Two Essays on Initial Public Offerings

• Other Authors: Chua, Ansley (authoraut)
• Format: Others
• Language: English; English
• Published: Florida State University
• Subjects: Finance; Management
• Online Access: http://purl.flvc.org/fsu/fd/FSU_migr_etd-3615

The first essay examines the real asset returns of investments of initial public offering funds. During an IPO, a firm receives a large influx of capital. The firm can invest these proceeds in three major categories: fixed asset capital expenditures, research and development, and advertising. I examine the fundamental question of which type of use of funds will yield the greatest return for the firm. I find that firms that actively invest, but do not overinvest, realized higher returns. I find that firms who greatly increase their investments in R&D experienced higher average real asset returns but with greater dispersion. Firms who modestly increase their investment in capital expenditures saw the highest returns. And firms' increase in advertising expenditures had no effects on the overall profitability of the firm. I find that the post-IPO equity returns are dependent on real asset returns. However, contrary to prior literature, I find that post-IPO returns are negatively correlated to R&D investment. This study contributes to the existing literature by describing the relationship between the performance of the underlying real investments and the returns previously described in the IPO literature. The second essay examines what affects post-IPO executive compensation. During an initial public offering, the firm receives a large influx of capital and this influx poses an ideal environment to test many factors that have been previously shown to affect executive compensations. In addition, this environment allows me to test other factors that have not been previously studied. Executives in traditional IPO firms are entrepreneurial by nature and sacrifice in order to make the business successful. However, the compensation payoffs to these entrepreneurs have never been studied. In this study I attempt to explain the change in executives' pay based on justifiable increases, such as managers' previous sacrifices and tenure and more controversial increases based on the free cash flow from IPO funds. I find that the extent of managers' undercompensation as compared to peer managers is compensated post-IPO. I do find other attributes, such as being a CEO, also affect the increase in pay. However, Chairmanship and Board status did not affect compensation. Additionally, I find that free cash flows and firm ownership value is consistently and strongly related to an increase in pay. However, governance variables do not limit the executives' change in compensation. I find strong support that both previous executive sacrifice and the principal/agent issues are major factors in the determination of executives' post-IPO compensation. === A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy. === Summer Semester, 2009. === June 26, 2009. === Returns, Executive Compensation, Finance, Initial Public Offerings === Includes bibliographical references. === James Ang, Professor Directing Dissertation; Thomas W. Zuehlke, Outside Committee Member; Yingmei Cheng, Committee Member; Bruce Haslem, Committee Member.