Moreover, based on the agency theory hypothesis and the signaling hypothesis, they mentioned that the IPO firms where entrepreneurs retain higher ownership normally show superior performance relative to other issuing firms both before and after adjustment for industry effects. The authors are interested in this issue. So, they examine the relation between management ownership and operating performance. In addition, they investigate whether IPO underpricing and post-IPO operating performance have the relations as suggested by the signaling models which predicts that IPO firm that is underpriced should demonstrate greater operating performance in comparison to those that is not. Part 3 explains the results of market expectations and earnings performance decline significantly after post-issue, showing in M/B and P/E ratios. Finally, part 4 is the conclusion of this article.
Summary of the important findings of the article
Jain and Kini observed that the operating performance as measured by the operating return on assets and operating cash flows scaled by assets of IPO firms decline relative to their pre-IPO levels, both before and after adjustment for industry effects. They tried to figure out for the reasons behind this situation and came up with some prospects. What if the IPO firms cannot generate income at the pre-IPO levels, managers reduce the required level of capital expenditures or positive NPV projects may have negative earnings and huge investments in the early periods. They studied the growth in sales, asset turnover and CAPEX for IPO firms to examine these possibilities. They found evidence that the IPO firms have high sales growth, declines in asset turnover and high CAPEX relative to their industry counterparts in the post-IPO period. So, the declining operating performance cannot be assumed due to a lack of sales growth opportunities or reduction in post-IPO CAPEX. They also find t View More »