Foreign issuers in emerging growth company IPOs

Journal Pre-proof Foreign issuers in emerging growth company IPOs Rachita Gullapalli, Anzhela Knyazeva

PII:

S1042-444X(20)30002-5

DOI:

https://doi.org/10.1016/j.mulfin.2020.100613

Reference:

MULFIN 100613

To appear in:

Journal of Multinational Financial Management

Received Date:

22 January 2020

Accepted Date:

25 January 2020

Please cite this article as: Gullapalli R, Knyazeva A, Foreign issuers in emerging growth company IPOs, Journal of Multinational Financial Management (2020), doi: https://doi.org/10.1016/j.mulfin.2020.100613

This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. © 2020 Published by Elsevier.

Foreign issuers in emerging growth company IPOs1 Rachita Gullapalli and Anzhela Knyazeva2 Rachita Gullapalli, US Securities and Exchange Commission Anzhela Knyazeva, US Securities and Exchange Commission and New York University 2

[email protected],

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Corresponding author: Anzhela Knyazeva, SEC and NYU Stern, [email protected]; Rachita Gullapalli, SEC, [email protected].

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Highlights  Recent reforms expanding IPO access in the US affected foreign and domestic issuers differently.  Foreign issuer IPO underpricing decreased rather than increased after the shock.  Greater flexibility in pre-IPO communications with potential investors helps explain the lower underpricing of foreign issuers after the shock.  The results are not driven by differences in issuer characteristics, changes in other costs of going public, or other likely sources of confounding. 1

Abstract

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The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the authors’ views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. This study has benefited from helpful comments and suggestions from Sandeep Dahiya, Kathleen Hanley, Vlad Ivanov, Kose John, Ying Lin, Mattias Nilsson, Christo Pirinsky, and seminar participants at the Securities and Exchange Commission and Financial Management Association annual meeting. We are grateful to Samuel Adams, Tristan Chiappetti, Sze Wing Wong, and Jay Varellas for assistance with emerging growth company status information. All errors and omissions are our own.

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We examine how the JOBS Act, a regulatory reform that streamlined the process of going public in the US, affected foreign issuers. The reform extended disclosure and offering process accommodations to issuers, including foreign issuers, qualifying as emerging growth companies (EGCs). We find systematic differences in the effects of the shock on foreign issuers, complementing existing evidence on the impact of the JOBS Act. In particular, underpricing of foreign issuer IPOs decreases rather than increases after the shock. Further, greater flexibility in pre-IPO access to potential investors, which is consistent with reduced valuation uncertainty, helps explain the lower underpricing of foreign issuers after the shock. The results are not driven by differences in issuer characteristics, changes in other costs of going public, or other likely sources of confounding. Our findings highlight the differential effects of regulatory shocks on foreign issuers accessing the US market. Keywords: initial public offerings, information asymmetry, foreign issuers/multinational companies, regulation JEL classification: G30, G32, G38.

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1. Introduction A fundamental question in corporate finance is how the information environment affects financing. A large existing literature examines this question in the initial public offering (IPO) context, given the significance of an IPO for a company’s financing strategy and the economic magnitude of IPO costs. In 2012 the Jumpstart Our Business Startups (JOBS) Act changed the US IPO environment by decreasing disclosure requirements and providing a more flexible

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offering process for “emerging growth companies” (EGCs). Recent studies of domestic issuers

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have found increased IPO volume but also higher underpricing due to increased adverse selection after the shock. Foreign issuers may respond differently to this shock. In this paper we

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revisit the effects of the EGC status focusing on foreign issuers conducting an IPO in the US

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market. This question is important for several reasons. Foreign issuers have become more prevalent in US financial markets, now accounting for one-fifth of the US IPO market.

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Regardless of the EGC regime, foreign private issuers have been able to qualify for certain types of disclosure relief that are now available under the EGC regime. At the same time, foreign

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issuers face greater information frictions and less investor recognition in the US market due to factors such as geographic distance, cultural differences, and the value of local knowledge in evaluating investment opportunities (home bias in investment). We hypothesize that the EGC regime may affect foreign issuers differently than domestic

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issuers. We focus on IPO underpricing, which prior literature has linked to high ex ante uncertainty about firm value (Beatty and Ritter (1986), Ljungqvist (2007)). The significantly higher ex ante uncertainty (information risk) associated with foreign issuers compared to domestic issuers, yields a natural setting for analyzing the differential effects of the EGC regime on IPOs. We test two contrasting predictions regarding the effects of the EGC regime on foreign

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versus domestic issuers. On the one hand, the EGC regime decreased the amount of disclosure required from an IPO issuer. Because US investors already face more difficulty in obtaining information about foreign issuers, a further decrease in disclosure under the EGC regime could exacerbate information frictions. This can increase the risk of adverse selection, causing investors to demand lower offer prices (greater underpricing) to compensate for the increase in information risk. This “information risk” hypothesis would predict greater underpricing for

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foreign issuers under the EGC regime, and a more pronounced effect of the EGC regime on

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underpricing of foreign issuers relative to domestic issuers.

On the other hand, we also hypothesize that the EGC regime can reduce underpricing for

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foreign issuers. In particular, because foreign firms frequently face greater challenges in

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attracting US investors, due to information costs and a lack of investor recognition (e.g., Ahearne, Griever, and Warnock (2004); Cooper, Sercu, and Vanpée (2013)), the flexibility of

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the offering process under the EGC regime that allows issuers to communicate with institutional investors prior to the IPO, may enable them to efficiently resolve valuation uncertainty. This

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allows issuers to appropriately price the deal in order to attract sufficient investor capital. By giving companies insight into investor opinions about the proposed deal, pre-IPO communications can help issuers set the offer price that matches investor demand more closely, rather than underprice the offering more aggressively to lower the risk of a failed deal. This

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hypothesis, which we term the “uncertainty resolution” hypothesis, would predict less underpricing for foreign issuers under the EGC regime. Under the null hypothesis, in equilibrium, IPO offer prices and investor information

acquisition should fully adjust to reflect changes in information risk and valuation uncertainty associated with the EGC regime. Thus, because investors and issuers anticipate the effects of the

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EGC regime, we should not see any ex post effects of the EGC regime on underpricing in either foreign or domestic issuer IPOs. This paper contributes to an extensive academic literature on IPOs. A number of studies have examined aggregate trends in US and global IPOs (e.g., Gao, Ritter, and Zhu (2013); Ritter (2011, 2012); Doidge, Karolyi and Stulz (2013)). A large literature focuses on first-day IPO underpricing (e.g., survey in Ljungqvist (2007); Loughran and McDonald (2013); Loughran and

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Ritter (2004); Lowry and Schwert (2004)). While most studies exclude them, several studies

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examine foreign IPOs. Ejara and Ghosh (2004) examine ADR IPOs from 1988-2001 and find that foreign issuers are associated with lower underpricing but significant compliance costs.

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Bruner, Chaplinsky, and Ramchand (2004) find similar IPO costs for foreign and domestic

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issuers during 1991-1999 and conclude that the information asymmetry and risks of foreign issuers are mitigated by other issuer characteristics. Caglio, Hanley, and Marietta-Westberg

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(2016) find that foreign IPO issuers in a global sample from 1995-2011 tend to be larger and more likely to use global underwriters and tend to choose more developed and better integrated

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capital markets with stronger mandatory disclosure rules, greater IPO activity, and good public enforcement. More recently, several studies examined the effects of the 2012 JOBS Act reforms introducing the EGC regime on domestic issuers and found evidence of an increase in IPO volume after the shock (Dambra, Field, and Gustafson (2015)); an increase in information risk,

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which results in greater underpricing (Chaplinsky, Hanley, and Moon (2017); Barth, Landsman, and Taylor (2017); Agarwal, Gupta, and Israelsen (2016)); and no change in spreads or direct costs (Chaplinsky et al. (2017)).1

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In addition, Dambra, Field, Gustafson, and Pisciotta (2018) find that analyst coverage of EGCs has more bias and less accuracy and information content.

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Our paper is also related to the large body of work on home equity bias - a welldocumented puzzle in international financial economics (French and Poterba (1991); Tesar and Werner (1995); Cooper and Kaplanis (1994)). Home equity bias is the preference of investors to invest the majority of their portfolios in domestic equities, instead of having a diversified portfolio that includes foreign equities. This pattern extends not just to individual investors but also to large institutional investors (Strong and Xu 2003). A number of explanations have been

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suggested in prior research, including information asymmetry driving investors’ tendency to

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allocate their portfolios to proximate investment opportunities.

This paper differs from related work in its focus on the implications of the JOBS Act

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shock, arguably the most significant regulatory change in the US IPO market in recent years, on

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an increasingly important category of companies that has generally been excluded in prior analyses. We explicitly allow for the differential effects of the EGC regime on foreign and

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domestic issuers. We focus on underpricing but also consider other IPO costs (compliance costs and spreads), long-run returns, and deal volume. More broadly, our study contributes to the

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existing literature on the effects of the information environment on financing. Our main findings are as follows. Unlike domestic issuers, foreign issuers experience significantly lower underpricing under the EGC regime. Our estimates show that underpricing is approximately 3-9% lower for foreign EGCs than for foreign non-EGCs, after controlling for

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differences in issuer and deal characteristics. In comparison, domestic EGCs experience approximately 4-6% higher underpricing than domestic non-EGC issuers, consistent with prior research. These differentials are economically important, considering that first-day underpricing on average is approximately 15%. We perform a battery of robustness tests to account for potential confounding effects and differences in issuer, underwriter, and deal characteristics;

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other disclosure relief; alternative sample and variable definitions; and falsification tests. To rule out an alternative explanation – that foreign issuers may be better-quality firms in ways that are not captured by the identifiable issuer characteristics – we include the ‘foreign’ variable (besides the interaction of foreign and EGC variables) in all of our tests, and find that unlike the interaction variable (Foreign*EGC) the direct foreign effect is not significant. This is corroborated in an analysis with country fixed effects.

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Our findings are consistent with the uncertainty resolution hypothesis. We hypothesize

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that the flexibility of the EGC offering process that allows communication with investors before the IPO helps firms and underwriters to resolve pre-IPO uncertainty about how the public market

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values the firm and what offer price will attract sufficient investor demand. Such resolution of

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uncertainty in turn enables the issuer to underprice the deal efficiently, resulting in lower firstday returns (lower underpricing). Foreign issuers have less US investor recognition and greater

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uncertainty about how their offering will be valued. Reaching out to investors before launching the IPO helps issuers overcome, to some extent, the barriers of asymmetric information arising

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from the foreign ownership/operations of the issuer. These barriers affect small foreign issuers the most and therefore the early investor outreach allowed under the EGC status makes this channel significantly more salient for smaller foreign issuers than for domestic issuers or large foreign issuers.

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We test this mechanism by looking at actual use of communications with investors prior

to the IPO, a key “de-risking” provision of the EGC regime. Consistent with the hypothesized channel, we find that increased access to potential investors during the pre-IPO period is associated with lower underpricing for IPOs of foreign EGCs, relative to foreign non-EGCs or domestic issuers.

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We do not find evidence that the underpricing effects are offset by the effects of the EGC regime on direct costs of an IPO. While foreign issuers generally incur higher compliance costs, those costs are marginally reduced or unaffected under the EGC regime. Gross spreads, which tend to be highly clustered, as noted in prior work, are not affected by the EGC regime for either foreign or domestic issuers. Further, the effects are not driven by differences in price stabilization. Finally, we do not find a significant effect in foreign issuer IPO deal volume

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around the EGC shock.

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Overall, for foreign issuers, which already disclose less when accessing the US market, the disclosure relief under the EGC regime did not lead to increased adverse selection costs. In

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contrast, the more flexible offering process under the EGC regime enabled the resolution of

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uncertainty prior to the IPO, which is most valuable for foreign issuers that tend to be less known to US investors. In turn, for domestic issuers, the scaled issuer requirements under the EGC

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regime expanded access to IPOs but also increased adverse selection, consistent with prior work. Overall, the EGC regime had markedly different effects on foreign versus domestic issuers in the

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US market.

The rest of the paper is organized as follows. Section 2 describes background on EGCs and foreign filers as well as presents sample, variables, and methodology. Section 3 presents results and robustness tests. Section 4 concludes.

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2. Background and data 2.1. Background

In 2012, the JOBS Act provided certain IPO process accommodations and disclosure

relief to issuers that qualify for the new EGC status. To qualify as an EGC, a company cannot be a large accelerated filer (public float cannot exceed $700 million as of the end of the most

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recently completed second fiscal quarter); its annual revenues cannot exceed $1 billion; and its total issuance of straight debt in the past 3 years cannot exceed $1 billion.2 A company can remain an EGC for up to five years if it meets these other criteria. Similar to domestic issuers, a large majority of foreign companies in our sample conducting a US IPO after the JOBS Act (approximately 80%) were EGCs. EGCs are exempt from the auditor attestation requirements. EGCs are also allowed more

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flexibility to communicate with institutional investors before launching a formal offering.

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Further, EGCs can confidentially submit a draft registration statement (but it must be publicly filed if the issuer proceeds with an offering).3 EGCs also have an extended transition period to

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comply with new or revised accounting standards. Finally, EGCs can submit two instead of three

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years of audited financials, discuss two years of audited financials as part of MD&A, present two years of selected financial data in the IPO registration statement, and are also exempt from

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certain executive compensation disclosures.

In turn, foreign private issuers can use IFRS or home country accounting standards

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instead of US GAAP and are exempt from Regulation FD, proxy disclosures, and certain executive compensation disclosures.4 The accommodations available during our sample period

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are described in greater detail in Appendix Table A1.

See http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm. In April 2017 – after the end of our sample period – the revenue threshold was raised to $1.07 billion. 2

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In July 2017, the option of confidential submission of draft registration statements was expanded to all issuers. In 2019 the option of communication with institutional investors prior to the offering was expanded to all issuers. 4

https://www.sec.gov/divisions/corpfin/internatl/foreign-private-issuers-overview.shtml.

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2.2. Sample Sample construction is described in detail in Appendix Table A2. The sample contains exchange-listed US IPOs from 2005-2016 (to incorporate periods both before and after the financial crisis) and 2010-2016 that were registered on Form S-1 or F-1. Because the empirical predictions focus on the 2012 regulatory reform, to avoid introducing noise from a long preshock period characterized by other major confounding events, we do not include the 1990s and

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early 2000s in our sample period.5 We end the sample period in 2016 to provide sufficient data

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after the shock but also to avoid confounding from subsequent regulatory changes in 2017 that expanded certain EGC relief to all issuers.

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The data is obtained from Dealogic and Audit Analytics. In line with prior work, we

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exclude investment funds, blank checks, acquisition corporations, REITs, unit offerings, OTC deals, penny stocks (IPO price below $5), and small deals (offer size below $5 million).

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Differently from prior work, we include foreign issuers in the analysis. Foreign companies account for approximately one-fifth of the US IPO market during our sample period. Because

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accommodations provided to EGCs overlap with certain exemptions offered to small issuers (exemption from the auditor attestation requirement; the option to provide two years instead of three years of audited financials; and certain scaled compensation-related disclosure 5

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In particular, the dot com boom of the late 1990s and its aftermath have been associated with systematically different patterns in IPO activity levels and pricing for reasons unrelated to the effects of the JOBS Act (e.g., Lowry, Officer, and Schwert (2010); Loughran and Ritter (2004)). Some studies have highlighted conflicts of interest in IPO underwriting during the dot com period while others examined subsequent reforms in the early 2000s, which have also been linked to systematic effects on underpricing (e.g., Loughran and Ritter (2002), Lowry and Schwert (2004), John, Knyazeva, and Knyazeva (2018)). Further, the Sarbanes-Oxley Act of 2002 enacted in the aftermath of the accounting scandals of the early 2000s introduced a range of requirements regarding disclosure controls, management assessment of internal controls, and for larger issuers, auditor attestation of internal controls over financial reporting. Finally, governance reforms to strengthen audit committee and board independence were also adopted in early 2000s, as part of Sarbanes-Oxley Act of 2002 and amendments to NYSE and NASDAQ listing requirements (e.g., Chhaochharia and Grinstein (2007)). If we were to extend the sample period to the early 1990s, these market and regulatory shocks, which are unrelated to the 2012 reforms, are likely to significantly confound the hypothesis tests.

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requirements) and because small issuers generally have greater information frictions, we exclude companies with sales below $50 million from the analysis to avoid confounding.6 For robustness, we exclude deals with gross proceeds below $75 million and find similar effects. 2.3. Variables Variable definitions are described in detail in Appendix Table A2. The EGC indicator is obtained from EDGAR filings and Audit Analytics. The main tests define the foreign issuer

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indicator based on the registration filing on Form F-1.7 For robustness, alternative foreign issuer

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measures are used: (i) issuers that file on Form F-1 or that are incorporated and headquartered outside the US are classified as foreign; or (ii) issuers incorporated outside the US are classified

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as foreign. These alternative measures yield similar results. Countries of incorporation and

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location of the issuer are obtained from Dealogic, supplemented with information from registration statements. The tests include the direct EGC and foreign issuer indicators as well as

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their interaction terms.

Figure 2 in the Appendix shows the distribution of locations of foreign issuers in the US

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IPO sample. The majority of foreign issuers were from Asia/Pacific (mainly, China), followed by Europe/Middle East/Africa (EMEA) countries (mainly, the UK and Israel), and the Americas

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In unreported robustness, we also lower the sales threshold and find consistent results. We exclude the smallest issuers from the sample for several methodological and conceptual reasons. The 2012 regulatory reform had minimal, if any, effect on such issuers. Small issuers already had extensive disclosure relief prior to the 2012 reform – they were exempt from the auditor attestation requirement and certain executive compensation disclosure requirements and could include two instead of three years of financial statements. Further, the option to communicate with investors prior to the IPO introduced by the 2012 reform was limited to institutional investors, which rarely invest in such issuers. Finally, very few foreign issuers pursing a US IPO are small companies, thus, their inclusion in the sample would significantly decrease comparability and increase noise in the tests (because small issuers are associated with substantial information frictions, which can affect pricing). 7

While all Form F-1 filers are foreign private issuers, a few foreign issuers use Form S-1 (and become subject to filing and disclosure requirements of domestic issuers). Foreign private issuers in our sample are unlikely to file on Form S-1. Foreign private issuers that use US GAAP may use Form F-1. Further, our tests exclude small issuers, ruling out the use of smaller reporting company status, not available on Form F-1, as a motivation for using Form S1). However, for robustness we exclude foreign-incorporated issuers that use Form S-1 and obtain similar results.

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(mainly, Canada). Figure 3 in the Appendix shows the industry distribution of foreign issuers, using the Fama and French 12 industry classification. The largest sector represented was business equipment (which includes software). The dependent variables measuring direct and indirect IPO costs are defined following existing work. Underpricing—an indirect cost of the IPO—is measured using the first-day return. Robustness checks examine the first-week and first-month returns. Generally, investors seek

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greater underpricing in exchange for participation in riskier deals where ex ante valuation is

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more uncertain and information risk is higher (e.g., Beatty and Ritter (1986); survey in Ljungqvist (2007)). Other studies have linked underpricing to attempts to increase research

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coverage (e.g., Rajan and Servaes (1997); Aggarwal, Krigman, and Womack (2002); Liu and

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Ritter (2011)).

Our tests include various explanatory variables to account for potential confounding

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effects. In particular, a foreign issuer electing to conduct a US IPO may already be sufficiently well established, with a good track record, a reputable US underwriter, and sufficient investor

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recognition (Bruner et al. (2004)). The inclusion of the direct foreign issuer effect and controls for observable characteristics described below should mitigate this possibility. The direct foreign issuer effect generally does not enter significantly, alleviating this concern. Another concern is that firms meeting the EGC size threshold, which may have a higher

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degree of information risk, are systematically different, irrespective of the reforms, and moreover, that foreign and domestic firms meeting EGC size criteria require differing levels of underpricing to attract US investors and compensate them for ex ante uncertainty. To rule out this alternative channel, we repeat the tests adding an indicator equal to 1 if the firm meets the EGC size threshold ($1 billion in revenue during our sample period) and 0 otherwise,

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irrespective of the reform, and an interaction of the size indicator with the foreign indicator. If that interaction term enters significantly irrespective of the reform, whereas the post-reform effect is no longer significant, the findings of the reform effects are spurious and are instead driven by differential underpricing of smaller foreign versus smaller domestic companies. We do not find that to be the case. The differential underpricing of foreign versus domestic companies meeting EGC criteria is only observed after the reform, alleviating this concern.

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Underwriter rank is used to capture underwriter reputation. The variable is defined based

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on updated underwriter rankings from Loughran and Ritter (2004), which build on the rankings in Carter and Manaster (1990) and Carter, Dark, and Singh (1998). Underwriters with ranks of

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eight or nine are classified as highly reputed, following Loughran and Ritter (2004). On the one

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hand, a reduction in uncertainty due to underwriter certification can result in lower underpricing (e.g., Carter and Manaster (1990); Carter, Dark, and Singh (1998)). On the other hand, the

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relation between underwriter prestige and underpricing was reversed in the 1990s and 2000s (Loughran and Ritter (2004); Loughran and McDonald (2013)). This is consistent with high-

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prestige underwriters setting ‘lowball’ offer prices (Lowry and Schwert (2004)) and issuers willing to accept low offer prices, thus, greater underpricing, in order to partner with reputable underwriters that can facilitate better analyst coverage (Lowry, Officer, and Schwert (2010)). Additionally, issuers may accept lower offer prices if the wealth effect of upward pre-IPO offer

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price revisions dominates the impact of underpricing (Loughran and Ritter (2002)). Offer price revision is the change in the price between the initial filing of the registration

statement that has a price or a price range and the final prospectus filing. The measure proxies price discovery over time, such as offer price adjustments to reflect unanticipated investor demand. Various studies find a correlation between offer price revision and first-day returns

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(e.g., Hanley (1993); Lowry and Schwert (2004); Loughran and Ritter (2004); Cliff and Denis (2004); Habib and Ljungqvist (2001); Ljungqvist and Wilhelm (2003); Smart and Zutter (2003); Ritter and Welch (2002); Aruǧaslan, Cook, and Kieschnick (2004)). It has been attributed to partial adjustment of the market to information revelation about the firm’s valuation after the initial filing (Benveniste and Spindt (1989)).

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Venture capital backing indicator has also been related to underpricing (e.g., Megginson and Weiss (1991); Barry et al. (1990); Gompers (1996); Brav and Gompers (2000); Smart and

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Zutter (2003); John, Knyazeva, and Knyazeva (2018)). On the one hand, the certification effect predicts a negative relation between VC backing and underpricing, to the extent that VC

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presence reduces the information asymmetry about the issuer. But studies of IPOs covering the

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1990s and 2000s find a positive effect of VC backing on underpricing, linking it to ‘grandstanding’ by VCs that prefer higher first-day returns to attract future investor flows (e.g.,

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Gompers (1996); Lee and Wahal (2004)); stronger VC preference for all-star analyst coverage attracted through underpricing (e.g., the ‘analyst lust’ theory in Liu and Ritter (2011)); implicit

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collaboration between VCs and underwriters whereby, VCs accept underpricing in return for underwriter price support enabling future exit at a high price (e.g., Hoberg and Seyhun (2009)); and self-selection of VCs into riskier firms with high information asymmetry (e.g., Loughran and McDonald (2013); Lowry, Officer, and Schwert (2010)).

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Share overhang, defined as the shares retained in the firm divided by issued shares, may

affect the relative cost of underpricing to the firm. The larger the share overhang, the less consequential the underpricing cost is to the issuer, hence, the higher the underpricing may be, all else equal (e.g., Loughran and Ritter (2004); Smart and Zutter (2003)).

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Smaller issuer size can proxy potential information asymmetry about the issuer’s prospects that may be associated with higher underpricing (e.g., Lowry and Murphy (2007) use pre-IPO assets adjusted for inflation)). Other controls include offer size, days in registration, and the NASDAQ indicator. NASDAQ may attract listings of smaller, younger, high-tech firms, which may be associated with greater information risk, thus, greater underpricing (e.g., Lowry, Officer, and Schwert

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(2010)). Offer size has been positively related to underpricing in some studies (e.g., Abrahamson

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et al. (2011) and negatively in others (e.g., Hao (2011)).

To capture direct IPO costs, we consider gross spreads and compliance-related offering

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expenses expressed as a percentage of deal value. Several studies have examined gross spread

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(e.g., Chen and Ritter (2000); Hansen (2001); Abrahamson, Jenkinson, and Jones (2011); Fernando, Gatchev, May, and Megginson (2015); Kim, Palia, and Saunders (2008); Hao (2011)).

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There is relatively little variation in gross spread across issuers (Chen and Ritter (2000)). Many of the explanatory variables from the underpricing regressions are also included in gross spread

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regressions, to the extent that they may affect underwriter effort or the value of underwriting services.8 We also examine compliance-related offering expenses as another component of direct IPO costs (the sum of accounting, legal, listing, registration and filing, and miscellaneous

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expenses).

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Some studies find a positive association of underwriter reputation and gross spread (e.g., Fernando et al. (2015); Hansen (2001); Beatty and Welch (1996)) while some others find a negative relation (e.g., Kim et al. (2008)). Some studies find a negative relation between VC backing and spreads (Fernando et al. (2015); Hao (2011)) while others find a positive relation (e.g., Abrahamson et al. (2011) for mid-size and large deals). Offer size has been positively associated with gross spread in some studies (e.g., Fernando et al. (2015); Corwin and Schultz (2005)) and negatively associated with spread in other studies (e.g., Kim et al. (2008); Hao (2011); Abrahamson et al. (2011)). Larger issuers have been associated with lower gross spreads (e.g., Hao (2011)). NYSE/AMEX IPOs have been associated with higher gross spreads (e.g., Hao (2011)).

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We incorporate industry fixed effects to capture variation in information risk across industries. We add country fixed effects for robustness. Differently from prior JOBS Act studies, we also add year fixed effects for robustness, to account for years with hot IPO markets and aggregate economic trends (e.g., Ivanov and Lewis (2008); Derrien (2005); Alti (2005) etc.). We recognize, however, that the inclusion of year fixed effects changes the interpretation of the direct EGC term to capture the EGC effect net of the aggregate time trend in IPO costs. The

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estimate of the direct EGC effect can be especially sensitive to the inclusion of year fixed effects

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because the majority of IPOs after the shock were EGCs.

Summary statistics of the main variables are presented in Table 1. The average first-day

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return is about 15% (median 9%), gross spread about 6.5% (median 7%), and compliance-related

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offering expenses – about 3% (median 2%). Foreign filers account for around one-fifth of IPOs. For the entire 2005-2016 period, around four-fifths of issuers would have qualified under the

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EGC revenue threshold during the sample period. EGCs account for around one-third of IPOs because EGC status was not available before the shock (however, EGCs account for about three-

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quarters of IPOs after the shock). Around thirty percent of issuers were backed by VCs and slightly less than half of all deals in the sample were listed on NASDAQ. Appendix Table A3 reports the summary statistics for the subsamples of domestic and foreign issuers. Foreign and domestic issuers exhibit various similarities in issuer and offering characteristics (underpricing,

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spreads, VC backing, offer price revision, size of the offering, size of the issuer, NASDAQ listing). However, foreign issuers incur higher compliance costs, are somewhat more likely to use top underwriters, spend fewer days in registration, and have marginally higher share overhang. We control for all of these differences using controls on the right-hand side in our main tests.

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[Table 1] 3. Results Table A3 in the Appendix presents univariate comparisons, which do not account for other controls: the EGC regime is associated with higher underpricing for domestic issuers (consistent with prior work) but not for foreign issuers. However, it is important to account for differences in issuer characteristics (Bruner et al. (2004) and Caglio et al. (2016)), particularly

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because the number of domestic IPO issuers grew under the EGC regime (Dambra et al. (2015)).

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The main tests are presented in Table 2. The EGC status is associated with higher underpricing for domestic issuers, consistent with prior work. By contrast, the effect is reversed

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for foreign issuers, all else equal. The interaction between foreign filer and EGC effects is

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negative and highly significant. All else equal, domestic EGC issuers had approximately 4-6% higher first-day return than domestic non-EGC issuers while foreign EGC issuers had

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approximately 3-9% lower first-day return than foreign non-EGC issuers. Foreign EGC issuers had 6-7% lower first-day returns than domestic EGC issuers. These estimates have considerable

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economic magnitude given that the average first-day underpricing of the issuers in the sample is around 15%. [Table 2]

The magnitude of the interaction coefficient exceeds the magnitude of the direct EGC

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effect, suggesting that foreign EGCs experience lower underpricing rather than a smaller increase in underpricing. The results support the uncertainty resolution hypothesis, according to which foreign issuers benefit more from being able to resolve valuation uncertainty prior to the IPO due to a more flexible offering process. In contrast, we do not find support for the information risk hypothesis (in the context of foreign issuers). Holding issuer characteristics

16

constant, the additional disclosure relief under the EGC regime does not appear to increase the information risk of foreign issuers, consistent with considerable disclosure relief already available to foreign private issuers. The direct effect of being a foreign issuer on underpricing is not significant, suggesting that the IPO registration requirements may mitigate some of the information asymmetries of foreign issuers. The regressions also control for issuer and deal characteristics to account for

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potential selection of higher-quality foreign issuers into the US IPO sample, which may offset

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the information asymmetries due to distance (e.g., Bruner et al. (2004)). The signs of coefficients on other control variables are largely in line with the findings of other work and the discussion in

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Section 2.3. Larger issuers are associated with lower underpricing, consistent with such issuers

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having lower information asymmetry. Offer price revision is positively related to underpricing, consistent with the partial adjustment model. Share overhang is associated with greater

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underpricing. VC backing is associated with more underpricing in 2005-2016 but the effect is not statistically significant in the second half of the sample period (2010-2016). With the industry

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effects and other controls included, the NASDAQ indicator, underwriter prestige, offer size and the number of days in registration do not have significant effects in our sample. Table 3 presents robustness tests. Panel A uses alternative EGC proxies. The main EGC measure was identified from filings. For robustness, we expand the definition to include all

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issuers with revenues up to $1 billion in the post-2012 period (Columns I and III). This measure is noisier because it does not take into account other qualification criteria. The results are generally consistent with the earlier evidence in Table 2.

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[Table 3] Further, a potential concern is that issuers with revenues in the EGC range are systematically different, both before and after the shock, in ways that may be only partly captured by our controls. Therefore, we add a separate control for revenues below $1 billion and its interaction with the foreign indicator. Issuers with revenues in that range, or their foreign subset, do not exhibit greater underpricing, holding other characteristics constant. However, the

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main finding of lower underpricing for foreign EGCs after the shock continues to hold,

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alleviating potential concerns about confounding issuer characteristics associated with meeting the EGC threshold.

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Panel B uses alternative definitions of the foreign indicator and underpricing. The main

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analysis has identified foreign issuers based on the registration statement type. For robustness we expand the definition to add filers that are both incorporated and located outside the US

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(Columns I and IV). Alternatively, we use an expanded definition based only on foreign incorporation (Columns II and V).9 Columns V and VI use the first-week return as an alternative

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dependent variable measure. The main results continue to hold using these alternative definitions.

All of the tests include the direct foreign indicator, in part to account for potential differences in information risk posed by foreign versus domestic issuer. For robustness, Panel C

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adds country fixed effects, based on the country of incorporation and country of location, to filter out any additional potential sources of unobserved country-specific heterogeneity in foreign

9

A foreign private issuer must be incorporated or organized under the laws of a foreign country. However, an issuer incorporated abroad will be ineligible for foreign private issuer status if (1) more than 50% of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the US; and (2) either the majority of the executive officers or directors are US citizens or residents, or more than 50% of the assets of the issuer are located in the US, or the issuer’s business is administered principally in the US.

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issuer characteristics and their level of information risk, to the extent not already captured by our control variables. The results continue to hold. Our main analysis uses the EGC status to proxy the relief available to issuers. Indeed, prior studies and industry surveys suggest considerable uptake of the accommodations by EGCs. To better understand why foreign EGC issuers had lower IPO underpricing despite potentially higher information risk than domestic issuers and larger foreign issuers, we test if utilization of

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some of the EGC provisions reduced valuation uncertainty, leading to lower underpricing. Table

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4 provides additional tests of the channels of the effect looking at some of the specific accommodations that Dambra et al. (2015) characterize as de-burdening or de-risking the

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offering process. In particular, Dambra et al. (2015) describe the exemption from the requirement

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of auditor attestation of internal controls as a key de-burdening accommodation. EGCs are less likely to include auditor attestations after the IPO, compared to non-EGCs.10 Underpricing is not

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significantly associated with a lack of attestation, including for foreign filers (Columns I and III). As a caveat, it is possible that investors do not foresee which EGC issuers will use this provision.

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Dambra et al. (2015) also discuss de-risking provisions that facilitate the resolution of valuation uncertainty and streamline the offering process (communications with large institutional investors before the IPO, also known as testing the waters, and confidential submission of draft registration statements). Because confidential submission was previously available to foreign

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private issuers and thus was not unique to the EGC status for foreign issuers, we focus on the flexibility in communications with institutional investors through the testing-the-waters provision. We find that this provision enters with the same sign as the EGC indicator, predicting significantly lower underpricing for foreign issuers (Columns II and IV). This suggests that the

10

We look at the year after the IPO because all issuers are exempt at IPO time and until their second annual report.

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use of the flexibility in the offering process prior to the IPO available to EGCs was particularly beneficial to foreign issuers that may have greater valuation uncertainty prior to the IPO (especially with respect to US investor valuations of the company because foreign issuers have less US investor recognition). Such access to investors prior to an IPO likely helps foreign EGCs (more than domestic EGCs) to price their IPOs effectively, which results in lower underpricing. [Table 4]

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The analysis above has focused on underpricing, which is an indirect IPO cost (and the

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largest cost in terms of average magnitude). In Table 5, we check whether the effects of the shock on underpricing are offset by changes in direct costs (gross spreads and offering

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expenses). Prior work does not find a decrease in direct costs for domestic EGCs. Our results are

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broadly in line with that finding. As prior work shows (e.g., Chen and Ritter (2000)), gross spreads exhibit little cross-sectional and time-series variation. We observe that the estimate of

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the direct EGC effect on spreads is sensitive to the sample period and the inclusion of year fixed effects. The effect of interest – the differential impact of the EGC regime on foreign issuers

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captured by the foreign-EGC interaction term – is insignificant during either sample period. All else equal, foreign issuers were associated with lower gross spreads (generally in line with Abrahamson et al. (2011)). [Table 5]

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Turning to compliance-related offering expenses, we do not find a decrease in offering

expenses under the EGC regime (generally in line with Chaplinsky et al. (2017)). The direct foreign issuer coefficient is significant and positive, consistent with the greater challenges for foreign issuers of navigating the US compliance environment. In one specification, this higher compliance cost for foreign issuers is partly mitigated for foreign EGCs, however, the estimate is

20

sensitive to the sample period and the inclusion of year fixed effects. Overall, we do not find evidence that the decreased underpricing for foreign issuers under the EGC regime is offset by increased spreads or offering expenses. Additional robustness tests We report several additional robustness tests in the Appendix. In Panel A of Table A4, we consider whether the results are driven by differences in underwriter price stabilization

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behavior. By reducing the incidence of negative initial returns, price stabilization could result in

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higher average initial returns, which may be conflated with greater underpricing (e.g., Ruud (1993); Asquith, Jones, and Kieschnick (1998)). If underwriters provide less after-market price

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support to foreign EGC, the effect we document could be confounded with lower underpricing of

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foreign EGC IPOs. Since after-market price support trades are not observable with the data available to us, we test for it indirectly by looking at the distribution of post-IPO returns over

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different horizons. Specifically, if the lower post-IPO returns of foreign EGCs are driven by a lack of after-market price support, we should observe: (i) an insignificant foreign EGC effect on

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initial returns in a subsample excluding negative returns; (ii) a higher incidence of negative initial returns for foreign EGCs; and (iii) a lower incidence of small positive initial returns for foreign EGCs. Because prior studies indicate that price stabilization may continue for up to a few weeks after the offering,11 we also examine the distribution of one-week and one-month returns.

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We do not see a higher incidence of negative returns or a lower incidence of small positive returns in foreign EGC IPOs for up to one month after the offering. We also see the foreign EGC results generally continuing to hold in a sample excluding IPOs that fall below the offer price. However, Asquith et al. (1998) note that “it is questionable that such efforts continue for up to four weeks after the offer date” and suggest that stabilization efforts likely have ended by the end of the second week. Aggarwal (2000) finds that “[m]ost price support activities end within 10 to 15 trading days, but in some cases they continue for months.” 11

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Overall, these tests are inconsistent with the alternative that the lower initial returns of foreign EGC IPOs are due to less after-market price support by their underwriters. In spite of a number of controls and robustness tests, some omitted source of heterogeneity in the issuer pool related to EGC status may be driving our result. Heterogeneity may arise due to differences in the size of EGC and non-EGC issuers, so our main tests exclude smaller issuers. Further, in one of the robustness tests above we separately controlled for

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potential differences in underpricing among foreign and domestic issuers that meet EGC size

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thresholds. Heterogeneity may also arise due to the differences between foreign and domestic issuers with respect to risk or valuation uncertainty. Because each issuer has a single IPO data

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point, we cannot use firm fixed effects. However, incorporating various controls, industry, year,

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and country fixed effects above alleviates some of the concerns about systematic differences between issuers from foreign countries and US issuers. In Panel B of Appendix Table A4 we

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consider whether foreign EGC issuers that pursue a US IPO may come from countries with different institutional quality and whether institutional quality characteristics (such as the level of

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protection against self-dealing, anti-director rights, control over corruption, and rule of law in the issuer’s country) are behind lower underpricing of such EGC issuers.12 Due to multicollinearity, we omit the foreign issuer and foreign EGC effects from these tests. Variation in home country institutional quality does not affect the underpricing in EGC IPOs.

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It is possible that some underlying aggregate factor, such as the economic recovery from

the global financial crisis or the Eurozone crisis or other aggregate trends in US and foreign

12

For example, Boulton, Smart, and Zutter (2010) find in a sample from 2000 to 2004 that underpricing is higher in countries with stronger corporate governance protections from insiders. They argue that IPO issuers underprice in order to induce ownership dispersion in countries with stronger minority shareholder protections. In turn, if strong investor protection institutions in the issuer’s country decrease the issuer’s risk and level of pre-IPO uncertainty, underpricing may be lower.

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issuance, coincided with the 2012 shock. Although the results held after controlling for year effects, it is possible that the time trend affected different issuer groups differently, violating the parallel trends assumption. As a falsification test, in Panel C (Columns I-III) we shift the timing of the shock forward and back by two years. Instead of the 2012 shock, we consider the effects of a placebo ‘EGC’ shock, set to equal 1 for firms with sales below $1 billion beginning in 2010. Alternatively, we consider the effects of a second placebo ‘EGC’ shock set to equal 1 for firms

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with sales up to $1 billion beginning in 2014. The interaction of the foreign indicator with the

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placebo shocks is not significant.

Further, in Panel C, Columns IV-V we perform a test of parallel trends by adding

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interactions of the EGC eligibility treatment (proxied by sales up to $1 billion) with the years

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before and after the actual shock. The effects of the shock are significant in 2012 but not in the runup to it, supporting the parallel trends assumption and validity of our main tests.

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In Appendix Figure 4, we perform a different falsification test in which we randomize the assignment of foreign issuer indicator (while maintaining the sample proportion of ‘foreign’

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issuers) and examine the distribution of coefficient estimates from regressions using this placebo ‘foreign’ measure. Coefficients on the placebo ‘foreign’ status and on the interaction of placebo ‘foreign’ status and actual EGC indicator are around zero, differently from the coefficients in the specifications using the actual foreign indicator in Table 2, which supports our intuition.

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In Appendix Table A4, Panel D, we use alternative sample definitions to further examine

the robustness of the results.13 In Column I, we narrow the sample to the 2010-2014 period, to more closely follow prior work on the EGC regime (with the difference that we include year

13

In an unreported test, we also exclude observations with missing or low (below 5%) institutional ownership. The effects of foreign EGCs and investor communications remain qualitatively similar. Because holdings are reported for the end of the IPO quarter, they may reflect post-IPO trading (more granular information is not available to us).

23

fixed effects, which affects the significance of the direct EGC indicator, as discussed above). In Column II, we extend the sample to the 2001-2016 period. While a larger sample can increase the power of the tests, it risks confounding due to other factors that may affect IPOs during the longer time period. We exclude year 2000 to avoid confounding effects from the dot com boom. The main sample excludes small issuers because they are associated with considerably higher information risk and because they can already use scaled disclosure provisions, making EGC

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relief less relevant for them. However, a typical EGC is by definition still smaller than a typical

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non-EGC because of the revenue test in the EGC definition. Therefore, all tests also control for size. As an additional robustness test, in Columns III-IV, we repeat the tests on a size-balanced

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sample, which is limited to firms whose revenues fall in the 10th-90th percentile range of non-

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EGC size. In Columns V-VI, we impose an additional size filter, suppressing deals below $75 million. In Columns VII-VIII, we exclude global IPOs (conducted both in the US and another

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market).14 In Columns IX and X, we also exclude foreign-incorporated filers that use Form S-1 because some of them may not qualify for the foreign private issuer status and may thus not

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receive the foreign private issuer disclosure relief discussed in Appendix Table A1. In Panel E, we vary the revenue threshold for sample construction, lowering it to $20 million, which results in statistically similar issuer revenues for foreign and domestic issuers. Importantly, the inclusion of the term for the issuer with revenues up to the EGC threshold to allow for statistical

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differences between small and large issuers unrelated to the shock continues not to affect the main result, while the difference in the treatment effect on treated foreign and domestic issuers

14

We also manually search prospectuses filed with Form F-1 for information on any prior foreign listings. We identify one (two) such issuers during 2010-2016 (2005-2016) and exclude them along with dual listings in Columns VII-VIII. Excluding just these observations in an unreported test similarly has no effect on the result.

24

remains significant, in line with the prior findings. The results continue to hold after these robustness checks. Further, it is possible that foreign and domestic issuers continue to have unobservable differences that may be confounding the analysis. We use propensity score matching to further balance the sample in Appendix Table A4, Panel F. The results continue to hold. Thus, foreign issuers experienced a decrease, rather than an increase, in underpricing

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under the EGC regime, suggesting that foreign issuers accessing the US market realized the

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benefits of a lower cost of capital and did not experience the costs of increased adverse selection, as compared to domestic issuers examined in prior studies. The effect is not explained by

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offsetting changes in other IPO-related costs or differences in issuer or deal characteristics or

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other likely confounding effects. IPO deal activity

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Finally, we examine the effects of the EGC regime on the volume of IPO activity among foreign issuers. Figure 1 in the Appendix shows trends in the number and market share of foreign

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issuer IPOs over time. It reveals significant variation from year to year, with an average share of just under 20% during the sample period. To determine whether the volume of IPO activity has changed after the 2012 shock, Table A5 in the Appendix presents regressions of foreign issuer IPO activity (at the industry-year level). In line with Dambra et al. (2015), the number of

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domestic issuer IPOs increased around the 2012 shock. However, the number of foreign issuer IPOs in a given industry did not increase around the shock. As a caveat, due to the smaller sample size and the confounding effects of aggregate economic conditions that may have coincided with the shock, we treat inference from this test as merely suggestive.

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4. Conclusions We have examined the effects of the EGC regime on the IPOs of foreign issuers as compared to domestic issuers in the US market. Introduced in 2012, the EGC status offered disclosure relief and a streamlined offering process. After controlling for issuer characteristics, recent studies of domestic issuers find mixed effects of the 2012 shock – an increase in IPO volume levels; an increase in IPO underpricing (indirect cost) due to increased information risk

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and adverse selection; and no decline in direct IPO costs. We extend and complement existing

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evidence by examining the impact of the EGC status on foreign issuers pursuing US IPOs, a group that has been excluded in prior studies of this important shock. We find that the effects of

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the EGC regime on foreign issuers differ significantly from the effects on domestic issuers.

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All else equal, rather than compound the information risk and increase underpricing, the EGC regime enabled foreign issuers to significantly decrease underpricing compared to non-

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EGC issuers. This effect is driven by the de-risking of the offering process. This suggests that foreign issuers, which face high valuation uncertainty and less US investor recognition, realized

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the benefit of EGC relief from access to institutional investors prior to the IPO, through lower information asymmetry and decreased valuation uncertainty prior to the IPO. The disclosure relief already available to foreign issuers moderates the incremental costs of increased information asymmetry associated with EGC relief for domestic issuers.

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The effects are not offset by changes in direct IPO costs (gross spreads and compliance-

related expenses) and continue to hold after controlling for differences in issuer characteristics and robustness tests using alternative measures, sample criteria, and estimation methodologies. Looking at IPO activity levels, foreign issuers did not experience a jump in deal volume after the 2012 shock, in contrast to domestic issuers.

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Combined, these results suggest that, for foreign issuers, which already disclose less when accessing the US market, the disclosure relief under the EGC regime did not increase adverse selection costs. In contrast, the more flexible offering process under the EGC regime facilitated the resolution of uncertainty prior to the IPO, which is most valuable for foreign issuers that tend to be less known to US investors. In turn, for domestic issuers, the reduction in the disclosure and other issuer requirements under the EGC regime expanded access to IPOs but

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also increased adverse selection costs, consistent with prior work. Overall, the EGC regime had

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markedly different effects on foreign versus domestic issuers accessing the US market.

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Figure 1. Number and share of IPOs by foreign issuers in the US market This figure summarizes the trend in the number (on the left axis) and market share (on the right axis) of foreign issuer IPOs in the US market. Sample and variable definitions are presented in the Appendix. 35

40%

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35% 30%

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25%

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20% 15

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15%

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10%

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5%

0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Foreign % (number) 16% 19% 18%

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Period 2000-2016 2005-2016 2010-2016

Foreign % (number)

-p

Number (foreign)

32

Figure 2. Regional breakdown of foreign issuers in US IPOs This figure summarizes the regional composition of foreign issuers in the US IPO market, based on the country of location of headquarters. Sample and variable definitions are presented in the Appendix.

2005-2016

11%

ro

of

30%

Asia-Pacific

Americas

re

EMEA

-p

59%

lP

2010-2016

7%

ur na

36%

Jo

57%

EMEA

Asia-Pacific

33

Americas

Figure 3. Sector breakdown of foreign filers in US IPOs This figure summarizes the sector composition of foreign issuers in the US IPO market, based on the primary SIC code assigned to sectors using the Fama and French 12 industry classification. Sample and variable definitions are presented in the Appendix.

2005-2016 2% 2% 2%

Business Equipment Other

4% 4% 4%

33%

Health Care

Finance

6%

ro

Consumer Nondurables

5%

of

Trade and Some Services

Misc. Manufacturing Telecom

-p

8%

Chemicals Utilities

30%

2010-2016 3%

3% 2%

2%

ur na

3%

lP

re

Consumer Durables

6%

Consumer Nondurables

38%

Misc. Manufacturing Finance Consumer Durables

10%

Jo

Other Trade and Some Services

4% 4%

Business Equipment

Health Care Telecom Chemicals

25%

Utilities

34

Figure 4. Falsification test (randomized foreign assignment) This figure summarizes falsification tests using a randomized Foreign indicator instead of the actual Foreign indicator in the specifications from Table 2, Columns I (2005-2016) and III (2010-2016). The mean of the placebo indicator equals the sample mean. Tests include the placebo ‘Foreign’ indicator, the actual EGC indicator, and their interaction (‘Foreign’xEGC). Each specification is estimated 10,000 times. The distributions and statistics for the coefficient estimates on ‘Foreign’ and ‘Foreign’xEGC are presented below. ‘Foreign’ and ‘Foreign’xEGC are insignificant and the actual EGC indicator is significant. 2010-2016

‘Foreign’xEGC

‘Foreign’xEGC

re

-p

ro

of

2005-2016

‘Foreign’

Jo

ur na

lP

‘Foreign’

Coefficient estimate 2005-2016 ‘Foreign’ filer x EGC EGC ‘Foreign’ filer 2010-2016 ‘Foreign’ filer x EGC EGC ‘Foreign’ filer

Obs

Median

Mean

Std. Dev.

t-test p-value

10,000 10,000 10,000

0.00 3.90 0.00

0.05 3.89 0.01

3.71 0.74 1.76

0.202 0.000 0.691

10,000 10,000 10,000

0.08 2.49 -0.04

0.03 2.50 0.02

4.68 0.93 3.29

0.465 0.000 0.609

35

Table 1. Summary statistics of the main variables Summary statistics of the main variables for the 2005-2016 period. Sample and variable definitions are presented in the Appendix. Obs Mean

Median

SD

Underpricing

950 15.37

8.94

23.87

Spread

950 6.48

7.00

0.91

Offering expenses

833 2.72

2.25

2.21

Offer price revision

950 -1.18

0.00

18.19

Highly ranked underwriter

950 0.89

1.00

0.31

Share overhang

950 4.01

3.49

3.27

Days in registration (log)

950 4.40

4.51

0.89

VC-backed

950 0.29

0.00

0.45

Offer size (log)

950 5.25

5.13

0.91

Assets (log)

950 6.15

5.95

1.65

Nasdaq

950 0.46

0.00

0.50

Revenues≤$1billion

950 0.80

1.00

0.40

EGC

950 0.33

0.00

0.47

EGC (2)

950 0.33

0.00

0.47

Foreign

950 0.20

0.00

0.40

ro

-p

re lP

ur na Jo 36

of

Sample: 2005-2016

Table 2. The EGC regime and IPO underpricing of foreign vs. domestic issuers This table reports the main underpricing tests. Sample and variable definitions are presented in the Appendix. Regressions control for two-digit SIC industry effects. Columns I-II use observations from 2005-2016 and Columns III-IV use observations from 2010-2016. Columns II and IV control for year effects. Robust t-statistics are italicized. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and *, respectively.

Days in registration

5.61 0.566

VC-backed

0.62 4.535

Offer size

2.23 0.301

Assets

0.29 -1.637

Nasdaq

-2.80 0.787

Foreign

0.52 2.216

EGC

0.86 5.702

Foreign x EGC

3.22 -9.007

0.83 1.109

ur na -2.29 Y 950 0.42 0.37

***

5.59 1.242

2.21 0.388 ***

***

**

0.58 1.047 4.96 0.674

1.26 4.540

**

**

0.38 -1.742

***

***

0.61 1.087

0.93 4.226

1.58 -0.468

1.54 -0.424

**

-0.31 -2.163

-2.43 0.236

-2.69 0.213

0.51 3.073

0.11 6.368

0.10 7.287

1.20 5.595 2.34 -9.262 -2.35 Y Y 950 0.43 0.38

37

**

**

1.36 5.427 2.49 -12.632 -2.29 Y 579 0.44 0.37

***

4.99 1.302

0.51 4.186

-0.36 -1.871

***

9.00 2.480

-2.86 0.771

Jo

Industry FE Year FE Obs. R2 Adj. R2

***

9.24 2.261

IV 2010-2016 0.669

of

0.85 1.089

11.23 1.896

***

ro

Share overhang

***

III 2010-2016 0.685

-p

Highly ranked underwriter

11.52 1.894

***

II 2005-2016 0.607

re

I 2005-2016 0.613

lP

Dep. var.: Underpricing Sample: Offer price revision

**

**

***

1.57 3.921 1.39 -12.861 -2.34 Y Y 579 0.45 0.37

**

Table 3. Robustness tests This table reports robustness tests of underpricing. Sample and variable definitions are presented in the Appendix. Regressions control for two-digit SIC industry effects. Panel A uses an alternative EGC proxy. Columns I and III use EGC (2), a revenue-based proxy for EGC status. Columns II and IV use the main measure but control for issuers with revenues below $1 billion. Panel B uses alternative foreign issuer definitions. Panel C uses fixed effects for country of incorporation (Columns I and III) and country of location (Columns II and IV). Robust t-statistics are italicized. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and *, respectively.

Panel A: Alternative EGC measure

Share overhang Days in registration VC-backed

Assets Nasdaq

**

***

0.55

Foreign x Revenues ≤$1billion Foreign

1.410 0.55

Jo

EGC

4.723 2.67

Foreign x EGC (2)

-7.559 -1.89 Y 950 0.42

EGC (2)

-0.25 6.048 3.36

***

2.003 0.51 1.028 4.82 0.346 0.26 4.215

***

1.58 -0.487 -0.38 -1.994 -2.51 0.479

1.07 ***

Y 950 0.42

38

1.61 -0.686 -0.52 -2.110 -2.30 0.458

**

**

0.05 6.875 3.07

***

-15.545

**

-2.47 -10.690 -1.95 Y 579 0.44

***

*

-2.40 *

2.368 0.61 1.050 5.00 0.826 0.63 4.254

***

0.21 -4.438 -1.60 9.774 1.44 0.238

4.858

3.847 1.77 -9.620

**

0.22

***

Foreign x EGC

Industry FE Obs. R2

2.21 0.190 0.18 -1.793 -2.71 0.927

**

0.61 -1.997 -1.02 4.186 0.92 -1.008

ur na

Revenues ≤$1billion

***

lP

2.32 0.230 0.22 -1.624 -2.74 0.831

Offer size

***

1.942 0.87 1.082 5.58 0.627 0.68 4.557

***

IV 2010-2016 0.684 9.34

of

1.821 0.82 1.075 5.46 0.307 0.34 4.719

***

III 2010-2016 0.685 9.29

ro

Highly ranked underwriter

***

II 2005-2016 0.614 11.45

-p

I 2005-2016 0.613 11.49

re

Dep. var.: Underpricing Sample: Offer price revision

*

Y 579 0.45

Adj. R2

0.37

0.37

0.36

0.37

Panel B: Alternative foreign issuer measure Dep. var.:

Underpricing

Underpricing

Underpricing

Underpricing

Sample:

2005-2016 I *** 0.612

2005-2016 II *** 0.611

2010-2016 III *** 0.683

2010-2016 IV *** 0.681

11.46 1.781 0.80 1.087 5.62 0.191

11.46 1.806 0.82 1.084 5.61 0.284

9.23 2.002 0.52 1.044 4.98 0.308

9.24 2.036 0.53 1.045 4.98 0.404

Offer size Assets

**

***

-2.78 0.725 0.48

Nasdaq

0.33 4.491 2.22 0.257 0.25 -1.628

**

***

-2.78 0.733 0.49

-2.45 0.308 0.14

0.685

0.924 0.48 5.375 2.97

ur na

Foreign (2) x EGC

***

***

**

-2.02

Industry FE Obs. R2

Y 950 0.42

-6.706 -1.96 Y 950 0.42

Adj. R2

0.37

0.37

Jo

Foreign (3) x EGC

**

-2.49 0.345 0.16

1.17

Foreign (3) 5.321 2.98 -7.205

0.31 4.299 1.62 -0.506 -0.39 -1.912

***

4.402

0.33

EGC

**

lP

Foreign Foreign (2)

0.24 4.188 1.58 -0.512 -0.39 -1.882

***

of

0.22 4.466 2.21 0.264 0.26 -1.622

VC-backed

***

ro

Days in registration

***

-p

Highly ranked underwriter Share overhang

re

Offer price revision

5.045 2.27 -10.602

**

4.814 1.41 5.234 2.31

**

**

-2.21 *

Y 579 0.44

-10.205 -2.29 Y 579 0.44

0.37

0.37

39

**

Panel C: Country fixed effects

VC-backed

0.841 0.76 -1.877 -2.93 0.400 0.26

Assets Nasdaq Foreign EGC Foreign x EGC

2.778 0.79 6.325 2.56 -10.485 -2.62 Y Y Y

Adj. R2

ur na

Industry FE Year FE Country of incorporation FE Country of location FE Obs. R2

*

***

**

1.126 5.62 1.290 1.25 4.233 2.01 0.330 0.31 -1.562 -2.49 0.729 0.47 10.352 1.99 5.911 2.41 -10.253 -2.51

lP

Offer size

***

***

***

**

**

Y Y

1.171 5.35 1.051 0.72 3.904 1.34 0.550 0.37 -2.323 -2.64 -0.535 -0.24

***

***

**

**

**

2.838 0.55 4.812 1.66 -13.109 -2.30 Y Y Y

2010-2016 0.659 8.86 0.904 0.21 1.152 5.13 1.635 1.12 4.107 1.40

***

*

**

0.332 0.22 -2.146 -2.38 -0.162 -0.07

10.872 1.67 4.662 1.60 -14.231 -2.47 Y Y

579 0.47

Y 579 0.47

0.38

0.38

0.37

0.36

Jo

950 0.45

Y 950 0.45

40

***

***

of

Days in registration

1.153 5.76 1.042 1.00 4.067 1.92

***

II 2010-2016 0.653 8.72 1.049 0.25

ro

Share overhang

***

2005-2016 0.617 11.51 1.449 0.61

-p

Highly ranked underwriter

I 2005-2016 0.604 10.91 1.753 0.74

re

Dep. var.: Underpricing Sample: Offer price revision

**

*

**

Table 4. Channels for the effect This table reports tests of underpricing and the use of specific provisions. Sample and variable definitions are presented in the Appendix. Regressions control for two-digit SIC industry and year effects. Columns I-II use the 2005-2016 sample period and Columns III-IV use the 2010-2016 sample period. Robust t-statistics are italicized. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and *, respectively.

2005-2016 0.606 11.12 1.664 0.71 1.026

Days in registration VC-backed Offer size

5.25 0.173 0.18 4.548 2.21 -0.025 -0.02 -1.976 -3.25 0.675 0.45 0.081

Assets

**

***

lP

Nasdaq

***

Foreign

0.03 -1.080 -0.60

ur na

No attest Communications

No attest x Foreign

2005-2016 0.621 10.82 2.410 1.01 1.082 5.54 0.982 1.00 5.271 2.47 0.220

0.21 -1.401 -2.22 0.840 0.54 2.409

re

Share overhang

***

III ***

***

**

**

0.95

5.958 2.22

Jo

4.94 0.361 0.26 4.531 1.63 -0.501 -0.38 -2.284 -2.84 0.155 0.07 2.403

**

-2.229

***

2010-2016 0.712 8.65 4.025 0.87 1.038

***

***

4.79 1.019 0.72 5.980 2.03 -0.853

***

***

**

-0.58 -1.386 -1.62 0.637 0.27 6.480 1.41

5.017 1.68

*

**

Y Y 579

-12.443 -2.00 Y Y 513

0.45 0.37

0.47 0.38

-5.270 -0.99

Communications x Foreign

R2 Adj. R2

2010-2016 0.660 8.95 2.067 0.50 1.048

0.57 0.615 0.24

-0.64

Industry FE Year FE Obs.

IV

of

Sample: Offer price revision Highly ranked underwriter

II

ro

I

-p

Dep. var.: Underpricing

Y Y 950

-8.497 -1.74 Y Y 884

0.43 0.37

0.44 0.38

41

*

of

Table 5. Other IPO costs

VC-backed Foreign EGC

Jo

Foreign x EGC

-0.6 -0.198 -2.19 -0.141 -3.06 0.102

Industry FE Year FE Obs. R2 Adj. R2

-4.59 -0.042 -1.10 -0.018 -0.58 0.007

-3.75 -0.041 -0.91 -0.052 -1.55 -0.005

lP

Days in registration

-4.7 -0.022 -0.48 -0.060 -2.04 0.021

**

ur na

Nasdaq

-6.01 -0.019 -0.49 -0.040 -1.4 -0.028

re

-p

ro

This table reports regressions of gross spreads and offering expenses. Sample and variable definitions are presented in the Appendix. All regressions control for two-digit SIC industry effects. Columns III, IV, VII, and VIII also include year fixed effects. Columns I, III, V, and VII use the 2005-2016 sample period and Columns II, IV, VI, and VIII use the 2010-2016 sample period. The dependent variable is gross spread as a percent of offer size in Columns I-IV and offering expenses as a percent of offer size in Columns V-VIII. Robust t-statistics are italicized. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and *, respectively. I II III IV V VI VII VIII Dep. var.: Spread Spread Spread Spread Offering Offering Offering Offering Expenses Expenses Expenses Expenses Sample: 2005-2016 2010-2016 2005-2016 2010-2016 2005-2016 2010-2016 2005-2016 2010-2016 *** *** *** *** *** *** *** *** Offer size -0.683 -0.724 -0.675 -0.696 -1.901 -2.062 -1.912 -2.110 -18.39 -15.77 -18.81 -15.05 -14.74 -12.9 -15.02 -12.82 *** *** *** *** *** *** *** *** Assets -0.117 -0.103 -0.092 -0.087 0.272 0.311 0.211 0.285

**

***

0.35 -0.229 -2.08 -0.091 -1.47 0.096

0.94 Y

0.77 Y

950 0.66 0.63

579 0.76 0.72

**

0.16 -0.195 -2.12 0.198 2.31 0.099 0.92 Y Y 950 0.68 0.65

**

**

-0.10 -0.275 -2.53 0.162 1.73 0.135 1.12 Y Y 579 0.77 0.73

42

4.19 -0.319 -2.47 0.371 3.28 0.034 **

*

0.2 1.095 3.01 0.469 2.79 -0.926

**

***

***

***

*

4.28 -0.100 -0.62 0.365 2.7 0.006 0.02 0.721 1.67 0.054 0.23 -0.509

-1.95 Y

-0.96 Y

833 0.51 0.46

554 0.52 0.46

***

*

3.32 -0.263 -2.06 0.375 3.00 -0.071 -0.38 0.910 2.31 -0.147 -0.60 -0.752 -1.50 Y Y 833 0.53 0.48

**

***

**

3.79 -0.083 -0.52 0.373 2.46 0.070 0.26 0.844 1.86 -0.276 -0.93 -0.630 -1.16 Y Y 554 0.53 0.46

**

*

Appendix Table A1. Summary of EGC and FPI accommodations during our sample period Note: small companies, including foreign issuers, that had public float up to $75 million or that had no float but had revenues up to $50 million, were exempt from the auditor attestation requirement and certain executive compensation requirements and could include two instead of three years of financial statements during our sample period. We exclude small companies to avoid confounding. EGC Yes

FPI No

Yes15

No

Yes

No

ro

of

Accommodation Exemption from the auditor attestation of the internal controls over financial reporting The option to provide two instead of three years of audited financial statements and correspondingly reduced disclosure in management's discussion and analysis of financial condition and results of operations (MD&A) in a common equity IPO registration statement Extended transition period to comply with new or revised accounting standards and exemption from any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or auditor discussion and analysis Communications with investors prior to the offering and quiet period provisions 16

Exemption from certain executive compensation requirements 19 The use of foreign accounting standards with reconciliation to US GAAP or the use of IFRS

Yes No

No In certain cases18 Yes Yes

Exemption from Regulation FD

No

Yes

Yes Yes

15

This accommodation can benefit EGC FPIs. However, in some cases, FPIs following IFRS must include three statements of financial position: first-time IFRS adoption; retrospective application of an accounting policy, a retrospective restatement, or reclassification of items in financial statements. http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm. The JOBS Act allowed EGCs and their underwriters to communicate with certain institutional investors about a potential securities offering (Dambra et al. (2015), describing it as a ‘de-risking’ provision). The JOBS Act also allowed underwriters to provide research coverage of EGCs that are the subject of a proposed IPO (Dambra et al. (2018) and Skelton (2014)). Dambra et al. (2015) also characterize it as a ‘de-risking’ provision. In July 2017, the provision was expanded to non-EGCs (https://www.sec.gov/corpfin/announcement/draft-registration-statementprocessing-procedures-expanded). Before December 2011, FPIs could submit initial registration statements for nonpublic review (http://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm). Afterwards, foreign private issuers can do so if they qualify as EGCs or if they are listed or are concurrently listing on a foreign exchange, are being privatized by a foreign government, or are limited from publicly filing under foreign laws. A large majority of foreign issuers in our sample qualified for EGC status. Flexibility to rely on scaled executive compensation disclosure provisions and exemptions from the Compensation Discussion and Analysis (CD&A) requirement, pay ratio disclosure, and say-on-pay vote requirement.

Jo

16

ur na

lP

re

-p

Confidential submission of draft registration statements for nonpublic review

17

17

18

19

43

Table A2. Sample and variable definitions The sample includes NYSE/AMEX and NASDAQ listed non-fund IPOs by domestic and foreign issuers filing on Forms S-1 and F-1 during 2005-2016 with nonmissing Dealogic and Audit Analytics data. Observations with missing deal values or other controls are omitted. EGC indicator is obtained from EDGAR filings and supplemented with Audit Analytics data. Countries of incorporation and location of the issuer are obtained from Dealogic supplemented with information from registration statements. The main analysis excludes small filers (defined as having revenues below $50 million) and considers 2005-2016 and 2010-2016 periods around the JOBS Act, incorporating periods before and after the financial crisis. The sample excludes blank checks (identified by SIC code 6770 and blank check flag), acquisition corporations (identified by name), REITs (identified by SIC code 6798), small deals (below $5 million), penny stocks (price below $5), OTC stocks, and unit offerings. Industry classification, market returns, and industry returns are obtained from the Kenneth French library. Continuous variables are winsorized at 1% of each tail of the distribution.

Offer price revision Highly ranked underwriter Share overhang

Offer size

Assets

NASDAQ Foreign Foreign (2) Foreign (3)

Jo

EGC

ur na

Revenues ≤ $1 bln

lP

re

Days in registration VC-backed

of

Offering expenses

ro

Spread

First-day percentage return. Dealogic. Supplemental tests use first-week and first-month percentage returns. Percentage gross spread. Dealogic. Total of legal, accounting, listing, registration and filing, and misc. offering expenses, where reported, as a percentage of offer size. Dealogic. Percentage change in offer price relative to initial offer price. Dealogic. Indicator equal to 1 if the lead underwriter (identified as the first underwriter in the list of underwriters) has a reputation rating of 8 or 9. Dealogic; Jay Ritter. Shares outstanding post-deal minus shares offered divided by shares offered (excluding overallotments). Dealogic. Log of one plus the number of days in registration. Dealogic. Indicator equal to 1 if the deal has venture capitalist (VC) backing. Dealogic. Log of one plus IPO gross offer amount. Offer size converted to December 2016 dollars using BLS CPI data to adjust for inflation. Dealogic data on deal value excluding overallotments supplemented with AuditAnalytics deal value data (discrepancies verified against prospectus information).. Log of one plus issuer total assets. Assets converted to December 2016 dollars suing BLS CPI data to adjust for inflation. Dealogic data on total assets supplemented with Compustat annual data. Indicator equal to 1 if issuer revenues are up to $1 billion. Dealogic data on revenues supplemented with Compustat annual data. Indicator equal to 1 if the IPO exchange is NASDAQ. Dealogic supplemented with Audit Analytics data. Indicator equal to 1 if the IPO issuer filed Form F-1. Indicator equal to 1 if the IPO issuer filed Form F-1 or if the issuer is both incorporated and headquartered abroad. Indicator equal to 1 if the IPO issuer is incorporated abroad. Indicator equal to 1 if the IPO issuer self-identified as an EGC in the registration statement or at least one periodic report filed during 2012-2016. Company filings; Audit Analytics. Indicator equal to 1 if Revenues ≤ $1billion for IPOs beginning in 2012. Dealogic; Compustat. Indicator equal to 1 if the issuer did not file an auditor attestation report in the year of or year after the IPO, similar to Dambra et al. (2015). Audit Analytics and Compustat. Indicator equal to 1 if the underwriting agreement exhibit to the EGC issuer’s IPO registration statements mentions that the underwriter is authorized to solicit – test the waters – with certain institutional investors, similar to Dambra et al. (2015); missing if the underwriting agreement does not mention it. Filings.

-p

Underpricing

EGC (2)

No attest

Communications

44

Table A3. Univariate evidence Panel A: Summary statistics for domestic and foreign subsamples Summary statistics of the main variables for the 2005-2016 period in the subsamples of foreign and domestic issuers. Sample and variable definitions are presented in the Appendix.

Obs.

Mean

Median

SD

Obs.

Mean

Median

SD

ForeignDomestic Diff.

Underpricing

186

14.00

5.54

26.49

764

15.70

9.64

23.20

-1.70

Spread

186

6.43

7.00

1.12

764

6.49

7.00

0.85

-0.06

Compliance expenses

116

3.35

2.82

2.56

717

2.61

2.19

2.13

0.74

Offer price revision

186

-1.34

0.00

19.05

764

-1.14

0.00

17.99

-0.20

Highly ranked underwriter

186

0.93

1.00

0.26

764

0.89

1.00

0.32

0.04

**

Share overhang

186

4.33

3.73

2.59

764

3.94

3.36

3.41

0.39

*

Days in registration (log)

186

3.42

3.14

0.71

764

4.64

4.62

0.76

-1.22

***

VC-backed

186

0.25

0.00

0.43

764

0.30

0.00

0.46

-0.05

Offer size

186

5.22

5.09

0.87

764

5.25

5.14

0.93

-0.03

Assets

186

5.98

5.89

1.49

Nasdaq

186

0.43

0.00

0.50

Revenues ≤$1billion

186

0.89

1.00

0.32

EGC

186

0.27

0.00

EGC (2)

186

0.26

0.00

***

ro

of

Domestic

-p

Foreign

6.19

5.99

1.69

-0.20

764

0.46

0.00

0.50

-0.03

764

0.78

1.00

0.41

0.10

***

0.45

764

0.35

0.00

0.48

-0.07

*

0.44

764

0.35

0.00

0.48

-0.09

**

re

764

lP

Sample: 2005-2016

Panel B: EGC effect in domestic and foreign subsamples

ur na

Pairwise correlations of underpricing in subsamples of foreign and domestic (correlations significant at 5% are in bold) and tests of differences in means between foreign and domestic issuers. Sample and variable definitions are presented in the Appendix. Dep. var.: Underpricing Sample

Foreign

Domestic

All

Correlation with EGC 2010-2016

-0.03

0.20

***

0.15

***

0.04

0.21

***

0.17

***

EGC

Non-EGC



EGC

Non-EGC



EGC

Non-EGC



15.51

17.56

-2.05

22.37

11.89

10.48

***

21.26

13.12

8.14

***

2005-2016

15.51

13.43

2.07

22.37

12.16

10.20

***

21.26

12.43

8.83

***

Jo

2005-2016 t-tests of differences in means 2010-2016

45

of

Table A4. Additional robustness analysis

lP

re

-p

ro

This table reports additional robustness tests. Sample and variable definitions are presented in the Appendix. Panel A examines evidence of after-market price support. Coefficients on controls from the main specification (Offer price revision, Highly ranked underwriter, Share overhang, Days in registration, VC-backed, Deal size, Assets, Nasdaq), industry and year fixed effects, and one-week (one-month) market index returns are suppressed for brevity. Panel B examines the effects of having high (above median) institutional quality in the issuer’s country of incorporation using the following measures: protection against self-dealing from Djankov et al. (2008); anti-director rights index from La Porta et al. (1998) as revised by Djankov et al. (2008); control over corruption and rule of law from Kaufmann et al. (2009, 2010). Panel C performs falsification and parallel trends tests. Columns I-III shift shock timing. Issuers with sales up to $1 billion receive the Placebo EGC (1) treatment beginning in 2010 and the Placebo EGC (2) treatment beginning in 2014, respectively. Columns IV and V examine shock responses in the years before and after the shock to test for parallel trends. Panel D imposes alternative sample filters: Column I uses the 2010-2014 sample period; Column II uses the 2001-2016 sample period; Columns III-IV limit the sample to observations with sales in the 10th-90th percentile range for non-EGCs; Columns V-VI exclude deals below $75 million; Columns VII-VIII exclude global IPOs and dual listings; Columns IX-X exclude foreign-incorporated issuers using Form S-1. Panel E lowers the revenue threshold to $20 million, resulting in statistically similar average and median sales among foreign and domestic issuers. Panel F uses propensity score matching with replacement. Matching is based on a teffects psmatch with a probit model using variables from the main specification with the following modifications: days in registration, industry dummies, and in Columns II and IV, year effects, are perfect predictors for some observations and are omitted. Regressions control for two-digit SIC industry and year effects. Robust t-statistics are italicized. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and *, respectively.

Panel A: Differences in after-market price support

Sample period: Foreign filer

Initial return

Initial return | return≥0

ur na

Dep. var.: First-day return

2005-2016

2005-2016

3.073

6.418

1.20

EGC

5.595

1.85

**

2.34

Foreign filer x EGC

-9.262

*

5.546

**

2.11

**

-12.510

**

Pr(Initial return<0)

Pr(Initial return0-1%)

Initial return

Initial return | return≥0

2005-2016

2005-2016

2010-2016

2010-2016 **

Pr(Initial return<0)

Pr(Initial return0-1%)

2010-2016

2010-2016

0.074

-0.083

0.031

0.012

7.287

14.959

0.55

0.28

1.57

1.99

0.92

-1.47

0.014

-0.019

3.921

3.807

0.037

-0.061

0.24

-0.44

1.39

0.55

-1.21

-0.064

0.088

-12.861

-0.128

0.180

1.16 **

-20.449

***

-2.56

-0.84

1.25

-2.34

-2.59

-1.38

2.31

Dep. var.: First-week return

Initial return

Initial return | return≥0

Pr(Initial return<0)

Pr(Initial return0-1%)

Initial return

Initial return | return≥0

Pr(Initial return<0)

Pr(Initial return0-1%)

Sample period:

2005-2016

2005-2016

2005-2016

2005-2016

2010-2016

2010-2016

2010-2016

2010-2016

Jo

-2.35

Foreign filer

EGC

*

1.180

3.358

0.035

0.018

4.584

10.650

0.104

-0.041

0.40

1.00

0.60

0.57

0.96

1.84

1.23

-1.30

-0.019

-0.004

2.572

2.978

0.003

-0.003

5.419

*

5.378

*

46

**

-9.131

1.77 **

-0.30 **

-10.405

-0.12

0.81

0.078

-0.061

-11.115

0.83 *

-16.538

**

of

1.93 Foreign filer x EGC

0.04

-0.09

-0.019

0.002

-2.10

0.94

-1.41

-1.92

-2.36

-0.18

0.05

Dep. var.: First-month return

Initial return

Initial return | return≥0

Pr(Initial return<0)

Pr(Initial return0-1%)

Initial return

Initial return | return≥0

Pr(Initial return<0)

Pr(Initial return0-1%)

Sample period:

2005-2016

2005-2016

2005-2016

2005-2016

2010-2016

2010-2016

-0.22 EGC

5.688 1.65

Foreign filer x EGC

0.159

1.54 *

2.64 *

6.280 1.78

-2.524

-10.571

-0.45

-1.74

0.010 0.17

*

-0.005

0.537

14.794

-0.14

0.10

2.19

2.99

-0.87

-0.032

1.203

2.600

0.021

-0.001

-1.08

0.31

0.63

-p

6.924

re

-0.828

2010-2016 **

0.250

2010-2016 ***

-0.030

0.30

-0.129

-0.016

-1.804

-16.442

-1.51

-0.38

-0.27

-2.15

lP

Foreign filer

***

ro

-2.10

**

-0.03

-0.226

**

-0.009

-2.20

-0.19

Panel B: The effects of home country institutional environment vs. EGC status on underpricing

Highly ranked underwriter Share overhang

Jo

Days in registration VC-backed Offer size Assets

I 2005-2016 *** 0.575 9.78 2.409

II 2005-2016 *** 0.575 9.78 2.452

III 2005-2016 *** 0.607 11.09 1.870

IV 2005-2016 *** 0.599 11.06 1.678

V 2010-2016 *** 0.655 8.80 2.545

VI 2010-2016 *** 0.652 8.76 2.711

VII 2010-2016 *** 0.663 8.85 1.774

VIII 2010-2016 *** 0.658 8.77 1.515

0.94 1.118 5.32 1.169 1.12 4.076

0.96 1.106 5.28 1.206 1.23 4.140

0.81 1.100 5.71 0.333 0.35 4.502

0.73 1.134 5.75 0.767 0.87 4.674

0.57 1.058 4.43 2.190 1.49 5.404

0.60 1.036 4.36 2.180 1.50 5.553

0.43 1.086 5.11 0.393 0.26 4.631

0.38 1.140 5.15 0.665 0.47 4.732

ur na

Dep. var.: Underpricing Sample: Offer price revision

1.83 1.155 1.00 -1.800 -2.69

***

*

***

1.86 1.120 0.97 -1.777 -2.67

***

*

***

2.23 0.384 0.37 -1.649 -2.68

***

**

***

47

2.31 0.551 0.54 -1.764 -2.90

***

**

***

1.79 0.114 0.07 -2.044 -2.11

***

*

**

1.82 0.070 0.04 -2.015 -2.09

***

*

**

1.67 -0.222 -0.16 -2.175 -2.66

***

*

***

1.72 -0.110 -0.08 -2.208 -2.73

***

*

***

2.166 1.30

EGC x Strong protections against self-dealing EGC x Strong anti-director rights

7.944 1.04

2.146 1.29

0.727 0.48

-p

2.852 0.78

EGC x Strong rule of law

Strong anti-director rights

ur na

Jo

Industry FE Year FE Obs. R2 Adj. R2

Y Y 787 0.46 0.39

1.787 0.74

0.094 0.04

0.240 0.11

re

2.275 0.74

Y Y 787 0.46 0.39

15.157 1.29 0.128 0.03

***

-6.556 -0.79 -1.664 -0.46

-0.267 -0.10

Strong control over corruption Strong rule of law

-6.000 -0.51

9.318 2.69 -1.118 -0.38

lP

Strong protections against self-dealing

ro

12.588 1.06

-1.275 -0.17 0.447 0.17

1.771 0.74

11.378 1.36

EGC x Strong control over corruption

EGC

0.888 0.59

of

Nasdaq

-10.560 -0.91

1.687 0.43

10.754 2.60 -4.193 -1.13

***

-6.720 -1.69

*

-2.721 -0.69

2.663 1.19

4.126 0.94 -2.467 -1.03

Y Y 941 0.43 0.38

Y Y 941 0.44 0.38

48

Y Y 486 0.49 0.40

Y Y 486 0.49 0.40

Y Y 574 0.45 0.37

Y Y 574 0.45 0.37

Panel C: Shifting shock timing and parallel trends Dep. var.: Underpricing Sample: Offer price revision

I 2005-2016 *** 0.608 11.15

II 2005-2016 *** 0.608 11.13

III 2010-2016 *** 0.669 8.96

IV 2005-2016 *** 0.615 11.00

V 2010-2016 *** 0.671 8.86

Highly ranked underwriter Share overhang

1.745 0.75 1.057 5.43 0.299 0.30

1.759 0.76 1.052 5.36 0.639 0.64

2.149 0.52 1.053 4.87 0.605 0.42

1.941 0.83 1.149 5.55 0.949 0.92

2.058 0.49 1.145 4.98 1.452 0.93

Assets Nasdaq Foreign Placebo EGC (1) Placebo EGC (2)

Foreign x Placebo EGC (2)

0.732 0.49 0.748 0.31

***

4.612 1.64 -0.500 -0.37 -2.341 -2.90 0.440 0.20 2.146 0.58

3.275 1.03

0.499 0.14

-5.801 -1.11

-6.623 -1.09

***

of

**

***

4.349 2.08 0.260 0.25 -1.677 -2.43

***

**

**

4.458 1.53 -0.285 -0.20 -2.194 -2.25

1.018 0.67 -2.651 -0.47

0.357 0.16 -5.392 -0.81

-1.159 -0.48 2.359 0.39 0.002 0.37

-0.640 -0.13 6.163 0.56 0.004 0.72

-0.001 -0.30 0.013 3.18 0.003 0.59

-0.001 -0.25 0.016 3.05 0.005 0.70

**

1.509 0.39

ur na

Foreign x Placebo EGC (1)

0.621 0.41 -1.553 -0.61 3.008 1.34

**

4.880 2.34 0.207 0.20 -1.845 -3.00

ro

Offer size

**

***

-p

4.615 2.26 0.213 0.21 -1.606 -2.50

lP

VC-backed

***

re

Days in registration

***

Revenues ≤$1bln

Foreign x Revenues ≤$1bln

Jo

Foreign x 2010 Foreign x 2011 Foreign x 2012 Foreign x 2013 Foreign x 2014

-0.002

49

***

0.000

***

Revenues ≤$1bln x 2010 Revenues ≤$1bln x 2011 Revenues ≤$1bln x 2012 Revenues ≤$1bln x 2013

-0.07

0.001 0.59 0.003 1.02 0.005 1.94

0.000 -0.12 0.002 0.51 0.003 0.95

*

0.001 0.45 0.002 1.09 0.002 0.37 0.008

Revenues ≤$1bln x 2014

0.001 0.24 0.001 0.32 0.001 0.08 0.008

of

Foreign x Revenues ≤$1bln x 2010

-p

ro

Foreign x Revenues ≤$1bln x 2011

1.05 -0.016 -3.10 -0.006 -1.00 -0.002

Y Y 579 0.45 0.37

-0.26 Y Y 950 0.44 0.37

Foreign x Revenues ≤$1bln x 2012 Foreign x Revenues ≤$1bln x 2013

Y Y 950 0.43 0.37

Jo

ur na

lP

Y Y 950 0.43 0.37

re

Foreign x Revenues ≤$1bln x 2014 Industry FE Year FE Obs. R2 Adj. R2

-0.43

50

***

0.81 -0.018 -2.65 -0.009 -0.99 -0.004 -0.45 Y Y 579 0.46 0.36

***

Panel D: Alternative sample definitions II

III

2010-2014 Main sample definitions

2001-2016

2010-2016 2005-2016 Balanced on size

***

***

***

***

7.81

12.60

9.27

10.36

8.28

Highly ranked

5.372

2.184

1.719

2.082

1.554

underwriter

1.13

1.26

0.32

0.75

VC-backed Offer size

0.810

4.35

6.38

1.74

0.235

0.862

1.240

0.16

1.02

4.684

5.012

1.51

2.93

-0.372

0.932

-0.22 -2.142

0.76 ***

1.11 **

-2.081

3.847

Nasdaq Foreign EGC

***

VII

0.689

1.460

***

3.16

IX

2010-2016 2005-2016 Exclude global IPOs and dual listings 0.684

***

0.623

***

X

2010-2016 2005-2016 Exclude foreignincorporated S-1 filers 0.689

***

0.622

10.98

9.11

11.13

8.89

10.98

0.317

3.364

2.429

2.187

1.797

0.82

1.04

0.52

0.10

***

VIII

1.331

***

1.064

***

1.077

***

1.094

1.126

3.63

4.88

5.43

4.90

5.56

1.097

0.605

0.563

1.144

1.093

1.222

1.223

0.95

0.38

0.51

0.81

1.09

0.82

1.18

3.914

4.445

2.059

2.388

4.046

4.280

**

1.25

1.58

0.64

1.03

1.46

2.06

1.37

2.10

0.055

0.180

-1.816

-1.182

-0.660

0.104

-0.538

0.240

-3.483

0.14

***

-2.182

-1.01 ***

-1.915

-0.99 *

-1.368

-0.48 *

-1.974

0.10 **

-1.587

-0.37 **

-2.114

-1.608

-3.18

-2.72

-1.75

-1.95

-2.41

-2.56

-2.45

-2.49

0.585

0.844

0.766

1.645

0.605

0.727

0.076

0.708

0.274

0.793

0.25

0.66

0.34

1.03

0.26

0.44

0.03

0.46

0.12

0.51

5.930

2.247

2.627

0.002

6.623

1.559

7.022

2.174

7.430

3.099

1.21

1.01

0.63

0.00

1.23

0.53

1.42

0.80

1.59

1.18

3.806

5.735

5.126 2.31

Jo

0.80

-13.160

**

-8.753

2.197

3.341

0.72

**

-10.141

0.811

1.15 *

-8.371

3.049

0.26 **

-14.157

3.901

1.17 **

-9.586

5.350

1.36 **

-12.695

**

2.19 **

-8.619

1.27 **

-13.004

**

**

**

2.27 **

-9.284

-2.23

-2.33

-1.90

-1.98

-2.32

-2.26

-2.19

-2.09

-2.34

-2.32

Industry FE

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Year FE

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Obs.

470

1200

473

777

492

805

569

930

553

907

R2

0.48

0.42

0.50

0.46

0.50

0.46

0.45

0.43

0.45

0.43

51

***

0.22 **

-4.03

**

***

0.75 ***

-2.06

2.463

Foreign x EGC

0.27

3.668

0.03

***

1.107 2.81

ur na

Assets

1.164

***

re

Days in registration

1.033

lP

Share overhang

0.781

-p

revision

*

0.631

VI

2010-2016 2005-2016 Exclude deals below $75 mln

0.665

***

0.679

V

Offer price

***

0.560

IV

of

I

ro

Dep. var.: Underpricing Sample

**

0.37

0.41

0.39

0.41

0.40

0.37

ur na

lP

re

-p

ro

of

0.39

Jo

Adj. R2

52

0.38

0.37

0.38

Panel E: Alternative sample definitions (revenue) Dep. var.: Underpricing

I

II

III

IV

V

VI

VII

Sample period:

2005-2016

2005-2016

2010-2016

2010-2016

2005-2016

2005-2016

2010-2016

***

***

Assets

Revenues ≤$1 bln

13.21

13.08

10.82

10.42

1.703

1.608

2.897

2.893

1.708

1.615

2.903

2.894

0.92

0.85

0.96

0.94

0.93

0.86

0.97

1.117

***

1.152

***

1.028

***

1.158

***

1.036

1.094

4.97

5.16

5.80

5.83

5.04

5.21

0.158

0.785

0.183

0.868

0.243

0.882

0.89 **

4.092

0.13 **

3.945

0.62 *

0.21

3.967

*

4.034

2.22

2.25

1.71

1.67

2.24

0.203

0.328

-0.574

-0.356

0.200

0.20

0.33

-0.47

-0.28

***

-1.763

***

-1.854

**

-1.909

0.95

**

0.20

**

4.156

-1.786

0.20

**

4.022

1.72

1.69

0.327

-0.600

-0.377

-1.757

-0.48 ***

-1.816

-1.876

-2.83

-2.19

-2.23

-2.81

-2.13

-2.17

0.986

-0.051

-0.273

1.217

1.014

0.010

-0.220

0.84

0.71

-0.03

-0.14

0.86

0.72

0.00

-0.11

-1.450

-0.911

-1.678

0.393

-1.782

-1.246

-2.535

-0.414

-0.80

-0.48

-0.63

0.14

-0.96

-0.64

-0.97

-0.15

2.479

2.679

4.899

4.750

0.55

0.60

0.78

0.75

3.266

-1.280

-0.557

-0.637

-0.001

0.76

-0.32

-0.14

-0.13

3.578

5.645

1.633 0.60 ***

-9.059

5.522 2.40

**

-9.603

2.754 0.64

**

5.518

***

2.74

**

-10.714

1.31

**

-10.829

***

3.55 **

-9.352

5.599

**

2.42 **

-9.936

5.949 -11.971

3.977 1.44

**

-12.064

-2.41

-2.53

-2.11

-2.15

-2.42

-2.54

-2.11

-2.12

1150

1150

688

688

1150

1150

688

688

0.42

0.43

0.44

0.45

0.42

0.43

0.45

0.45

0.38

0.39

0.38

0.39

0.38

0.39

0.38

0.39

53

**

0.00 ***

2.98 **

*

-0.29 **

1.185

0.29

***

0.69

-2.92

0.764

-2.90

*

2.26 0.33

***

3.982

***

0.94 ***

0.799

Jo

Adj. R2

1.123

5.82

ur na

R2

***

0.130

3.50

Obs.

1.087

5.77

5.544

Foreign filer x EGC

***

lP

EGC

0.677

10.40

Foreign filer x Revenues ≤$1 bln Foreign filer

0.696

10.79

-1.794

Nasdaq

0.648

13.07

3.986

Deal size

0.657

2010-2016 ***

13.19

0.15 VC-backed

0.679

***

of

Days in registration

0.698

ro

Share overhang

0.649

***

-p

Highly ranked underwriter

0.658

***

re

Offer price revision

***

VIII

**

Panel F: Propensity score matching

VC-backed

Foreign filer x EGC

0.65 -2.074 -1.14 -0.706 -0.65 -0.519 -0.21 7.052 1.88 -14.601 -2.20 7.311

Obs. R2 Adj. R2

1.29 372 0.47 0.36

Deal size Assets Nasdaq Foreign filer

**

1.00 631 0.46 0.39

Jo

ur na

lP

EGC

*

1.99 -0.610 -0.39 -1.325 -1.57 1.703 0.87 11.496 2.87 -17.359 -3.36 4.630

***

**

**

0.12 -2.392 -0.86 -1.751 -1.24 0.293 0.07 9.001 1.48 -15.984 -1.91 8.395

54

***

*

***

***

1.19 216 0.47 0.27

IV 2010-2016 EGC 0.582 8.63 5.943 1.36 1.155 3.02 0.198 0.12 4.676

***

***

of

Days in registration

***

III 2010-2016 Foreign 0.787 4.86 16.062 1.84 0.838 1.09 2.506 0.82 0.558

ro

Share overhang

***

II 2005-2016 EGC 0.621 9.32 3.728 1.04 1.737 3.35 3.261 2.31 5.111

-p

Highly ranked underwriter

I 2005-2016 Foreign 0.698 7.73 -1.486 -0.29 0.162 0.29 2.839 1.52 2.413

re

Sample: Matching variable Offer price revision

*

1.60 1.321 0.78 -1.089 -1.19 0.667 0.33 8.766 1.70 -15.617 -2.57 6.531 2.29 631 0.43 0.36

*

**

**

Table A5. IPO deal volume of foreign vs. domestic issuers Sample and variable definitions are presented in the Appendix. Regressions of the number of IPOs of US IPOs involving foreign versus domestic issuers. Aggregate number of IPOs is computed at the industry-year level, with industries defined following the Fama and French 49 and 12 classification, as indicated. Industry-years with no exchange-listed IPOs by either domestic or foreign issuers are omitted. For the remaining industry-years, the dependent variable is log of one plus the number of IPOs. Industry fixed effects are included. The sample period is 2010-2016. Robust standard errors are used. Statistical significance at 1%, 5%, and 10% is denoted with ***, **, and * , respectively. Foreign

I -0.132

Domestic

II *

-1.67

III

-0.143 -1.80

Industry return (FF49)

Domestic

*

IV

0.187

***

2.64

of

Post-2012

Foreign

0.002

0.178 2.44

0.002

1.27

0.94

Y

Y

Y

Obs.

181

181

181

181

0.51

0.52

0.67

0.67

Adj. R

0.36

0.36

0.56

0.56

Dep. var.: Number of IPOs (FF12)

Foreign

Foreign

Domestic

Domestic

I

II

Post-2012

-0.168

0.209

-1.07

-1.22

1.95

Y

Obs.

76

2

0.201 1.92

0.004

0.002

1.14

0.48 Y

Y

76

76

76

0.55

0.55

0.77

0.77

0.46

0.46

0.72

0.72

Jo

Adj. R

IV *

Y

ur na

Industry FE (FF12) R

III

-0.150

Industry return (FF12)

2

re

2

lP

R

Y

-p

Industry FE (FF49) 2

**

ro

Dep. var.: Number of IPOs (FF49)

55

*