0
Source: Warsaw Stock Exchange Fact Book 2006
The differences in the development between Polish, Czech and Hungarian stock
markets stem from the differences in regulations of securities markets adopted in
these counties. Poland has adopted legal rules highly protective of investors, has
mandated extensive information disclosure by securities issuers and intermediaries,
and has created an independent and highly motivated regulator to enforce the rules.
Glaeser, Johnson and Shleifer (2001) argue that this approach to regulations in Poland
has stimulated a rapid development of securities markets and it has enabled a number
of firms to raise external funds. Negligent regulations in the Czech Republic have led
to a high expropriation of minority shareholders and resulted in a failure of the stock
34
exchange as a source of investment capital. Hungary, which has adopted an
intermediate regulatory attitude, has shown an intermediate level of financial
development. It is also believed that the successful case-by-case privatisation had an
extremely positive impact on the popularity of the security exchange in Poland as
opposed to the failed Czech voucher mass privatisation, which resulted in common
mistrust of stock market institutions (Aussenegg, 1999).
Table 2 Development of CEE stock markets 1994-2004.
1994 1995
1996
1997
1998
1999
2000 2001
2002
2003
2004
A. Number of domestic companies listed:
Prague 1028 1716
1670
320
304
195
151
102
79
65
55
Budapest 40
42
45
49
55
66
60
56
49
53
54
Warsaw 44
65
83
143
198
221
225
230
216
203
230
B. Market capitalisation (in % of GDP):
Prague 14.5
30.1
31.2
24.1
21.4
21.6
21.7
16.4
22.9
20.7
27.7
Budapest 4.2
6.0
12.9
36.6
29.9
36.0
28.3
19.4
17.3
22.8
28.8
Warsaw 3.2
4.2
5.9
9.0
15.1
18.6
19.9
14.8
14.3
17.9
29.3
Bratislava 8.0
7.1
11.6
9.4
4.7
5.4
6.4
7.6
8.0
8.7
5.9
Vienna 15.6
13.9
14.5
18.1
16.8
16.9
15.8
13.4
14.8
22.5
30.4
Frankfurt 23.9
25.6
27.7
39.2
50.9
72.1
67.8
58.1
31.2
45.0
44.2
London 106.9
121.7
146.3
155.0
171.0
198.3
184.3
152.2
111.0
137.1
132.0
Source: Warsaw Stock Exchange www.gpw.com.pl, Prague Stock Exchange
www.pse.cz, Budapest Stock Exchange www.bse.hu.
The recent strong performance of the WSE can be partly attributed to Poland’s
membership in the EU, which has triggered a surge in IPOs. Many Polish companies
have undergone restructuring in recent years in order to become more competitive and
well prepared for the EU market.
Table 3 below presents data on the number of IPOs and offering values in 2004 and
2005 at the leading European stock markets. Although the number of IPOs in Poland
is far below that at the London or Euronext stock markets, the CEE region stock
exchanges may envy WSE its performance.
35
Table 3 IPOs per exchange in 2004 and 2005.
London
Euronext
Deutsche Borse
Warsaw Stock Exchange
Luxemburg
Oslo Bors
Borsa Italiana
Swiss Stock Exchange
Stockholm
Wiener Borse
Copenhagen Stock Exchange
Ireland
Madrid Exchange
Athens Stock Exchange
Europe Total
IPOs
2004
305
48
10
36
8
2
8
4
5
1
2
2
3
2
433
Offering value
(EUR million) 2004
8,309
8,486
1818
2,988
380
292
2,481
408
90
7
681
2,415
5
27,679
IPOs
2005
354
65
43
35
31
30
15
10
8
7
3
3
1
1
603
Offering value
(EUR million) 2005
18,866
16,319
3,593
1,740
2,075
1391
2,400
2,137
392
1,162
766
12
157
29
50,677
Source: IPO Watch Europe Annual Review 2005, PwC
2.3 Polish IPOs survey results
In an attempt to define the determinants of the Polish stock market development, Grat
and Sobolewski (2005) have conducted a survey of 101 public companies, 55 private
companies that had used bond financing, and 207 private companies that had financed
themselves neither at the bond nor the stock market. The study investigates the
motives behind a decision to go public and the motives for a company to stay private.
Recently, KPMG has conducted a similar survey among Polish companies that went
public during 2004-2005. The short summary of both surveys allows for an
examination to what extent Polish managers’ motivations for conducting an IPO
correlate with the theory and the motivation of CFOs in other countries.
2.3.1 Polish issuers’ motivation for going public
The results of surveys conducted among Polish companies that went public only
partially correspond to similar surveys conducted at the US (Brau, Ryan, DeGraw,
2004; Brau and Fawcett, 2006) and Swedish (Rydqvist and Hogholm, 1995) markets.
Similarly to Swedish companies, Polish private firms state that they go public for
financing reasons. The results of a survey conducted by Grat and Sobolewski (2005)
36
and by KPMG indicate that the desire to obtain financing for investments and growth
is the main motivation for Polish companies to go public (graph 7) which is in line
with the general view that firms go public to raise additional external equity to fuel its
growth (Ritter and Welch, 2002). In contrast, for US companies obtaining financing is
not the main reason to go public (Brau and Fawcett, 2006), although the surveyed
CFOs strongly agreed that it is a benefit of an IPO (Brau et al. 2004). The main
motivation for US companies to go public was to create public shares for use in future
acquisitions (Brau and Fawcett, 2006), which supports Gleason’s et al. (2006) view
that companies go public not only to become targets but also acquirers.
Graph 7 Official motives for going public
obtain financing
70%
increase credibility
44%
sell a company
41%
company valuation by the market
26%
marketing motives
26%
increase prestige
22%
other
7%
0%
20%
40%
60%
80%
Source: KPMG, 2006: “Destination: Stock Exchange. The Process of Going Public at
the Warsaw Stock Exchange between 2004 - 2006”.
Polish companies view raising capital as the main but not the only reason to conduct
an IPO. Mr. Wieslaw Rozlucki, former President of the Warsaw Stock Exchange,
points out that because of the high regulatory standards at the WSE firms also gain
credibility, trust of stakeholders and recognition for their brands.6 Managers of Polish
companies seem to share this opinion as the firm’s increased credibility and reputation
were indicated as the second most important motive to go public (KPMG, 2006; Grat
and Sobolewski, 2005). Likewise, in the US one of the three most important motives
to go public is to enhance the reputation of the company (Brau and Fawcett, 2006).
6
Samcik, M., “About the stock exchange on vacations”, attachment to the Gazeta Wyborcza daily,
issue 145, 23 June 2004, p. 4.
37
The next important motive for Polish entrepreneurs to go public is to sell the company
(KPMG, 2006). In contrast, managers of US companies no do not agree that a benefit
of an IPO is that it allows for the sale of some of owners’ shares. Neither is IPO
perceived as an exit strategy for initial owners (Brau et al., 2004). US companies go
public in order to create public shares for use in future acquisitions rather than being
taken over in the future (Brau and Fawcett, 2006). Company valuation by the market
is an important motive for going public for both Polish and US companies.
Interestingly, many Polish companies perceive IPO as a marketing move and hope
that going public will increase their firm’s prestige and attract media attention
(KPMG, 2006; Grat and Sobolewski, 2005). Likewise, Swedish companies believe
that IPO make the company’s products better known (Rydqvist and Hogholm, 1995).
In contrast, most of the US companies do not believe that an IPO attracts more media
attention or increases prestige (Brau et al., 2004). It is important to note that Polish
IPOs indeed receive a lot of media attention as early as they announce a desire to go
public. It is possible because the yearly number of IPOs in Poland is still relatively
small comparing to the UK market when tens of companies go public each month or
US market where the number of companies going public from 1980 to 2001 exceeded
one per business day (Welch and Ritter, 2002).
In the KPMG survey only 7 percent of Polish companies admitted that there were
informal motives for going public. All of them stated that it was the necessity to
follow competitors who were already public. This is in line with Maksimovic and
Pichler’s (1998t) theory according to which new entrants make inferences from the
already public firms’ experience and may free ride on the costly information
generated by companies that have gone public before them (Benveniste et al., 1997).
2.3.2 Concerns about going public
One of the most serious concerns of Polish companies that considered an IPO is the
necessity to disclose confidential information about a firm (KPMG, 2006; Grat and
Sobolewski, 2005). This supports the Bhattacharya and Ritter (1983) and Maksimovic
and Pichler (1998) view that firms considering an IPO face trade-off between raising
financing at better terms in the public equity market and disclosing confidential
38
information to competitors. Also CFOs of US companies agree that a disadvantage of
an IPO is that it suddenly opens the firm up to public scrutiny (Brau et al., 2004).
Moreover, Polish companies also stress that when going public they encounter hurdles
caused by additional informational duties (graph 8).
Graph 8 Main concerns about going public
other
15%
confidential information disclosure
59%
hurdles caused by additional
informational duties
48%
costs related to an issue
37%
necessity to meet the stock market
standards
19%
lost of controll over a firm
7%
0%
20%
40%
60%
80%
Source: KPMG, 2006: “Destination: Stock Exchange. The Process of Going Public at
the Warsaw Stock Exchange between 2004 - 2006”.
The necessity to meet the stock market standards is a concern of every fourth
company. Polish companies are also concerned about the high financial costs related
to an issue. Grat and Sobolewski (2005) report that small companies, with yearly
revenues below EUR 7 million, were the most concerned about the fixed issue costs.
This supports the general view that smaller companies are less likely to go public
because of high, rather fixed administrative costs of going public that are unrelated to
the company’s size (Yosha, 1995; Pagano and Roell, 1998). According to the WSE
publication “Companies financing through the capital market”, the average cost of an
IPO in Poland in recent 10 years was about 10.78 percent of the total offer value. An
average cost of a seasoned equity offering (SEO) was much lower, at about 4.61
percent. The size of the offer is also very important as issues below PLN 10 million
cost on average 13.8 percent of the total offer value, while issues between PLN 30-40
million cost on average only 4.5 percent. In comparison, issue costs in US during the
39
period of 1990-1994 were on average around 7 percent (Lee, Lochhead, Ritter, and
Zhao, 1996).
Only 7 percent of Polish managers were worried about losing the control over the
company. Likewise, managers of US companies were rather “neutral” in the response
to the question whether the reduction in control is a disadvantage of going public
(Brau et al., 2004). This indicates that the trade-off between the cost of capital and the
degree of autonomy is not that remarkable as Boot et al. (2005) suggests.
According to KPMG, 80 percent of Polish managers after the IPO said that their
concerns about going public were unjustified. Only 11 percent of companies indicated
that costs of going public were indeed high and 7 percent of companies mentioned the
negative effects of confidential information disclosure for competitors (KPMG, 2006).
2.3.3 Motives for staying private
The main reason for Polish companies to stay private is that they do not need
additional financing or because they have access to cheaper sources of financing, such
as bank and merchant credits, issue of short term bonds on the non-public market,
foreign credits and leasing (graph 9). This result suggests that there has to be a clear
financial motivation for companies to take IPO into account. Secondly, this result
supports the pecking order theory that firms will always prefer to issue the cheapest
source of financing (Myers and Majluf, 1984; Myers, 1984). The second most
frequent response is that the current legal form does not allow the company to go
public but at the same time over 50 percent of companies stated that this is not an
important factor that influenced the decision to stay private. Polish companies referred
to maintaining decision-making control as the fourth issue, while in the US it is the
most important in deciding whether or not to stay private (Brau and Fawcet, 2006).
The second most important reasons for US companies to stay private is to avoid
ownership dilution. In contrast, in Poland almost half of the surveyed companies
perceive the dilution of ownership as unimportant.
Other reasons for staying private in Poland, the most frequent response include: the
owner’s decision, too risky a project, the company is still in the early development
40
stage, the decision to stay private was made by the capital group, the company
concentrated on short-term financing.
Graph 9 Factors that had an impact on the decision to stay private.
other
56,1
insufficient knowledge of stock markets
3 31,1
60,3
complicated law regulations
36,8
9,7
43,7
11,8
19,4
21,4
5,55,1
16,4
6,7
complicated tax regulations
49,2
11,9
16,9
13,6 8,4
dilution of ownership
48,9
13,9
15,6
12,2 9,4
necessity to meet corporate governance standards
51,5
necessity to disclose financial information
50
cost related to an IPO
41,8
hurdles caused by additional informational duties
46
loss of control over the company
43,4
have access to cheaper sources of financing
40
current legal form does not allow
37,1
0%
2
3
20%
4
15,5 7,1 10
12,6
14,2
11,1
16,8
17,2
14,8
14,2
15,2
14,9
10,1 10,5
12,6
11,4 12,6
11,5
19,1
7,8 13,9 11,3
27
4,27,6 6,3
28,5
53,4
no needs for additional financing
1 - not important
15,9
9,2
17,9
40%
60%
7,1
28,7
80%
100%
5 - very important
Source: Grat and Sobolewski (2005)
Hurdles caused by additional informational duties were declared by only 12.6 percent
of companies. More than a half of companies do not perceive fixed costs related to an
IPO as an important motivation to stay private, which is rather surprising taking into
account all direct and indirect costs indicated by Ritter (1998).
2.3.4 Effects of an IPO
Polish companies’ expectations for IPO were met only partially. Although 70 percent
of companies confirmed that IPO increased credibility of their company, which was
the second most frequent reason for going public, only 30 percent of companies
managed to achieve their primary goal, which is additional financing (graph 10). The
41
marketing effect seems to be achieved as over half of the companies state that IPO
increased recognition of the firm and its products. Every fifth company indicated also
a more visible management system as a benefit of an IPO. 75 percent of companies
state that they managed to achieve the main aims and are satisfied with the effects of
an IPO. Moreover, taking into account all advantages and disadvantages of going
public, managers state that they would have made the same decision again.
Graph 10 Areas where the company gained the most through IPO.
70%
increased credibility
increased recognition of a company and its
brands
52%
30%
access to new sources of financing
19%
more visible management system
15%
other
0%
20%
40%
60%
80%
Source: KPMG, 2006: “Destination: Stock Exchange. The Process of Going Public at
the Warsaw Stock Exchange between 2004 - 2006”.
The above cited surveys, conducted among Polish companies, indicate that the stated
motives for going public and concerns associated to the public issue correspond to the
theory of the going public decision. Polish companies state that they go public to
obtain financing for future development and are most concerned about the disclosure
of confidential information to the public. However, as previous empirical evidence
suggests the motives stated in prospectuses and cited by company’s insiders do not
necessarily correspond to the true motives and effects of an IPO. Thus, the rest of the
paper focuses on empirical analysis of determinants and consequences of the initial
public offering in Poland allowing for comparison of theory, survey results and
empirical results obtained on other markets.
42
Chapter 3 Methodology and data description
Methodology and data description
The analyses of motives and consequences of a decision to go public are based on the
methodology previously employed by Pagano et al. (1998) and Chun and Smith
(2002). Pannemans (2002) and Fisher (2000) have also investigated the subject,
however they focused on determining motives of an IPO decision and did not actually
check the results of an issue in the long-run. As Pagano et al. (1998) noticed, both ex
ante and ex post analysis is necessary because ex post information complements the
evidence on the ex ante characteristics of the IPO companies. If motives of going
public declared by managers before an issue are true, the determinants identified in
the ex ante analysis should correspond to effects of an IPO. For example, if
management of a company states that the main reason for going public is to obtain
capital for further development and investments, this should result in increases in
tangible and/or intangible assets after an IPO. This paper aims at discovering both the
motives of an IPO and its consequences on a company’s investment and financial
policy after an issue. Therefore, the results of the research into the Polish market are
comparable with other European markets and add additional insights to the IPO
literature.
3.1 Ex ante analysis
What is the probability that something will occur, and how is that probability altered
by a change in some independent variable? It is especially interesting to discover the
probability that a firm will go public in a given year and variables that have an impact
on this decision. It is possible to observe only two states for a company: private or
public. Since number of economic issues investigated by scientists is measured in
noncontinuous ways and for this reason cannot be analyzed using a classical
regression model, it is necessary to model the likelihood that an event will occur.
Logit and probit are two most common techniques for estimation of models with a
dichotomous dependent variable. I describe both models with a special focus on the
probit model, which is employed further in the analysis. The models are described
based on Greene (2003) textbook for econometrics.
43
3.1.1 Binomial choice models
In multiple economic issues a dependent variable is a discrete variable, for example a
company has received a credit or not, accepts payments in foreign currency or not, is
bankrupt or not. In such cases the dependent variable is represented by dichotomous
variable, which takes value yit = 1, if an event occurs with probability pit. In such a
case the expected value of dependent variable equals:
E(yit) = 1 · pit + 0 · (1 - pit) = pit
(1)
and is usually modelled as a function of some independent variables:
pit = prob[yit = 1] = E(yit xit) = F(xit’ β )
(2)
The right site of this equation has to be found.
The simplest approach is to use OSL regression:
F (xit’ β ) = xit’ β
(3)
However, Linear Probability Models (LPMs) have limitations. Firstly, stochastic
disturbance is heteroscedastic, taking the value either (- xit’ β ) with probability (1- F),
or (1 - xit’ β ) with probability F, and thus we have:
var ( ε it
xit) = xit’ β (1 - xit’ β )
(4)
which shows that the variance of disturbances is not equal for all individuals.
However, the most serious disadvantage of the LPM approach is that estimated
probabilities can be less than 0 or greater than 1. Such a model produces both
nonsense probabilities and negative variances (see the formula for variance of
disturbances above). A solution to this problem might be a use of cumulative
distribution function for a given distribution, as it results in limitation of F(xit’ β ) to
44
the desirable from the point of view of the probability theory range [0, 1]. Commonly
used CDF functions are logistic CDF (logit model) or standard normal CDF (probit
model).
Binary variable might be also used, when dependent variable is continuous but
unobservable. For example, a person decides to accept a job offer if the offered salary
(yit*) exceeds a certain level:
yit = 1 if yit* > 0 and yit = 0 if yit* ≤ 0, where: yit* = xit’ β + ε it
(5)
Thus, we have: prob (yit = 1) = prob (yit* > 0) = prob ( ε it > - xit’ β ) = F (xit’ β )
(6)
Probit model: F (xit’ β ) = Φ (xit’ β ) =
Logit model: F (xit’ β ) = Λ(xit’ β ) =
∫
xit 'β
-∞
e xit 'β
1 + e xit 'β
1
2π
e −u
2
/2
du
(7)
(8)
Both the logit and the probit regression models are estimated by maximum likelihood.
Consequently, goodness of fit and inferential statistics is based on the log likelihood
and chi-square test statistics.
The idea behind maximum likelihood parameter estimation (MLE) is to determine the
parameters that maximize the probability (likelihood) of the sample data. Usually,
when specifying a probability density function (e.g. a normal with unknown mean µ
and unit variance), we treat the probability density function (PDF) as a function of z
(the value of the random variable) with the distribution parameters Θ assumed to be
known. With maximum likelihood estimation, we reverse the roles of the observed
value and the distribution parameters by asking: Given a vector of observations z,
what can we say about Θ ? To specify this alternative interpretation, the density
function is denoted as λ ( Θ | z), the likelihood of Θ given the observed vector of data
z. This defines a likelihood surface, as λ ( Θ | z) assigns a value to each possible point
in the Θ -parameter space given the observed data z. The maximum likelihood
estimate of the unknown parameters, Θ̂ , is the value of Θ corresponding to the
45
maximum of λ ( Θ | z), i.e., the MLE is the value of Θ that is “most likely" to have
produced the data z.
Probit and logit models are among the most widely used members of the family of
generalized linear models in the case of binary dependent variables. The conventional
wisdom is that in most cases the choice of the link function is largely a matter of taste.
According to Amemiya (1981) in the univariate dichotomous model, it does not
matter whether we use a probit or logit model, except in cases where data are heavily
concentrated in tails. Liao (1994) states that either model gives identical substantive
conclusions in most applications. Moreover, he argues that multiplying a probit
estimate by a factor of π / 3 = 1.814 one will get an appropriate value of the
corresponding logit estimate. Graph 11 gives an example of predicted probabilities for
logit and probit.
Graph 11 The predicted probabilities for logit and probit.
Source: Gruszczynski (2002)
Chambers and Cox (1967) discuss in detail similarities and differences between both
models and conclude that it is only possible to discriminate between the two models
when sample sizes are large and certain extreme patterns are observed in the data.
Nevertheless, Noreen (1988) notices that probit models seem to be preferred and more
frequently used than logit models in recent accounting classificatory studies. I decided
to use probit model following Pagano’s et al. (1998) approach.
46
The probability model is a regression:
E [y | x] = 0[1 - F (x’ β )] + 1[F (x’ β )] = F (x’ β )
(9)
It is important to note that the parameters of the model, whatever distribution is used,
are not marginal effects – they only show the qualitative, but not the quantitative
impact of an independent variable on the probability, that the binary dependent
variable will be equal to 1. Marginal effects have to be computed to measure the
quantitative effect and there are two approaches for doing so: evaluate the expressions
at the sample means of the data or evaluate the marginal effects at every observation
and use the sample average of the individual marginal effects. As Greene (2003)
notices, current practice favours averaging the individual marginal effects when it is
possible to do so.
The appropriate marginal effect for a binary independent variable d, would be:
Marginal effect = Prob[Y=1| x(d ) , d = 1] – Prob [Y=1| x(d ) , d = 0],
(10)
where x(d ) , denotes the means of all the other variables in the model, excluding
variable d.
The main challenge with the logit and probit is the interpretation of the estimated
regression function. The first step in interpretation is to test and describe the overall
goodness of fit of the model. In maximum likelihood approaches, the common
method is to examine the difference between the residuals of the model under the
constraint that all regression coefficients are zero and the residuals where the
coefficients are estimated from the sample data. The reduction in the "badness of fit"
as a result of freeing parameters for each X can be tested as a chi-square statistic with
as many degrees of freedom as freed parameters.
47
Likelihood ratio test
Maximum likelihood provides for extremely convenient tests of hypotheses in the
form of likelihood-ratio that examine whether a reduced model provides the same fit
as a full model. The likelihood-ratio test statistic is given by:
LR = -2 [ln L̂R - L̂U ] ~ χ 2 (r),
(11)
where r is the number of restrictions imposed on a full model, L̂R and L̂U are the loglikelihood functions evaluated at the restricted and unrestricted estimates,
respectively. A common test, which is similar to the F test that all the slopes in a
regression are zero, is the likelihood ratio (LR) test that all the slope coefficients in
the probit or logit model are zero. For this test, the constant term remains unrestricted.
Pseudo R-squared
In contrast to OLS regression where R-squared is the common measure of goodnessof-fit, for binary choice models, such as logit and probit, there is an abundance of
measures (Cameron and Windmeijer, 1997). R-squared is not an appropriate indicator
of goodness-of-fit within a qualitative dependent variable model because the predicted
values of the dependent variable are probabilities, while the actual values are either
zero or one (for a dichotomous dependent variable). The most frequently used
measure of goodness-of-fit used for binary choice models is the likelihood ratio index,
commonly known as pseudo R-squared or McFadden R-squared:
pseudo R-squared = 1 –
ln L
ln L0
(12)
The pseudo R-squared measures the success of the model in explaining the variations
in the data. The pseudo R-squared is calculated depending upon the likelihood ratio.
The McFadden's R-squared compares the likelihood for the intercept only model to
the likelihood for the model with the explanatory variables in order to assess the
model goodness of fit. The pseudo R-squared indicates that the proportions of
48
variations in the outcome variable are accounted for by the explanatory variables. The
larger the pseudo R-squared the better the model fitting. McFadden's R-squared can
be as low as zero but can never equal one.
3.1.2 Probit model and the explanatory variables
In order to analyze the determinants of the likelihood of going public in Poland, the
probit model is used, following Pagano et al. (1998) methodology. The dependent
variable (IPO) is a qualitative attribute and it equals 1 if the company goes public in
the analyzed period, and 0 if the company remains private. F(.) is the cumulative
distribution function of a standard normal variable. The sample is restricted to all
company-years that satisfy the listing requirements as of that year.
The decision to go public is affected by a broad range of factors described in
international literature and cited in chapter 1. However, not all of the theories about
factors behind an IPO decision have testable implications and it is virtually not
possible to capture all of them in a single model. Thus, for the purpose of this thesis I
focus on those determinants that can be tested on data available for Polish IPO and
private companies.
The following set of independent variables, captured in the probit model, was selected
to test the hypotheses about the reasons for going public:
P (IPO it =1) = F ( β 1 AGE it −1 + β 2 SIZE it −1 + β 3 GROWTH it −1 +
(13)
+ β 4 INVEST it −1 + β 5 LEVER it −1 + β 6 INTAN it −1 +
+ β 7 ROA it −1 + β 8 MTB it + β 9 MTB it −1 + β 10 GDP it −1 +
+ β 11 INF it −1 + β 12WIG it + β 13WIG it −1 )
where:
AGE – firm’s maturity measured by the number of years from incorporation till IPO.
SIZE – firm’s size is measured by the logarithm of assets.
GROWTH – firm’s annual growth rate in sales computed as sales in year t minus
sales in year t-1 divided by sales in year t-1.
INVEST – firm’s growth rate of fixed assets.
49
LEVER – firm’s leverage measured as the value of total debt over total debt plus
equity.
INTAN – a ratio of firm’s intangible assets over total assets.
ROA – firm’s profitability measured as EBITDA (earnings before interest, taxes,
depreciation, and change of provisions) over total assets.
MTB - market-to-book ratio in the industry as computed by the WSE.
GDP – Polish gross domestic product growth (y-o-y) as computed by the Central
Statistical Office (GUS) www.stat.gov.pl.
INF – Polish inflation rate as computed by the GUS.
WIG – Warsaw Stock Exchange WIG INDEX, which is a total return index which
includes dividends and pre-emptive rights (subscription rights). Index includes all
companies listed on the main market, excluding foreign companies and investment
funds. The index base value is 1000.00 as of April 16, 1991.
I decided to use first lags of the year-end accounting data in order to avoid the timing
problem noticed by Chun and Smith (2002). The main reason of the timing problem is
that the data available for Polish IPO and private companies are presented in year-end
accounting numbers but they do not measure IPO firm characteristics properly as IPO
may have happened at any time during the year. The use of first lags of the year-end
accounting variables would incorporate both ex ante determinants and effects of the
IPO, especially when the firm goes public at the beginning of the year. The use of first
lags of the year-end accounting variables as independent variables eliminates the
timing problem.
The hypotheses about the reasons for going public are created based on the theoretical
predictions widely discussed in international literature and prior empirical findings.
Hypothesis 1
Company size and maturity is positively correlated with the decision to go public.
It is commonly assumed that stock market is a place for big and mature companies.
Young companies, with a short track record and instable market position, remain
under the influence of adverse selection (Chemmanur and Fulghieri, 1999). Mature
companies are in a better position and may reduce the adverse selection problem
50
providing longer historical records (Ritter, 1991). According to Pastor and Veronesi
(2003), younger firms pose a greater valuation problem, and uncertainty about their
future profitability is greater than that of older companies because uncertainty
declines with time.
The size of a company seems to be related to the probability of going public for at
least two reasons. Firstly, IPO is related with considerable and rather fixed costs
unrelated to the company’s size and in the case of small companies issue costs
consume a large fraction of proceeds (Yosha, 1995; Pagano and Roell, 1998). For this
reason it is expected that small companies are less likely to go public. Secondly, small
companies have more problems with selling their shares at the IPO as investors focus
their attention rather on large companies. The main reason is that trade volumes of
small firms are smaller than the trade volumes of large companies and it is more
difficult to buy and sell shares of small companies. As liquidity of a company’s shares
is a function of its trade volume, only sufficiently large companies may benefit from
such liquidity gains (Pagano et al., 1998). For this reason one may predict that larger
firms are more likely to go public.
Hypothesis 2
Financing needs positively influence the likelihood of going public.
The firm’s development depends on financing sources. The realization of a
company’s investment plans and strategy of fast growth require substantial funds.
Thus, it is not surprising that obtaining financing capital is one of the most frequent
IPO reasons mentioned in prospectuses. Rydqvist and Hogholm (1995) find that 97
percent of Swedish companies stated in prospectuses that they go public because of
financing reasons. In order to assess whether financing needs influence the decision to
issue equity, two variables are used as a proxy for investment opportunities. The first
one is investments in fixed assets (INVEST). Chun and Smith (2002) state that the
growth rate of fixed assets measures the company’s needs for direct productive
investments funds that enable a purchase of a plant and equipment, which increases
the probability of an IPO. The second proxy is a firm’s annual growth rate in sales
(GROWTH). If firms go public to finance investments and growth, these two
variables should be positively related to the probability of an IPO.
51
Hypothesis 3
High leverage positively influences the decision to go public.
International literature presents an ambiguous relationship between the leverage and
the probability of an IPO. On the one hand, the stock market represents an important
source of outside equity for companies that have already financed their investments
by debt, are highly leveraged, and for whose liquidity further debt financing would be
dangerous. Myers (1977) argues that highly leveraged firms with investment
opportunities should be more likely to go public. Moreover, highly leveraged
companies are easier and cheaper for investors’ evaluation as they have already
undergone the scrutiny of bank lenders (Harris and Raviv, 1990). On the other hand,
highly indebted firms bear a greater risk and this is why investors may be reluctant to
inject equity in such a company (Gill de Albornoz and Pope, 2004). Helwege and
Packer (2003) findings indicate that indeed highly leveraged firms are likely to be
rather private than public.
The summary statistics of independent variables that will be used in the analysis,
presented later in the chapter (section 3.3.3), demonstrate that an average IPO
company one year before going public is more leveraged than an average private
company. This makes one expect that there may be a positive relation between the
leverage (LEVER) and the likelihood of the IPO.
Hypothesis 4
More risky companies are more likely to go public.
Diversification is believed to be one of the motives influencing the decision to go
public because when the ownership is dispersed, the risk is shared by the large
number of well-diversified investors (Pagano, 1993; Roel, 1996; Chemmanur and
Fulgheri, 1999). Thus, IPO is a perfect opportunity for initial owners to diversify as
they may divest from the company and reinvest in other assets or they may raise a
fresh capital after an IPO and acquire stakes in other companies (Pagano et al., 1998).
Fisher (2000) was the first to test the relationship between diversification and the
probability of going public using intangible assets over total assets (INTAN) as a
proxy for the company risk. The high proportion of intangible assets (such as patents
52
or other usage rights) and their positive impact on the probability to go public is not
surprising in the case of technological firms listed on the Neuer Markt in Germany.
However, the positive relation between intangibles and probability of the IPO has also
been found for companies that went public on other segments than Neuer Markt of the
Frankfurt Stock Exchange (Fisher, 2000) and in the UK (Gill de Albornoz and Pope,
2004). Thus, this paper will test this relationship with regard to the Polish market.
Hypothesis 5
The high market-to-book ratio of companies in the same industry increases the
company’s propensity to go public.
Ritter (1991) suggests that the high market-to-book ratio (MTB) in the industry
indicates that securities are overpriced. It is easier for issuers to attract optimistic
investors. This gives an incentive for other companies in the same industry to go
public in order to take advantage of this “windows of opportunity”. However, such a
myopic behaviour has a negative impact on the long-run performance. Loughran and
Ritter (1995) found evidence that companies which went public during the “hot
market” in order to take advantage of investors’ over-optimism usually underperform
in the long-run. On the other hand, high MTB ratio may indicate that investors have
high expectations about the growth opportunities in the industry (Pagano et al., 1998).
If these opportunities require large investments, companies go public to gather the
necessary funding. Chun and Smith (2002) argue that if indeed growth opportunities
stay behind the high MTB ratio, companies should record a higher growth and profits
after the IPO. If growth and profit do not increase after an issue, it seems to be the
firms’ opportunistic behaviour that makes them go public and this confirms the
“windows of opportunity” hypothesis.
Apart from the MTB ratio which measures the market mood in the industry, the yearly
WIG index is also used as a measure of the overall market mood at the Warsaw Stock
Exchange. Every year, industry MTB ratios as well as WIG data are taken from the
multiple issues of the Warsaw Stock Exchange Fact Book and the WSE statistics
(appendix 1) respectively.
53
Hypothesis 6
Profitability positively influences the decision to go public.
The relationship between the profitability and the probability of going public is not
straightforward. Fisher (2000) argues that high cash flows make a company more
independent from external investors and relax its financing constrains, thus profitable
companies which are able to finance their investments and growth stay private. This is
in line with Pagano and Roell’s (1998) view that external sources of financing are
relevant for firms that are not able to generate sufficient internal cash flows. This
indicates a negative relation between profitability and probability of an IPO.
However, in light of the market timing hypothesis presented by Ritter (1991), an
increase in profitability may be only temporary and this encourages companies to go
public to capture the “window of opportunity”. The results of studies of the long-run
performance demonstrating that profitability of IPO firms usually decreases after an
issue (Jain and Kini, 1994; Mikkelson and Shah, 1994; Mikkelson et al., 1997) seem
to confirm Ritter’s (1991) view. Profitability is measured as the return on assets
(ROA).
Hypothesis 7
Macroeconomic conditions have an impact on the decision to go public.
According to Dzwonkowski (2006), the development of any stock exchange, which is
an instrument of the financial market, is coupled with a country’s economic
development. At the same time, the economic growth rate depends on the shape and
the state of the financial market in that country. Periods of favourable macroeconomic
conditions create new development opportunities and help companies in achieving
good financial results. This results in increases of stock prices, indices and investors’
valuations, and it creates favourable conditions for companies to go public. When
times are good, an average firm’s quality is higher as there are more profitable
investments opportunities, so problems of adverse selection are reduced, which means
that the cost of going public is lower in upturns (Choe et al. 1993). However, when
times are bad there are less interesting projects to invest in and firms postpone the
stock issue until the economic conditions improve. Thus, it is expected that changing
macroeconomic conditions influence the economic performance of the Polish
54
companies and their propensity to go public. Macroeconomic conditions are measured
by lagged inflation (INF) and lagged GDP growth (GDP), both reported in the
appendix 2. The decision to use lagged, instead of current, values is intuitive as both
measures of macroeconomic conditions are observable and reported only with a lag.
Table 4 summarised hypothesis about the factors influencing the likelihood of an IPO,
that will be tested empirically.
Table 4 Summary of hypotheses about the factors that influence the likelihood of
an IPO.
Factor
Relationship
Hypothesis 3
SIZE,
AGE
INVEST,
GROWTH
LEVERAGE
Hypothesis 4
INTANG
Company size and maturity is positively correlated with the
decision to go public.
Financing needs positively influence the likelihood of going
public.
High leverage positively influences the decision to go
public.
More risky companies are more likely to go public.
Hypothesis 5
MTB,
lagged MTB,
WIG,
lagged WIG
ROA
High market-to-book ratio of companies in the same
industry increases the company’s propensity to go public.
The market mood has an influence on the decision to go
public.
Profitability positively influences the decision to go public.
GDP,
INF
Improving macroeconomic conditions have a positive
impact on the decision to go public.
Hypothesis 1
Hypothesis 2
Hypothesis 6
Hypothesis 7
Source: Author’s analysis
3.2 Ex post analysis
The ex post analysis is aimed at complementing the determinants of IPO uncovered in
the ex ante analysis. By comparing the ex post performance of the companies that
went public with companies that stayed private it is possible to capture the motives
that are unobservable in the ex ante analysis e.g. the investment and debt policy after
an IPO. Following Pagano et al. (1998), fixed-effects regressions are employed in
which the consequences of an IPO are captured by dummy variables for the IPO year
and the three years following the stock issue. For panel data sets, the fixed-effects
model assumes that differences across units can be captured in differences in the
55
constant term and therefore a firm before the IPO is used as a control for itself after
the IPO.
The fixed-effects regressions are aimed at discovering the impact of the decision to go
public on various accounting variables and measures of performance. However, it is
important to note that changes in the accounting variables cannot be explained solely
by the IPO decision. A broader set of explanatory variables is necessary, separately
constructed for each accounting variables. Pagano et al. (1998) estimated the models
using a larger list of explanatory variables and, although they report neither the list of
those variables nor the results, concluded that in most of the cases the results were
qualitatively similar to the results obtained for models capturing only IPO effects.
Since the aim the ex post analysis is to compliment the ex ante analysis and discover
the consequences of the IPO on firms operating performance, I made an assumption
that whatever additional variable is used to explain the accounting variables, the
results obtained are similar to those that capture only the decision to go public.
The following specification is used in the ex post performance analysis:
yit = α +
3
∑ β IPO
j
j =0
t− j
+ β 4 IPOt −n +
3
∑γ
j
QUOTt − j + ui + ε it
(14)
j =0
where yit is the ith accounting variable in the tth period. IPOt − j are dummy variables
equal to 1 if year t-j was the IPO year, IPOt − n is a dummy variable equal to 1 of the
IPO took place more than three years before and QUOTt − j are dummy variable equal
to 1 if company ith satisfied the listing requirements the year t - j. Firm-specific effects
are included (ui ).
In general, it is expected that companies are better off after an IPO, otherwise they
would not have gone public. However, results of prior empirical studies indicate that
the operating performance of IPO companies decreases with time (Jain and Kini,
1994). In theory, effects of an IPO should correspond to the motives of going public.
Thus, the analysis of motives of an IPO decision helps to develop a set of predictions
about the effects of an IPO, which are tested with the fixed-effects model.
56
Hypothesis 8
IPO reduces the leverage of publicly traded companies.
One of the main benefits of going public is obtaining an alternative to the bank credit
source of financing (Pagano et al., 1998). IPO enables companies to gather necessary
funds to finance their needs. This is why it is expected that one of the consequences of
an IPO would be a reduction of the debt exposure.
Hypothesis 9
IPO has a positive effect on a company’s investments.
It is common view that companies go public to finance their growth and investments
(Rindqvist and Hogholm, 1995; Roell, 1996). Thus, it is expected that after going
public companies will show increases in their investments in fixed and/or intangible
assets.
Hypothesis 10
IPO has a positive effect on a company’s sales growth.
According to Stasiuk (2004), going public is a means of publicity and promotion for a
company. A firm receives a lot of public interest already at the stage of pre-IPO
preparations and every day it draws mass media attention as it is quoted on a stock
exchange. Moreover, as Stoughton et al. (2001) notice, consumers learn about the
product quality of the firm from the stock market and therefore good firms can charge
higher prices for their products. Thus, it is expected that publicity and promotion
gained by a public company will result in a larger clients’ database and larger sales
after an IPO.
Hypothesis 11
IPO has a negative effect on a company’s profitability.
According to Ritter (1991), companies that show high profitability are suspected of
going public when their good performance is temporary. Moreover, entrepreneurs
may engage in creative “earnings management” at the time of the IPO (DeGeorge and
57
Zeckhauser, 1993) and they go public when they know that this high profitability
cannot be sustained in the future. This is what may cause a decline in the profitability
in the long run. However, Pagano and Roell’s (1998) propose contrary expectations
about the relation of profitability and probability of an IPO: companies go public
when they are not able to generate sufficient internal funds to finance their
investments. Although predictions about the influence of profitability on the IPO
decision are contrary, the expectation about the result of an IPO in any case seems to
be unambiguous. No matter what that the relation between profitability and a firm’s
propensity to go public is, one may expect in any case the post-IPO profitability will
decrease. Firms, that have recorded high profitability levels will not be able to
maintain this high level in the long run while firms that were not able to finance their
needs from internal sources before an IPO, after the IPO will be unlikely to succeed
either. Table 5 summarises the hypothesis that will be tested in the ex ante analysis.
Table 5 Summary of the expected effects of an IPO
Hypothesis
Expected effect
Hypothesis 8
IPO reduces the leverage of publicly traded companies.
Hypothesis 9
IPO has a positive effect on a company’s investments.
Hypothesis 10
IPO has a positive effect on a company’s sales growth.
Hypothesis 11
IPO has a negative effect on a company’s profitability.
Source: Author’s analysis
3.3 Data sources and sample characteristics
3.3.1. Data sources
In order to analyze the probability that a Polish company will go public, a database is
built consisting of financial and accounting data. The database is constructed based on
two main sources of data. Financial reports of Polish private companies come from
the AMADEUS database that contains financial information on approximately 8
million public and private companies in 38 European countries. The database provides
records of companies for up to 10 last years. Unfortunately, in the case of companies
from the CEE countries, this database is not as comprehensive as for companies from
58
Western Europe. In many cases the continuity of year by year financial data is not
sustained. Thus, the reference sample of Polish private companies is reduced
substantially to 650 companies for which at least 4 years of consequent financial data
is available. The maximum 10 years of data available, with a one year delay, also
limits the time framework of this study to the period from 1995 to 2004.
Information about Polish companies that are or used to be traded on the WSE comes
from the AMADEUS and NOTORIA databases. Financial reports of publicly traded
companies available at these two databases correspond to each other; however
NOTORIA provides also data on companies that are no longer traded on WSE. Thus,
the sample includes IPOs which were delisted before their three-year anniversary,
which is especially important for the analysis of IPO consequences.
The accounting and financial data has been used in absolute values and as ratios.
Absolute values are in real terms, obtained by discounting nominal values by inflation
to the real values as of 1994. Information about inflation and GDP growth come from
the Central Statistical Office (appendix 2). The value of shareholders equity was used
in nominal terms for the purpose of reference sample construction based on minimum
shareholders’ equity requirement as of that year. WSE index values were gathered
from the WSE (appendix 1).
3.3.2. The sample
3.3.2.1 The IPOs sample
The ex ante analysis encompasses 127 Polish private companies that went public
during the period of 1997 - 2004. The range of data used in the analysis contains
financial and accounting information starting from 3 years before going public till the
issue year. In the ex post analysis the data ranges from the IPO year till 2004, or
earlier if the company has been delisted.
Dudko-Kopczewska (2004) has analysed Polish IPOs during the period of 1992 2001, which covers the first ten years of the WSE's operations (in 1991 there were
only privatization IPOs). This study partly overlaps Dudko-Kopczewska’s (2004)
59
sample, however it is superior in two aspects. Firstly, it includes companies that went
public in 2004, during the second biggest wave of IPOs at the WSE (the first wave
dates back to 1997-1998). This allows a closer look at the factors influencing the
decision to go public, especially from the “windows of opportunity” hypothesis
perspective. Secondly, and most importantly, the sample period of IPO companies
corresponds to the sample of companies that remained private during the same period,
which is lacking in the Dudko-Kopczewska’s (2004) study. Thus, I am able to
complement her analysis and cast additional light on the determinants and
consequences of the decision to go public in Poland. Table 6 presents summary
statistics of companies listed on WSE during the period of 1997 -2004.
Table 6 Summary statistics of companies listed on WSE (1997 – 2004).
Year
Number of listed
companies
1997
1998
1999
2000
2001
2002
2003
2004
TOTAL
of which
foreign
127
182
205
209
213
199
186
213
0
0
0
0
0
0
1
5
Number of new Number of
listings
delistings
46
2
57
2
28
5
13
9
8
4
5
19
6
19
36
9
199
Source: Warsaw Stock Exchange statistical data, www.gpw.com.pl
However, not all companies traded on the WSE have been included in the analysis.
Out of 199 companies that went public during the period of 1997-2004, the following
companies were excluded:
-
National Investments Funds (NFIs) (26 companies)
-
Financial institutions, such as banks and insurance companies (9 companies)
-
Privatization companies with state origins (23 companies)
-
Foreign companies listed on WSE (5 companies)
-
Companies for which the track record of pre-IPO financial data is incomplete
(9 companies)
60
Financial companies were excluded due to differences in balance sheet structure that
make them incomparable with non-financial companies.7 Because one of the
objectives of this thesis is to find determinants that have an impact on a company’s
decision to issue equity, it is required that the company’s management is allowed to
make this decision without any political influences. Privatization and NFI companies
do not meet this requirement as according to Perotti (1995) and Biais and Perotti
(2002), share issue privatizations (SIPs) can be structured in a way to help achieve
various government objectives. Jones, Megginson, Nash and Netter’s (1999) study of
59 country samples of 630 share issue privatizations revealed that governments
consistently undertake various actions, such as underpricing, favouring domestic
investors, imposing control restrictions on privatized firms etc., in order to achieve
political and economic policy objectives. This is why one cannot expect that factors
behind the decision to go public are the same for private and privatization IPOs. As a
result 127 companies were included in the IPO sample.
Table 7 presents distribution of the IPO sample by year and industry. A large
clustering of IPOs in certain years and industries is noticeable. Out of the 127 IPOs,
81 (63 percent) occurred during 1997 and 1999. There is also a clustering of some 47
percent of IPOs (60 firms) in just thee industries: trade, IT and construction materials.
Table 7 Distribution of IPOs by year and industry
Metal processing
Media
Communal services
IT
Construction materials
Chemical
Wood
Light industry
Automotive
Telecommunication
Food
Engineering and
machining
Construction
Trade
TOTAL
1997 1998 1999 2000 2001 2002 2003 2004
3
1
2
2
1
2
1
1
2
1
2
1
4
4
3
3
5
2
3
1
1
2
2
2
2
1
2
1
1
1
1
1
1
1
4
6
1
2
1
3
4
1
22
4
9
4
39
1
4
6
20
1
7
2
1
3
2
5
2
6
6
26
TOTAL
8
7
3
20
11
7
1
2
2
2
14
10
17
23
127
Source: Author’s calculations
7
The case of financial companies that decided to go public has been investigated by Rosen, Smart and
Zutter (2005).
61
3.3.2.2. The reference sample
The reference sample consists of private non-financial companies that were able to go
public because they met all quantitative listing requirements but they decided to stay
private. Pagano et al. (1998) considers a company to have at least a minimal
probability of going public when it meets the requirement of minimal shareholders’
equity of 5 billion lire (USD 3.2 million). However, Fisher (2000) criticizes the use of
shareholders’ equity as a selection criterion. He points out that the equity balance
sheet is changeable and many issuing companies use so-called bridge financing
provided by specialized financial intermediaries in order to increase their equity
position in the year before an IPO. Nevertheless, I decided to form the Polish sample
of private companies based on the minimal shareholders’ equity criterion, which is in
line with the official WSE listing requirements. The company is considered to have a
minimum probability to go public in any year at which it exceeds the required
equivalent of EUR 1 million, which is approximately PLN 4 million.
The main conditions that a company has to meet in order to be admitted to the main
market are specified in the Warsaw Stock Exchange Charter and Regulation of the
Minister of Finance dated October 14th, 2005 on Detailed Requirements for an
Official Stock-Exchange Listing Market and Issuers of Securities Admitted to Trading
on Such Market (Journal of Laws No. 206, item 1712). However, the Warsaw Stock
Exchange's rules and regulations regarding listing requirements were changed already
on 1 May 2004, when Poland joined the European Union. Since that time there are
two markets on the Exchange: main and parallel. Before 1 May 2004 the free market
also existed. Appendix 3 presents listing requirements that had been in force till 1
May 2004.
In the sample covering the period of 1982-1992, Pagano et al. (1998) includes only
the companies that met the requirement of minimal shareholders’ equity as of 1982,
and the companies that had already been established that year. I will be less severe.
Firstly, taking into account the changes in listing requirements I assume that a
company may have gone public at any market (main, parallel or free) at any point in
time at which it met the PLN 4 million shareholders’ equity requirement. Secondly,
Pagano’s et al. (1998) restriction regarding the age as of 1982 means that IPO
62
companies were older than private companies as there were no age restriction for the
latter. Yet, Pagano et al. (1998) do not empirically check the relation between the age
and the probability of going public. This is however one of the hypotheses tested in
this paper so in order to check the relation I do not make any restriction regarding a
company’s age or date of its incorporation. As a result, the whole reference sample is
made up of the company years from 1995 to 2004 of 573 privately held companies
that met the requirement of minimum shareholders’ equity (requirement 1).
The analysis of the reference sample shows a substantial size bias between the preIPO and the reference sample (table 9). Thus, to improve the comparability of samples
an additional size and industry matched reference sample is constructed. The
procedure for size matching is based on assets. Firstly, companies in the reference
sample have to meet the PLN 4 million shareholders’ equity requirement (requirement
1). Than a private company is included in the size matched reference sample if in a
given year and industry had assets equal to or higher than the minimum assets of a
private company went public (requirement 2). The aim of such an approach is to find
companies that apart from meeting the official listing requirements are at least as big
as companies that went public.
The international literature on IPOs presents various approaches to constructing size
matched reference samples. For example, Pannemans (2002) used the procedure for
size matching based on sales of the IPO company in the year before going public
while Fisher (2000) simply cut back the 20th percentile of the smallest companies in
the reference sample to make IPO and non IPO companies more comparable in size.
However, it is virtually not possible to find exact matches for each IPO company and
researchers are usually constrained from making more general assumptions.
3.3.3 Summary statistics
Table 8 presents summary statistics of company size measures. A median IPO
company has many more people employed both in the IPO year and one year before
the issuance than an average potential IPO firm.
63
Table 8 Summary Statistics of Company Size Measures
Panel A consists of 127 companies that went public during 1997 – 2004 and shows the size measures as
of the IPO year. Panel A1 and A2 consists of the same IPO sample and shows size measures for year 1
and 2 before floatation, respectively. Panel B consists of average size measures of the reference sample
that consists of 573 privately held companies that may have gone public during the same period, which
means that they meet requirement 1. Panel C presents average size measures of size and industry
matched reference sample that consists of 282 private companies that meet requirement 1 and have
assets at least as big as assets of IPO companies that went public. All amounts are in thousands of PLN.
Panel A
Employees
Sales
Total
Solvency
Net
Equity
Panel A1
Employees
Sales
Total
Solvency
Net
Equity
Panel A2
Employees
Sales
Total
Solvency
Net
Equity
Panel B
Employees
Sales
Total
Solvency
Net
Equity
Panel C
Employees
Sales
Total
Solvency
Net
Equity
Mean
Median
Std. Dev.
Min
Max
Obs.
539.189
76214.72
75506.8
55.78888
1598.565
79404.6
327
45867.36
36829.46
60.3381
2183.231
41079
1004.49
93131.07
189182
50.9694
23501.27
146518.4
4
53.90411
4066.708
-470.685
-236129.1
4937
10840
547094.5
1941180
95.90089
71613.66
1219616
127
127
127
127
127
127
591.3858
65676.09
58261.08
45.45435
2091.418
47014.51
344
37364.86
25311.85
48.40356
1985.884
21583
905.6177
78958.63
159473.9
47.14183
16933.34
110840.2
7
347.9972
3080.192
-413.9235
-173186.1
-1253
9000
475575
1640887
100
49645.13
949817
127
127
127
127
127
127
567.8548
57929.67
39957.05
45.97525
2230.869
29269.3
334.5
30453.06
18595.83
43.47534
1182.305
12799.5
766.0908
69389.35
83344.45
23.22559
11126.52
92447.51
6
1016.057
2252.025
-22.5997
-90573.37
-92924
7000
337809.9
761579.5
100
48659.7
984218
124
124
124
124
124
124
339.8858
45006.94
28530.99
51.50974
1463.414
29989.69
200
27003.39
13981.29
51.19473
573.1295
13080
391.1766
90238.26
123436.1
20.92238
11710.15
124323.2
1
847.1693
0.0092443
3.075312
-30737.01
4001
4000
2400497
34135664
100
385994.7
4095213
3468
3468
3468
3468
3468
3468
437.9874
76565.82
53926.83
49.20622
3224.02
52269.69
349.5
50480.58
28717.67
49.53912
1164.919
23376
457.4102
143024.7
195421.3
21.93779
20819.44
192482.3
1
1411.42
5427.01
3.328743
-29396.73
4073
4000
2400497
3413564
100
385994.7
4095213
554
554
554
554
554
554
Source: Author’s calculations
64
However, the typical IPO company seems to reduce its employment in the year of
going public, which is rather surprising and contrary to Belgian (Pannemans, 2002)
and German (Fisher, 2000) companies’ employment strategy after an IPO.
The typical IPO company reports large sales and assets increases when comparing to
two years before going public and the IPO year. Moreover, a median IPO company
one year before floatation has sales almost 1.4 times as large and assets 1.8 times as
large as a median potential IPO. The solvency ratio that reflects a company's ability to
meet its long-term obligations, calculated as total net worth divided by total assets,
increases when consequent years before an IPO are compared. However the solvency
ratio is higher for a potential IPO company than for an IPO company one year before
an issue. The median net income of an IPO company almost doubles comparing to the
net income in the IPO year and 2 years before. Moreover, the typical IPO company
one year before an issue has the net income almost 4 times as large as the median net
income of a potential IPO. Average equity of IPO companies increases after going
public, which is in line with our expectations.
The size and industry matching procedure employed to better match the reference
sample with IPOs sample helped to tackle the issue of a size bias problem observable
in the whole reference sample. The typical potential IPO matched by size and industry
turned out to have comparable, but slightly higher, assets than an IPO company one
year before going public. However, size and industry matched potential IPOs seem to
be much bigger in terms of employees and sales than a typical IPO one year before
floatation, although the latter has a higher net income. The solvency ratio is at a
similar level for both samples. The investigation of IPO company size measures
before and after an issue shows that in the short run these companies have become
larger and better off in terms of net income, sales and solvency. They also report
higher assets. In order to assess the impact of an IPO on a company’s long term
performance, a further analysis is conducted with results presented in chapter 4. Table
9 presents summary statistics of some explanatory variables that will be used in the
analysis of determinants and consequences of the IPO decision.
65
Table 9 Summary statistics of explanatory variables
Panel A consists of 127 companies that went public during 1997 – 2004. Panel A1 and A2 consists of
the same IPO sample and summary statistics of the explanatory variables for year 1 and 2 before
floatation, respectively. Panel B shows average figures of the explanatory variables of the reference
sample. Panel C shows summary statistics for the size and industry matched reference sample. The
explanatory variables are: AGE is the firm’s maturity measured by the number of years from
incorporation till IPO; SIZE is the firm’s size is measured by the logarithm of assets; GROWTH is the
firm’s annual growth rate in sales; INVEST is the firm’s growth rate of fixed assets; LEVER is the
firm’s leverage measured as the value of total debt over total debt plus equity; INTAN is a ratio of the
firm’s intangible assets over total assets; ROA is the firm’s profitability measured as EBITDA over
total assets.
Mean
Median
Std. Dev.
Min
Max
Obs.
22.6063
10.51131
17.39539
2.975563
44.21112
107.2047
7.680695
11
10.51405
9.622636
1.982154
39.6619
58.39211
8.16
26.48664
1.034081
39.31261
4.208231
50.9694
190.2627
13.52186
2
8.310589
-84.51019
0
4.099115
-49.26423
-75.5
162
14.47881
223.3528
30.33099
570.6849
1564.191
72.45
127
127
127
127
127
127
127
21.6063
10.17748
28.59035
2.21473
54.545665
137.2339
10.65239
10
10.13903
14.30254
0.9047644
51.59644
38.39058
9.84
26.48664
1.085713
61.40288
3.120716
47.14183
352.8649
16.23848
1
8.032747
-94.92767
0
0
-58.03786
-129.9
161
14.31075
390.2838
25.60399
513.9235
2926.069
43.87
127
127
127
127
127
127
127
21.05645
9.873526
18.41692
1.436406
53.03794
66.01058
12.63249
9
9.830693
9.898429
0.3184557
56.10343
30.96416
9.125955
26.64226
1.103757
68.44825
3.103317
22.88529
123.1165
13.29815
1
7.719585
-87.42225
0
0
-96.88151
-12.2
160
13.54315
480.2354
22.75012
106.1987
841.5674
49.46
124
124
124
124
124
124
124
27.78345
9.649333
7.860382
1.265616
48.49026
27.58012
9.668916
12
9.545475
-0.581493
0.1695148
48.80527
5.029303
6.785
33.61423
0.962233
52.52115
4.079629
20.92238
138.7931
14.172
1
-4.683749
-94.38917
0
0
-88.54094
-84.12
218
15.04327
1682.726
75.4688
96.92469
3968.756
95.08
3468
3468
3468
3468
3468
3468
3468
Panel A
AGE
SIZE
GROWTH
INTAN
LEVER
INVEST
ROA
Panel A1
AGE
SIZE
GROWTH
INTAN
LEVER
INVEST
ROA
Panel A2
AGE
SIZE
GROWTH
INTAN
LEVER
INVEST
ROA
Panel B
AGE
SIZE
GROWTH
INTAN
LEVER
INVEST
ROA
Continued on the next page.
66
Table 9 - continued.
Panel C
AGE
SIZE
GROWTH
INTAN
LEVER
INVEST
ROA
31.90975
10.35807
7.782643
1.363326
50.79378
34.7116
10.31587
13
10.26525
2.107899
0.2589079
50.46088
10.17727
6.64
39.21862
0.8078563
37.09945
4.011076
21.93779
78.41831
14.28021
1
8.599144
-94.38917
0
0
-76.74973
-31.48
216
15.04327
464.2884
44.05533
96.67126
748.529
80.33
554
554
554
554
554
554
554
Source: Author’s calculations
The average age of a Polish company that went public during 1997 – 2004 was 22.6
years (median 11). In Italy the average age of a company that went public during
1982-1992 was 33.4 years (median 26) (Pagano et al., 1998). German companies
going public on Neuer Markt during 1997-1999 were on average 13.3 years old while
IPO companies on Frankfurt Stock Exchange were on average 58.8 years old (Fisher,
2000). The average age of a Belgian company that went public between 1996 - 2000
was 15 years (Pannemans, 2002). Thus, Polish IPO companies are older than Western
European companies that went public about the same time but Polish results cannot be
fully comparable with international findings. The main reason is that mature
companies did not have a chance to go public before 1991 because no stock exchange
existed in Poland. The typical sample IPO company in 1997 was 27.2 years old while
in 2004 was 10 years.
The typical size of an IPO company measured as logarithm of assets, increases each
year comparing levels 2 and 1 year before and issue with the size in the IPO year. A
median IPO company before floatation is also bigger in terms of assets than a median
potential IPO, but it is comparable with a potential IPO matched by industry and size.
A high sales growth of a typical IPO one year before going public is also noticeable
but in the IPO year the growth rate comes back to a similar level as two years before
an issue.
Surprisingly, a typical potential IPO company is characterized by a negative rate of
sales growth while a potential IPO firm matched by size and industry has a sales
growth rate of 2.1 percent, which is still much lower than an IPO company one year
before an issue. This proves that IPO companies are increasing their sales and
67
customers base extremely fast. Thus, Subramanyam and Titman’s (1999) idea that
companies go public to get a more precise valuation of the company by, among
others, investors who are the company’s customers able to make use of serendipitous
information, seems to be reasonable in the Polish case.
Both intangibles and investments of a typical IPO company increase substantially
every year before the issue including the IPO year and are considerably higher than
investments in fixed and intangible assets of a potential IPO company. The leverage
of an IPO company decreases in the IPO year, which is rather expected as stock issue
is aimed at obtaining a different form of financing than credit. It is also noticeable that
the leverage of a typical IPO company decreases when comparing its level to that 2
years or 1 year before an IPO. One possible interpretation is that companies who
already consider a public offering do not increase their leverage levels as they know
that funds obtained through an IPO will enable them to realize their investments
plans. It is also possible that companies consciously decrease the level of leverage
before an issue as they are aware that a very high leverage can prevent investors from
injecting equity in a company and may therefore be a deterrent for firms to go public
(Gill de Albornoz and Pope, 2004). There is not much difference, however, in the
level of leverage between a typical IPO company one year before an issue and a
potential IPO company, whichever reference sample is considered. The profitability
of an IPO company 2 years or 1 year before floatation is much better than the
profitability of a potential IPO company, yet it decreases in the IPO year.
68
Chapter 4 Results and Discussion
Results and Discussion
4.1. Results of the ex ante analysis
The effect of the variables, described in detail in chapter 3 (see page 50) on the
probability to go public is estimated by a probit model. The estimation method is
maximum likelihood. The dependent variable is equal to 0 if the company was not
listed and 1 if a company went public.
The probit regression analyses were performed with STATA 8.0 statistical package.
The data were prepared in MS Excel. The illustration how the data was organized and
prepared is presented in appendix 4. The appendices 5-A to 6-B contain original
outputs from the STATA.
Table 10 reports the test results of the probit estimations. The complete sample
consists of data about IPO companies that issued equity on the Warsaw Stock
Exchange and Polish private companies that might have gone public because they met
the official minimum shareholders’ equity requirement. The size and industry
matched sample consists of Polish IPOs and private companies that besides meeting
the requirement of minimum shareholders’ capital have assets at least as big as
minimum assets of an IPO company from the same industry in the same year.
Exponent ( β i ) is the factor by which the odds – i.e. the ratio of the probability to go
public to the probability not to go public – change when the ith independent variable
increases by one unit, so this is the marginal effect mentioned in the previous chapter.
The likelihood ratio test examines the null hypothesis that the joint effect of all
explanatory variables equals zero. Standard errors are in parentheses.
69
Table 10 The results of the probit model. Determinants of the IPO decision.
The effect of the variables on the probability to go public is estimated by a probit model. The variables
are: AGE which is the firm’s maturity measured by the number of years from incorporation till IPO;
SIZE is the firm’s size measured by the logarithm of assets, GROWTH is the firm’s annual growth rate
in sales computed as sales in year t minus sales in year t-1 divided by sales in year t-1; INVEST is the
firm’s growth rate of fixed assets; LEVER is the firm’s leverage measured as the value of total debt
over total debt plus equity; INTAN is the ratio of firm’s intangible assets over total assets; ROA is the
firm’s profitability measured as EBITDA over total assets; MTB is the market-to-book ratio in the
industry as computed by the WSE, GDP is gross domestic product growth (y-o-y); INF is the inflation
rate; WIG is the WSE index. The estimation method is maximum likelihood. The dependent variable is
0 if the company is not listed and 1 on the year of listing. The complete sample is restricted to all
company-years that meet the listing requirements as of that year (requirement 1). The size and industry
matched sample is restricted to companies that meet requirement 1 and have assets at least as big as
minimum assets of an IPO company from the same industry in the same year. Standard errors are in
parentheses. Exponent ( β i ) is the marginal effect.
Explanatory variable
AGE
S.E.
Exp ( β )
SIZE
S.E.
Exp ( β )
GROWTH
S.E.
Exp ( β )
INTAN
S.E.
Exp ( β )
LEVER
S.E.
Exp ( β )
INVEST
S.E.
Exp ( β )
ROA
S.E.
Exp ( β )
WIG
S.E.
Exp ( β )
lagged WIG
S.E.
Exp ( β )
Complete
sample
-0.002955
(0.0015655)
-0.0001548
0.2213296***
(0.0388935)
0.011594
-0.0002763
(0.0005461)
-0.0000145
0.020638***
(0.0080273)
0.0010811
Size and industry matched
sample
-0.0024948
(0.0020512)
-0.0006265
0.2538893***
(0.05609)
0.0637603
-0.0005612
(0.0006674)
-0.0001409
0.0204681*
(0.011817)
0.0051402
0.0016464*
(0.0008912)
0.0000862
0.0001544
(0.000106)
8.09e-06
-0.0005489
(0.028374)
-.0000288
0.0011586
(0.0012493)
0.000291
0.002417***
(0.0006766)
0.000607
-0.004922
(0.004224)
-0.0012361
-0.0196408***
(0.0071171)
-.0010288
0.0113916*
(0.006894)
0.0005967
-0.0138371
(0.0095775)
-0.003475
0.0136902
(0.008974)
0.0034381
Table continuation on the next page.
70
Table 10 – continued.
lagged GDP
S.E.
Exp ( β )
Industry MTB
S.E.
Exp ( β )
Lagged industry MTB
S.E.
Exp ( β )
Lagged INFLATION
S.E.
Exp ( β )
Constant
S.E.
Obs.
Thereof IPO = 0
Thereof IPO = 1
Log likelihood
LR χ 2 (14)
0.1481969***
(0.0788286)
0.007763
0.0402216
(0.609398)
0.010101
0.2370711***
(0.0788286)
0.0124185
-0.0790256
(0.077518)
-0.0041396
0.0002273
(0.8119505)
0.0000119
0.1928178**
(0.0893284)
0.0484231
-0.073808
(0.087258)
-0.0185357
-0.0064323
(0.0246872)
-0.0016154
-4.858127***
(0.4284804)
700
573
127
-479.12851
140.28
-3.865199***
(0.6215029)
430
303
127
-293.36176
68.53
0.0000
0.0000
Prob > χ 2
*** Coefficients significantly different from zero at the 1 percent level or less.
** Coefficients significantly different from zero at the 5 percent level.
* Coefficients significantly different from zero at the 10 percent level.
Source: Author’s calculations
In the case of the whole sample the likelihood ratio chi-square of 140.28 with a pvalue of 0.0000 indicates that the model as a whole is statistically significant, as
compared to model with no predictors. In the case of the size and industry matched
sample the likelihood ratio chi-square of 68.53 with a p-value of 0.0000 indicates that
the model as a whole is statistically significant, as compared to model with no
predictors.
Hypothesis 1
Company size and maturity is positively correlated with the decision to go public.
It was expected that more mature companies face lower adverse selection costs
because they have longer track records and thus are easier for investors to evaluate.
Based on the probit model estimations carried out on the Polish data it turned out that
age of a company is not statistically significant. This result does not support the
prediction that company’s maturity has a significant positive impact on the decision to
71
go public. However, it is important to notice that the sample of Polish IPO companies
is age biased. This is because of the short period of the WSE operations many
companies had to wait many years to be given a chance to issue equity. In such a
sample, the lack of significance is not surprising although it is in contradiction with
the theory. Helwege and Packer (2003) who also empirically tested the relation
between a firm’s age and probability to go public in the US found no evidence that
younger firms have trouble going public.
The company’s size, measured by the logarithm of assets, is significant at the 1
percent level for both reference samples used. Assets increase has a positive impact
on the decision to go public and, what is more, it is one of the most important
determinants of the probability of issuing equity. A one percent increase in the total
assets raises the probability of an IPO by 1.16 percent in a complete sample and by
6.38 percent in a size and industry matched sample. This result corresponds to the
results obtained by Pagano et al. (1998) on the Italian market and by Chun and Smith
(2002) on the Korean market who found that the firm size is the second most
important (after MTB ratio) determinant of the probability of an IPO. Size was also
one of the main factors affecting the probability of an IPO in the UK (Gill de
Albornoz and Pope, 2004). The result is consistent with both prior empirical evidence
found in other countries and the theory, it however contradicts Dudko-Kopczewska’s
(2004) findings that the size of a company has no impact on the decision to go public
in Poland.
Hypothesis 2
Financing needs positively influence the likelihood of going public.
It was expected that for firms that have huge financing needs to finance investment
and growth the probability of an IPO would be positively related to the growth in
sales (GROWTH) and investment opportunities (INVEST). Nevertheless, the results
indicate that growth decreases the probability of listing for the probit analysis of both
reference samples; however, the coefficients are very small and statistically not
significant. This is in contrary to the Pagano et al. (1998) and Fisher (2000) findings
which report a positive relationship between growth and possibility of an IPO. Yet,
72
the result that growth decreases the probability of listing is found also by Pannemans
(2002) on the Belgian market.
Investments increase the probability of an IPO when the probit analysis is carried out
on a complete sample; however the coefficients are also not significant. On the other
hand, the findings of the probit analysis on sample that includes size and industry
matched private companies indicate that increases of investments have a positive and
statistically significant influence of the decision to go public. A one percentage point
increase in investments increases the probability of an IPO by 0.06 percent. The
positive relation between investments (measured by the growth rate of fixed assets)
and size (measured by the logarithm of total assets), and the decision to issue equity in
the sample including size and industry matched companies indicate that Polish
companies go public after a period of huge investments. The ex post analysis of the
impact of IPO on the firms investments will reveal if the companies went public to
finance their future investments. The empirical evidence found in Italy (Panago et al.,
1998), Germany (non-Neuer Markt companies analysed by Fisher, 2000), Belgium
(Pannemans, 2002), the UK (Gill de Albornoz and Pope, 2004), and Korea (Chun and
Smith, 2002) suggests that on average financing needs is not the major factor in IPO
decisions. Dudko-Kopczewska (2004) reported on a lack of a clear relation between
financing needs and the probability to go public of Polish IPOs.
Hypothesis 3
High leverage positively influences the decision to go public.
The results of the probit estimations indicate that leverage has positive effect on the
likelihood of going public as expected, however the coefficient is statistically
significant at the 10 percent level only for the whole sample. A one percentage point
increase in leverage increases the probability to go public by 0.009 percent. This
corresponds to Myers’ (1977) view that highly leveraged firms with investment
opportunities should be more likely to go public. The positive effect of leverage on
the likelihood of IPO is in line with our expectations and prior empirical evidence
found by Pannemans (2002) on Belgium market (except for the results of Nasdaq
Europe listed companies). However this is in contrary to Pagano et al. (1998) results
who found negative but statistically not significant impact of leverage on the
73
likelihood of going public of Italian companies. Also Fisher (2000) and Gill de
Albornoz and Pope’s (2004) report that in Germany and the UK leverage is negatively
related to the probability of an IPO. The findings of probit analysis of Polish
companies contradict prior empirical evidence found by Dudko-Kopczewska (2004),
who found negative relation between leverage and a company’s propensity to go
public.
The results obtained on the sample of Polish firms contradict the Gill de Albornoz and
Pope’s (2004) view that highly leveraged firms may face constraint on raising
additional debt financing because their creditors are aware of the increasing risk. On
the contrary, it seems that insiders, aware of the fact that they have reached the level
of leverage that may result in financial distress, try to mitigate the problem issuing
equity.
Hypothesis 4
Riskier companies are more likely to go public.
It was expected that riskier companies have higher propensity to go public as public
offering enables initial owners to diversify the risk. The level of intangible assets over
the total assets has been used as a proxy for company risk. The results indicate that the
level of intangibles is positively and significantly related to the probability of going
public in the Polish sample. A one percentage point increase in intangibles increases
the probability of an IPO by 0.11 percent in the whole sample. As far as the industry
and size matched reference sample is concerned, the effect is even stronger indicating
that a one percent increase in intangibles increases the probability of going public by
0.51 percent. The coefficients are significant at 1 and 10 percent level for complete
and size matched samples respectively. This result, together with the positive signs of
leverage and investments suggests that our sample period includes many risky
companies that are already highly leveraged and go public to diversify the risks. The
positive relation between intangibles and probability of an IPO has been also found on
the German (Fisher, 2000) and the UK (Gill de Albornoz and Pope, 2004) market.
74
Hypothesis 5
High market-to-book ratio of companies in the same industry increases the
company’s propensity to go public.
Both the current and the lagged market-to-book ratio has been used in the probit
analysis conducted on the sample. Similarly to Pagano et al. (1998), it turned out that
the current industry MTB ratio is one of the most significant determinants of the
probability of going public. For the whole reference sample a one percentage point
increase in the current MTB ratio increases the probability of going public by 1.24
percent. For the size and industry matched reference sample the impact of the current
MTB ratio is even stronger indicating that a one percentage point increase of MTB
ratio increases the probability of going public by 4.84 percent. The coefficients are
significant at the 1 percent level for both reference samples. However, it is also found
that the lagged MTB ratio decreases the probability of listing when both reference
samples are used. Yet, these results are not statistically significant.
The opposite signs of the coefficients on the current and lagged MTB ratio have also
been found by Chun and Smith (2002). They notice that the interpretation of the
information content of the current MTB is different than that of a lagged MTB and
this is why none of them should be omitted in the regression analysis. The
interpretation of the negative sign of the lagged MTB ratio may be that most firms
wishing to conduct an IPO would already have done it when there had been a recent
hot market. According to Chun and Smith (2002), only firms whose propensity to go
public has markedly increased, or which have suddenly met the minimum listing
requirements, would be expected to conduct an IPO in the period immediately
following a high MTB ratio. Thus, the obtained results support the windows of
opportunity hypothesis under which firms go public in order to take advantage of the
market’s overvaluation of firms in their industry.
Surprisingly, increases in the current WIG index level have a negative impact on the
probability to go public while a lagged WIG increases the probability of an IPO.
However, coefficients are statistically significant only for the complete reference
sample. Thus, the overall market mood has an opposite impact than the market mood
per industry. It is possible that companies make a decision to go public encouraged by
75
the last year good stock exchange conditions and wait until the current MTB ratio in
the industry indicates that this is the best time for a company to capture the benefits of
being overvalued.
Hypothesis 6
Profitability positively influences the decision to go public.
The finding for Polish market regarding the relation between profitability and
probability of an IPO is consistent with Dudko-Kopczewska (2004), who found a
negative impact of profitability on probability of an IPO. However, the Polish results
are contrary to those found in Italy (Pagano et al., 1998), Germany (Fisher, 2000) and
Belgium (Pannemans, 2002). For both reference samples, the coefficients are
negative. Such a result supports Fisher’s (2000) view that profitable companies should
be able to finance their investments and growth by internal cash flows and that is why
they are more likely to stay private. The negative sign of profitability might indicate
that the Polish sample period includes many companies facing borrowing constraints
that were not able to generate sufficient internal funds; however a clear interpretation
is not possible as variables coefficients are not statistically significant.
Hypothesis 7
Macroeconomic conditions have an impact on the number of companies deciding to
go public.
The hypothesis about the impact of macroeconomic conditions on a firm’s probability
to go public has been verified based on the results of models for lagged GDP growth
and lagged inflation. Both variables seem to have a positive impact on the probability
of an IPO, however, only GDP is statistically significant and only when the size and
industry matched reference sample is concerned. These results are in line with
Boehmer and Ljungquist’s (2004) findings who, after investigating 330 privately-held
German companies that during the period of 1984 and 1995 announced their intention
to go public, concluded that macroeconomic conditions had little effect on IPO
timing. Therefore, contrary to Dudko-Kopczewska (2004), I cannot conclude that
macroeconomic conditions are the main factors that influence the decision to go
public in Poland.
76
5.2. Results of the ex post analysis
An ex post analysis has been conducted in order to estimated the consequences of an
IPO and to complement the ex ante analysis so that more a precise interpretation
about motives for going public can be formulated. Following Pagano et al. (1998) the
fixed effect regressions are used in which the effect of the decision to go public is
captured by the dummy variables for the year of the IPO and the three subsequent
years. The fixed effects regressions were performed with STATA 8.0 statistical
package. The appendices 7 - 11 contain original outputs from the STATA. Table 11
presents estimates of the IPOs on some operating and financial variables.
Hypothesis 8
IPO reduces the leverage of publicly traded companies.
The results of the analysis reveal that, contrary to the expectations, leverage of an
average IPO company sharply increases in the years following an IPO although a
noticeable decrease is observable in the IPO year. The decrease in leverage is
statistically significant in all years except from the first year following the IPO. These
results are in contrary to the findings of Panago et al. (1998) and Chun and Smith
(2002), who reported a sharp decrease of leverage immediately after an IPO.
Therefore, contrary to Pagano et al. (1998) it is found that Polish firms do not go
public to reduce the level of leverage. A sharp decline in leverage in the IPO year may
indicate that sources obtained at IPO help reduce the high leverage level that a
company reached before the IPO. An increase in leverage in the years following the
IPO does not support the view that after an issue firms change their source of funds
from debt to equity.
77
Table 11 Effects of the decision to go public.
Standard errors are in parentheses. The last column reports the p-value of an F-test of the hypothesis that all the coefficients standing next to all the post-IPO dummies are
equal to zero, meaning that these dummies are jointly insignificant and that the IPO decision had no effect on the analyzed operating/financial variable. ROA which is
(EBITDA) over total assets measures profitability SIZE is the logarithm of total assets; GROWTH is the firm’s annual growth rate in sales computed as sales in year t minus
sales in year t-1 divided by sales in year t-1; INVEST is the firm’s growth rate of fixed assets; LEVER is the firm’s leverage measured as the value of total debt over total
debt plus equity. INTAN is a ratio of the firm’s intangible assets over total assets.
ROA
Obs. 5620
SIZE
Obs. 5621
GROWTH
Obs. 5621
LEVER
Obs. 5621
INVEST
Obs. 5621
INTAN
Year 0
-3.669188***
(1.267785)
Year +1
-6.371511***
(1.586509)
Year +2
-13.13934***
(1.620245)
Year +3
-16.02276***
(-1.689561)
Year > 3
-14.30735***
(1.417537)
F-test
0.0000
0.4931998***
(0.0427796)
0.1421389***
(0.0535344)
0.1879125***
(0.0546728)
0.1774669***
(0.0570118)
0.1052739**
(0.0478327)
0.0000
-6.321331
(8.477311)
-3.843059
(10.60852)
12.66539
(10.83411)
-2.592428
(11.2976)
11.50031
(9.478657)
0.4495
-9.668548***
(2.774089)
3.177992
(3.4715)
8.562471**
(3.54532)
16.44045***
(3.696992)
32.17315***
(3.101766)
0.0000
4.353043
(25.13092)
-80.45667**
(31.44888)
-85.38356***
(32.11763)
-110.838***
(33.49165)
-105.114***
(28.0994)
0.0000
1.036285***
(0.2710828)
-0.0544644
(0.3392335)
0.3178848
(0.3464472)
-0.0503634
(0.3612685)
-0.8880524***
(0.3031033)
0.0000
Obs. 5621
*** Coefficients significantly different from zero at the 1 percent level or less. ** Coefficients significantly different from zero at the 5 percent level.
* Coefficients significantly different from zero at the 10 percent level.
Source: Author’s calculations
78
Hypothesis 9
IPO has a positive effect on a company’s investments.
The hypothesis that The size of total the assets slightly increases after an IPO, with
the increase ranging from 0.49 percent in the IPO year and between 0.14 and 0.18
percent in the next three years and all these results are statistically significant.
Although the effect of an IPO on investments in total assets (SIZE) is positive it has a
negative impact on the investments growth rate (INVEST). For the full sample, the
investment growth rates decline sharply in the first year after an issue to -110.8
percent in the third year and -105.1 percent in the following years. The effect of an
IPO on intangible assets (INTAN) is mixed and statistically significant only in the
IPO year and 3 years after an issue.
Hypothesis 10
IPO has a positive effect on a company’s sales growth.
The effect of an IPO on a company’s growth rate is not statistically significant. This
conclusion may be drawn either by considering significance of coefficients for
individual post-IPO dummies or by looking at the F test statistic, which value does
not allow to reject null hypothesis of joint insignificance of post-IPO dummies. By
way of comparison, Chemmanur, He and Nandy (2005) find that the sales growth is
increasing in the years prior to the IPO, and declining in the years subsequent to the
IPO. However in all years the result is also not statistically significant. Pagano et al.
(1998) report that growth of sales rises temporarily at the time of the IPO but
decreases again in the second year after an issue.
Hypothesis 11
IPO has a negative effect on a company’s profitability.
Profitability declines after an IPO. This effect is increasing very fast during the first
three years after an IPO, deteriorating from -3.7 percent in the IPO year to –16.02
percent in the third year. The fall is statistically significant at the 1 percent level in
each individual year. This is consistent with prior empirical findings in other countries
(Jain and Kini, 1994; Mikkelson et al., 1997; Pagano et al., 1998; Chun and Smith,
79
2002). The ex ante analysis has revealed that profitability is negatively related to the
probability of an IPO. This suggests that Polish companies went public because they
were not able to generate sufficient funds internally and public offering was the only
way for them to obtain financing for investments and growth. Companies that are not
able to generate sufficient internal funds have even more serious problems with
profitability after an issue. Thus, the decline in post-IPO operating performance is not
a result of a pre-IPO window dressing of accounting numbers but rather a trend that
might have been expected based on the results of an ex ante analysis.
In summary, the results of the ex post analysis indicate that the profitability of the IPO
company sharply decreases after the issue. Moreover, the leverage of an average IPO
company increases after an IPO while the rate of investments in fixed assets decrease.
Thus, the expected effects of an IPO have not been achieved. One possible
explanation may be that the initial public offering was too small and the money raised
at the IPO helped the firm only in the short term.
80
Chapter 5
Conclusions, limitations and suggestions for further research
The aim of this paper was to investigate the motives of Polish companies to go public
and the consequences of such a decision on their operating performance in the longrun. The analysis concerns companies that went public during the period of 1997 2004 in Poland, by far the largest stock market in Central and Eastern Europe. Thanks
to the access to the AMADEUS database that contains accounting information on a
large number of privately held firms, the study has been carried out by comparing
firms that went public with those that chose to remain private, in contrast to prior
research conducted in Poland. The research combines the analysis of ex ante and ex
post firms’ characteristics.
The results of ex ante analysis have revealed that the probability of an IPO is
positively affected by a company’s size, its level of intangible assets, and the stock
market valuation of firms in the same industry. The results of the ex post analysis
indicate that IPO firms’ profitability declines after the IPO, leverage decreases only in
the short run and money raised at the IPO is not spent to finance the company’s
strategy of fast growth and intensive investments. Polish firms that decided to go
public in the sample period are rather large, risky, already highly leveraged, unable to
generate sufficient funds internally, and they go public after periods of investments.
They go public not to finance future investments, as growth of investments in fixed
assets decreases after an IPO, but time the issue in order to take advantage of
“windows of opportunity” created by investors who are overoptimistic about the
company’s development opportunities.
The analysis was limited by the time range of data available at the AMADEUS
database. The maximum 10 years of data, available with a one year delay, limited the
time framework of this study to the period from 1995 to 2004. This is why the
interesting part of the “hot issue” market of 2004-2006 could not be investigated.
Future research that encompasses the whole hot period of 2004-2006 has to account
for a large number of companies that went public before 1 July 2005. The timing of
these issues may have been triggered, apart from other factors, by the issuers’ attempt
81
to go public before the EU prospectus regulations came into force in Poland. Thus, it
would be worth investigating whether there was actually a “hot issue” period as
defined by Ibbotson and Jaffe (1975), and Ritter (1984).
It was not possible to test the hypothesis that companies go public to sell the company
(Zingales, 1995) as no database delivers information on the ownership structure of
Polish companies on the regular basis. It would be possible to draw the information
about the pre-IPO ownership structure from the company’s prospectuses and case by
case investigate substantial changes in the ownership structure as announced by a firm
but this means an extremely time consuming and hand collecting process of data
gathering. However, when such a database is constructed it would be possible to
follow changes in the structure of ownership and this way check whether one of the
most frequent motives of Polish companies to go public, according to a KPMG
survey, namely to sell a company, is indeed an important factor.
One of the weaknesses of the ex post analysis is that, although it is clear that changes
in accounting measures of performance depend not only on the decision to go public,
it is assumed that any additional variable used to explain the accounting variable has
the same explanation power as the IPO variable. Thus, it should be recommended for
future researchers to built richer models which would include other relevant
regressors.
The ex post analysis has revealed that the operating performance of IPO firms
declines with time. It would be interesting to investigate why the post issue operating
performance of IPO firms decreases with time. There are a number of explanations
proposed in international literature that may be tested in future research, for example
“earnings management” before an IPO (Teoh, Welch and Wong, 1998), or increased
agency problems resulting from separation of ownership and control (Jensen and
Mecking, 1976). It is also frequently argued that the declining operational
performance is a result of entrepreneurs’ attempt to take advantage of the “windows
of opportunity” and make a decision to go public when a company demonstrates an
exceptionally good performance that cannot be sustained in the long run.
82
The empirical literature on the motives that influence the company’s decision to issue
equity is still scarce and further researcher in this field is recommended in other
countries and over several sample periods. The results of this paper has been
compared with a few researches conducted mainly on the US and Western Europe
markets. The motives of companies from other Central Eastern Europe countries
remain unexplored. Also in Poland several puzzling IPO issues require further
analyses.
83
Appendices
Appendix 1
WSE main statistics as of June 2006
Year
Number of
listed
companies
of which
foreign
Number of
new listings
Number of
delistings
WIG (%)
2005
255
2004
230
2003
203
2002
216
2001
230
2000
225
1999
221
1998
198
1997
143
1996
83
1995
65
1994
44
1993
22
1992
16
1991
9
7
5
1
-
-
-
-
-
-
-
-
-
-
-
-
35
36
6
5
8
13
28
57
46
18
21
22
6
7
9
10
9
19
19
4
9
5
2
2
0
0
0
0
0
0
33.66
27.94
44.92
3.19
-21.99
- 1.30
41.30
-12.80
2.30
89.10
1.50
-39.90
13.20
- 8.09
Market
capitalisation
Domestic
companies
(PLN mil.)
Foreign
companies
(PLN mil.)
Total turnover
value
(PLN mil.)
308
418
214
313
140
002
110
565
103
370
130
085
1
095.30
7 450 5 845
351
161
116 77 385 27 715
482
-
-
-
191
096
118 79 774 63 662 80 443
518
123 72 442 43 766 24 000 11 271
411
-
-
-
-
-
-
-
169 88 974 62 338 52 342 29 895 13 671 23 420
096
7 873
228
30
Source: Warsaw Stock Exchange statistics: www.gpw.com.pl
84
-
-
Appendix 2
Inflation rate and GDP growth data
year
inflation rate
GDP growth
1994
32,2
5,2
1995
27,8
7
1996
19,9
6
1997
14,9
6,8
1998
11,8
4,8
1999
7,3
4,1
2000
10,1
4
2001
5,5
4
Source: Central Statistical Office (GUS)
85
2002
1,9
1,3
2003
0,8
3,8
2004
3,5
5,2
Appendix 3
Selected listing requirements that had been in force till 1 May 2004.
Minimum value of shares to be
admitted to trading
Minimum book value of company
Minimum value of shares admitted to
trading
and held by shareholders, each of
whom owns no more than 5% of the
total number
of votes at the general meeting
Minimum percentage of shares to be
admitted to trading and held by
shareholders, each of whom owns no
more than 5% total number of votes
at the general meeting
Minimum number of shareholders
who hold shares to be admitted to
trading
Main
market
PLN 40
million
PLN 65
million
PLN 32
million
Parallel
market
PLN 14
million
PLN 22
million
PLN 11
million
25% or at
least 500 000
shares of
value at least
PLN 70
million
500
10% or at
least 200 000
shares of
value at least
PLN 35
million
300
-
Period for which company is required three
to disclose audited financial reports to financial
the public
years
two financial
years
Free market
PLN 4
million
PLN 4
million
-
last financial
year
Source: Warsaw Stock Exchange Factbook, 2003
86
Appendix 4
The illustration how the data for the analyses was organized and prepared.
87
Appendix 5 A
Probit estimates – Complete sample
88
Appendix 5 - B
Marginal effects
89
Appendix 6 - A
Probit estimates – Size and industry matched sample
90
Appendix 6 – B
Marginal effects
91
Appendix 7
92
Appendix 8
93
Appendix 9
94
Appendix 10
95
Appendix 11
96
List of tables
Table 1 Development of the WSE vs. GDP growth.....................................................30
Table 2 Development of CEE stock markets 1994-2004.............................................35
Table 3 IPOs per exchange in 2004 and 2005..............................................................36
Table 4 Summary of hypotheses about the factors that influence the likelihood of an
IPO success. .........................................................................................................55
Table 5 Summary of the expected effects of an IPO...................................................58
Table 6 Summary statistics of companies listed on WSE (1997 – 2004). ...................60
Table 7 Distribution of IPOs by year and industry ......................................................61
Table 8 Summary Statistics of Company Size Measures.............................................64
Table 9 Summary statistics of explanatory variables...................................................66
Table 10 The results of the probit model. Determinants of the IPO decision..............70
Table 11 Effects of the decision to go public...............................................................78
List of graphs
Graph 1 Number of companies listed at the WSE and market capitalization (PLN
million) .................................................................................................................27
Graph 2 Initial Public Offerings at the WSE between 1991 and 2005 ........................28
Graph 3 Total turnover value and WIG changes (y-o-y) during 1991-2005. ..............29
Graph 4 Number on new listings and delistings at the WSE during 1991-2005. ........31
Graph 5 Relation between GDP growth and stock market capitalisation ....................32
Graph 6 Number of companies listed in 2005 on various European stock markets. ...34
Graph 7 Official motives for going public ...................................................................37
Graph 8 Main concerns about going public .................................................................39
Graph 9 Factors that had an impact on the decision to stay private.............................41
Graph 10 Areas where the company gained the most through IPO. ............................42
Graph 11 The predicted probabilities for logit and probit. ..........................................46
97
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