Does the market incorporate previous IPO withdrawals when pricing second-time IPOs?

This paper examines the initial public offering (IPO) valuations of issuers that return to the IPO market successfully after withdrawing their first IPO attempt. We find that these second-time IPOs sell at a significant discount relative to similar contemporaneous IPOs that succeed in their first attempt. We also demonstrate that switching underwriters on the second IPO attempt reduces, but does not eliminate, the discount for second-time IPOs. When compared to their matched first-time IPOs, second-time IPOs have similar price revisions and post-IPO long-run stock and operating performances. Overall, these results suggest that the negative information conveyed by the withdrawal event is incorporated into the lower offer valuations for second-time IPOs. Switching investment banks can mitigate, but not eliminate, the perceived higher risk of the second-time offerings.

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In the United States, issuers typically sell initial public offering (IPO) shares to the public through a process known as book-building. In book-building, an issuer hires investment banks to generate and measure investor demand for the pending issue and determine the offer price that investors are willing to pay. The issuer can cancel the offering if the offer price is not acceptable.

While withdrawing the offering prevents selling the firm at an unfavorable price, it is coupled with a cost since it sends a negative public signal to the market. The potential market perception is that negative information, information not revealed by observable firm characteristics, has been revealed during the book-building phase. However, investment banks maintain secrecy over the demand schedule built in the book-building process, and investors remain unaware of the nature and magnitude of the negative information.

Investigating the differences in initial returns and price revisions between second-time and first-time issuers, Dunbar and Foerster (2008) present evidence that prior withdrawal is a priced risk factor for second-time issuers that have withdrawn their previous IPO filing. In this paper, we examine the IPO valuations of second-time IPOs (issuers that return to the IPO market successfully after withdrawing their first IPO attempt) directly to investigate whether and how the market incorporates previous IPO withdrawals when pricing second-time IPOs.

To accomplish this goal, we examine the differences in offer valuation multiples, price revisions, and post-IPO long-run stock and operating performances between a sample of 147 second-time IPOs from 1984 to 2004, and a matched sample of contemporaneous first-time IPOs (those that succeed in their first IPO attempt).

Two main findings emerge from our study. First, using different valuation multiples based on IPO offer prices and pre-IPO financials, we find that even after controlling for other valuation factors, second-time IPOs sell at a significant discount relative to comparable first-time IPOs. Furthermore, we document that switching investment banks on the second attempt reduces, but does not eliminate, the significant offering valuation discount for second-time IPOs (roughly 78% of second-time IPOs switch to different underwriters on their second attempt). We also demonstrate that, when compared to similar first-time IPOs, second-time IPOs have significantly lower expected offer valuation multiples based on the midpoint of the initial filing prices, but similar price revisions from the initial filing prices to final offer prices. This result suggests that underwriters discount second-time IPOs at the initial stage of the book-building process due to anticipated investor awareness of the negative information conveyed by their prior withdrawals.