Does the Involvement of Expert Intermediaries Improve the Aftermarket Survivability of IPO Firms? Evidence from Industry Specialist Auditors and Reputable Venture Capitalists Ting-Kai Chou Jia-Chi Cheng Chin-Chen Chien National Cheng-Kung University, Taiwan

Motivations the tendency of IPO delistings occur within a few years of issuance (Jain and Kini 1999 ) a dramatic decline in the survival rates of newly listed firms (IPOs)(Fama and French 2004)

Motivations Investors in IPOs would suffer huge losses with the declining performance or even failure of the newly listed companies. What would affect the survival rate of IPO?

Objectives IPO firms have no sufficient information and have a greater uncertainty associated with their valuation and assessed future delisting risk (Webber and Willenborg 2003) Market intermediaries help to reduce information asymmetry problems (Fargher el al. 2000;Mitchell et al. 1997) Screening, monitoring, and value-adding affairs

Objectives Reputable intermediaries bear a reputation cost We examine whether the expert (or reputable) intermediaries are good improvers of aftermarket survivability of IPO firm. auditors venture capitalists

Auditors ’ industry focus In the prior studies, audit firm size is commonly used as a proxy for audit quality (Palmrose 1988;Teoh and Wong 1993;Becker et al. 1998) Industry specialization represents an additional level of auditors’ service quality (Dunn and Mayhew 2004)

Hypothesis development IPO firms have a greater need for a strategic and technical advisor. Industry expertise enable auditors to identify and address industry specific problems and risks of IPO clients (Brown and Raghunandan 1995;Craswell and Taylor 1991)  improve the IPO issuers’ competitive advantages, translating into higher aftermarket survivability

Hypothesis 1 H1a: Firms retaining an auditor with industry specialization in the IPO process are less likely to be delisted from the stock exchange. H1b: Firms retaining an auditor with industry specialization in the IPO process are less likely to be delisted sooner from the stock exchange.

The Role of VCs in the IPO Context VC firms may provide a wide range of benefits to a young, high-growth privately held companies screening cash funding monitoring value-adding expertise

Hypothesis development The quality of services VCs provide may be not homogenous, and probably hinges on their reputation level (Hall and Hofer, 1993). Intangible reputation of VC firm is driven by the activity and especially the proven success in terms of the number of companies they have taken public (Hellmann, 2000).

Hypothesis development A VC firm with strong track records may provide higher value-enhancing service quality than other VCs.  improve involved IPO issuers’ performance and ultimately chance of survival

Hypothesis 2 H2a: Firms backed by reputable VCs in the IPO process are less likely to be delisted from the stock exchange. H2b: Firms backed by reputable VCs in the IPO process are less likely to be delisted sooner from the stock exchange.

IPO Data U.S. IPOs spanning from Data sources SDC Compustat CRSP

“ Delisting ” Classification We classify firms as “delisted” if their CRSP delisting codes are in the 400-range or the 500-range, excluding firms with delisting codes of and 573. failure to meet listing standards financial distress Liquation insufficient capital lack of liquidity

Econometric Methods-1 Logit Analysis Logit regression analysis Logit regression analysis the impact of reputable auditors and VCs on the IPOs’ delisting rate Empirical model: Empirical model:

Econometric Methods-2 Survival Analysis Cox proportional hazard analysis Cox proportional hazard analysis model firm survival in “IPO life expectancy” to conduct calendar time-based analyses Empirical model: Empirical model:

Explanatory Variables Industry Specialist Auditor Reputable Venture Capitalist We identify VC firms’ reputation in a given year based on their past cumulative IPO market share. high reputation when its both volume and dollar market share fall in the top half of market shares.

Descriptive statistics and univariate tests

Interactive Comparison of Non-industry specialists and Non-Big 5s ’, Non-industry specialists and Big 5s ’ and industry specialist auditors ’ IPO Clients

Interactive Comparison of non-VC-backed, VC-backed and Reputed VC-backed IPO Firms

Logit Regression Models

Cox Proportional Hazard Models

Survival Curve for IPOs (Non-Specialist and Non- Big 5-backed vs. Non-Specialist and Big 5-backed vs. Industry Specialist Auditor-backed IPOs)

Survival Curve for IPOs (Non VC-backed vs. Non- reputed VC-backed vs. Reputed VC-backed IPOs)

Contributions Delisting of IPO stocks due to financial distress is one measure of long-run performance that avoids the controversies surrounding appropriate risk benchmarks. We are the first one to demonstrate that industry specialist auditors are associated with IPO firms that are less likely to fail.

Contributions We try to develop a simple reputation measure to differentiate among VC firms. Compared to Jain and Kini (2000), we present supplementary evidence that only reputable VC participation can effectively improve the survivability of IPO issuers.

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