Online from: 1975
Subject Area: Accounting and Finance
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|Title:||IPO valuation and insider manipulation of R&D|
|Author(s):||Robert Hull, (School of Business, Washburn University, Topeka, Kansas, USA), Rosemary Walker, (School of Business, Washburn University, Topeka, Kansas, USA), Sungkyu Kwak, (School of Business, Washburn University, Topeka, Kansas, USA)|
|Citation:||Robert Hull, Rosemary Walker, Sungkyu Kwak, (2013) "IPO valuation and insider manipulation of R&D", Managerial Finance, Vol. 39 Iss: 10, pp.888 - 914|
|Keywords:||Capital expenditure, Capitalization, Corporate finance, Financial management, Financial markets, Financial performance, Research and development|
|Article type:||Research paper|
|DOI:||10.1108/MF-05-2012-0125 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
Purpose – The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change minus predicted R&D change where a negative difference indicates R&D underinvestment.
Design/methodology/approach – This study is designed to build on prior IPO research that has found reduced R&D expenditures when insiders lower their ownership. The paper derives an R&D manipulation variable that measures underinvestment in R&D. This variable is used in a regression methodology to test its influence on: IPO stock valuation at various points in time and post-IPO price changes relative to the offer price.
Findings – The paper discovers that greater underinvestment in R&D is associated with greater values during the IPO stock valuation process. This association is reversed when the paper looks at short-term valuation based on market prices. Only for bubble period IPOs do the paper finds poorer valuations for the long-term. Larger insider ownership decreases lead to poorer valuations regardless of the period of occurrence. Greater R&D underinvestment and insider ownership decreases both lead to less underpricing.
Research limitations/implications – Like prior research, the paper assumes that knowledge about the change in R&D is known at the time of the offering. Interpretations for long-run results can be tenuous due to unexpected changes that occur over time.
Practical implications – Investors should note that managers are able to set higher offer prices when they inflate earnings by underinvesting in R&D. Buying at an inflated offer price with R&D manipulation leads to losses in the aftermarket with these losses associated with IPOs that occur during a bubble period.
Social implications – Misrepresentation during the IPO valuation process affects those who buy shares at inflated prices. This raises ethical questions about the behavior of those involved in the issuance process.
Originality/value – This study is unique in testing how R&D manipulation and changes in insider ownership proportions impact the: IPO valuation process, post-IPO valuation, and changes in the stock price over time relative to the offer price.
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