Narrow Results

This paper examines the impact of the recently passed Jumpstart Our Business Startups (JOBS) Act on the behavior of market participants. Using the JOBS Act — which relaxed mandatory information disclosure requirements — as a natural experiment on firms’ choices of the mix of hard, accounting information and textual disclosures, we find that relative to a peer group of firms, initial public offering (IPO) firms reduce accounting disclosures and change textual disclosures. Because it allows a partial revelation of IPO quality, only textual disclosures affect underpricing. We also find that the Securities and Exchange Commission (SEC) changes its behavior post-JOBS Act in responding to draft registration statements. Specifically, the SEC’s comment letters to firms are more negative in tone, and more forceful in their recommendations, focusing on quantitative information. Finally, under the JOBS Act, investors place more emphasis on the information produced by the SEC when pricing the stock. Returns following public release of the letters vary by about 4% based on letter tone.

This chapter analyzes stock return behavior following initial public offering (IPO) events in the pharmaceutical sector and examines factors that could have an impact on this behavior.

The results of the research indicate a positive Cumulative Average Abnormal Return (CAAR) of 3.03% in the 20 days following the IPO until the end of the quiet period for all firms under examination, and a decline of tens of percent in the 18 months post-IPO. When the sample is divided into two subsamples according to firm size, a market value (MV) of US$500 million can be identified as a threshold for positive or negative post-IPO yields. Companies with an MV below this threshold experience a positive but not significant CAAR in the first 20 days post-IPO and a significant negative CAAR from day 31 onwards. In contrast, companies above this US$500 million threshold show a significant positive CAAR 20 days post-IPO, followed by a consistent increase in CAAR for the next few months. The results also indicate that MV, IPO proceeds, shareholder dilution and clinical phases are critical factors determining post-IPO returns. In conclusion, we suggest that investors recognize a US$500 million market value of a firm as a confidence threshold when investing in newly issued pharmaceutical companies. We postulate that firms valued above this amount attract more attention and gain greater investor confidence than do firms below this threshold. Lower-valued firms shares can be considered “lottery stocks,” as their IPO ignites a period of enthusiasm until the quiet period ends, where after investors’ attention to such firms gradually diminishes, and their focus moves on to their next potential lottery-like opportunity.

Earlier studies document positive first-day return for initial public offerings (IPOs), commonly interpreted as underpricing of the issue. The empirical evidence also indicates that IPO underpricing is negatively related to the public float (the fraction of the firm sold to the public). One possible explanation for this relation is that firms allocate a fixed amount of money for underpricing, and set an issue price accordingly — a behavioral characteristic. But, if indeed firms allocate a fixed amount of money to underpricing, then this underpricing should diminish in the public float. Using a sample of IPOs between 1996 and 2008, we provide empirical evidence that indeed the relation between underpricing and the public float is non-linear. Specifically, the higher the public float, the less the decrease of underpricing in the public float. Moreover, in our regression analysis, regressing underpricing on the reciprocal of the public float provides the best fit. As we show, this result is consistent with firms allocating a fixed amount of money for underpricing. This finding is important because it helps predict underpricing and has implications for firms, investors and regulators.