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Entrepreneurial Finance and IPOs

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Association of Financial Economists
  • Chair: Ann Sherman, DePaul University

Trademarks and Entrepreneurial Firm Success: Theory and Evidence from Private Firm Exits and Initial Public Offerings

Onur Bayar
,
University of Texas-San Antonio
Thomas J. Chemmanur
,
Boston College
Harshit Rajaiya
,
University of Ottawa
Xuan Tian
,
Tsinghua University
Qianqian Yu
,
Lehigh University

Abstract

We analyze, theoretically and empirically, the role played by trademarks in the financing and performance of startup firms, for the first time in the literature. We first show theoretically, in a setting where firm insiders have private information about product quality and obtaining trademarks is costly, that trademarks increase firm operating performance (play a “protective role”), and allow them to convey information about intrinsic firm value to outside investors (play an “informational role”). Based on our model predictions, we develop testable hypotheses relating the number of trademarks held by private firms to the amount and staging of venture capital (VC) investment in these firms, their probability of successful exit (IPO or acquisition), IPO and secondary market valuations, institutional investor IPO participation, post-IPO operating performance, and post-IPO information asymmetry. We test these hypotheses using data on VC investment in private firms, private firm exit, and on initial public offerings and find supportive evidence. We conduct an IV analysis using the leniency of trademark examiners as the instrument and show that the above findings are causal.

SPACs

Minmo Gahng
,
University of Florida
Jay R. Ritter
,
University of Florida
Donghang Zhang
,
University of South Carolina

Abstract

Special Purpose Acquisition Company (SPAC) IPO investors have earned annualized returns of 15.9%, while investors for the merged companies have earned -8.1% in the first year on common shares but 68.0% on warrants. We rationalize why certain companies go public via a SPAC merger despite their high costs. We identify the economic roles of SPAC sponsors and investors, and analyze the agency problems that certain SPAC features address. To complete mergers, sponsors frequently forfeit a significant part of their shares and warrants, often transferring them to investors as inducements. SPACs are evolving towards a more sustainable equilibrium.

Bucking the Trend: Why Do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them?

Laura Field
,
University of Delaware
Michelle Lowry
,
Drexel University

Abstract

While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of IPO firms with these structures has doubled over this period. We test whether IPO firms implement these structures optimally or whether they are utilized to allow managers to protect their private benefits of control. Both shareholder voting patterns and changes in firm types going public suggest that the Optimal Governance hypothesis best explains IPO firms’ use of classified boards. There is considerable heterogeneity across dual class firms, with some more consistent with optimal governance and others with agency.

Discussant(s)
Michael Ewens
,
California Institute of Technology
Ann Sherman
,
DePaul University
Lubomir Litov
,
University of Oklahoma
JEL Classifications
  • G2 - Financial Institutions and Services
  • G3 - Corporate Finance and Governance