Does It Pay to Invest in Small Business IPOs

摘要: DOES IT PAY TO INVEST IN SMALL BUSINESS IPOS?* The need for capital to finance growth and development has been a constant challenge small businesses. Investors tend perceive business investments as riskier than more established vehicles such blue chip stocks, treasury notes, bonds, so forth. In the recent past, entrepreneurs have faced high interest rates, reduction of government-backed loan programs, change in gains tax regulations (1978). Taken collectively, these factors helped improve climate initial public offerings (IPOs). * authors thank Terry Freeman Stewart Winograd National OTC Stock Journal Professor Mark Hirschey their assistance. An earlier draft this paper was presented at 30th Annual World Conference International Council Small Business, Montreal, Canada, June 16-19, 1985. While internal sources financial institutions provide most financing businesses, equity investment is especially important new growing firms.1 Many investors IPOs are betting that, due lack generally available information, many stock initially underpriced2 should therefore higher expected returns.3 1 State Business: A Report President (Washington, D.C.: U.S. Government Printing Office, 1985), pp. 199-244. Also, it reported that mutual funds, pension big institutional buyers, well individuals, beginning increase newly created firms (see Alexander L. Taylor III. "Making Mint Overnight.' Time, January 23, 1984, 44-54). 2 K. R. Rock, "Why New Issues Are Underpriced.' Ph.D. dissertation, University Chicago, 1982. 3 Jay Ritter, "The "Hot Issues' Market 1980,' vol. 27 (1984), 215-240. purpose study investigate rationale some incentives investing IPO market. Three hypotheses examined, based upon returns following characteristics: (1) age firm, (2) offering type, (3) industry characteristics. first hypothesis (H1) states less underpriced those means compensating cost becoming informed. second (H2) (Best Efforts) will experience risky (Firm). third (H3) effects occur, one other industries. PREVIOUS RESEARCH Previously, studies focused primarily on occurrence "hot issues' which investores received significant positive returns. Several different time periods were covered studies. For example, Reilly Hatfield examined 1964 1965 period; McDonald Fisher quarter 1969; Ibbotson, 1960 1977 1982.4 Ritter's further tested Rock's underpricing reflected greater uncertainty about firm.5 Angell Hunt concentrated Denver penny market determine whether during late mid-1980 period.6 Ibbotson Jaffee could predict over 1970 period. They found there predictability; however, transaction costs buying selling stocks may overwhelm any gains.7 4 Frank Hatfield, "Investor Experience with Issues,' Financial Analysts (September-October 1969), 73-80; J. G. A.K. Fisher, "New Issue Price Behavior,' Finance (March 1972), …