LAKEWOOD
RANCH, Fla., Aug. 27,
2024 /PRNewswire/ -- A new study published by
the American Accounting Association finds publicly traded companies
will strategically release bad news when a competitor is launching
an initial public offering (IPO), in order to drive down the value
of the IPO or torpedo the IPO completely.
"Because there is little company-specific information available
to investors when a company attempts a public listing for the first
time, investors trying to place a value on the offering depend
largely on the information from publicly traded companies that are
already operating in that industry," says Mark Ma, co-author of a paper on the work and an
associate professor of business administration at the University of Pittsburgh.
"We wanted to see whether companies would make themselves appear
less profitable in order to get a competitor to withdraw its IPO or
limit the amount of money the competitor can raise."
For this study, researchers collected data on 3,878 firms that
went public in the U.S. between 1991 and 2017, as well as 866
withdrawn IPOs. The researchers also evaluated quarterly financial
statements issued by large, publicly traded companies during the
same time period.
The researchers then used statistical tools to identify patterns
among publicly traded companies when an industry competitor was
preparing to issue an IPO.
To help identify the potential impact of a competitor's IPO
offering, the researchers compared financial statements of
companies who issued their statements shortly before a competitor's
IPO was filed with companies in the same sector who issued
statements after the IPO was filed.
"When a company files its IPO, publicly traded competitors in
the same sector were more likely to report lower earnings, issue
pessimistic revenue forecasts, and take a negative tone in their
financial statements," Ma says.
"This strategy works," Ma says. "In cases where competitors
issued negative financial statements, companies who had listed an
IPO were more likely to revise their offering price downward or
withdraw the IPO altogether. Even if these firms go public, they
suffer poor operating performance – probably because they couldn't
raise sufficient capital at the IPO stage. Meanwhile, their
competitors experience higher profitability and market share
growth.
"One takeaway message is that investors should be skeptical of
competitors' financial statements when evaluating IPO
offerings."
"Academic studies have shown that raising external capital can
be costly for firms due to information asymmetry in capital
market," says Xiaoyun Yu, co-author
of the study and a Chair Professor of Finance at Shanghai Jiao Tong
University. "Our paper suggests the cost of financing may be higher
than previously estimated when considering the strategic negative
disclosure of already publicly traded industry peers."
"In addition, by deploying strategic disclosure to hinder
competitors' ability to raise capital and to go public, large
incumbents can shape the competitive landscape and alter the
industry structure," Yu says. "Consequently, industry policies may
become tilted in favor of large incumbents, as they gain influence
over the industry's development."
The paper, "Torpedo Your Competition: Strategic Reporting and
Peer Firm IPO," is published in The Accounting Review. The
paper was co-authored by Matthew
Billett, Chase Chair Professor of Banking and Finance at
Indiana University Bloomington.
The American Accounting Association (www.aaahq.org) is
the largest community of accountants in academia. Founded in 1916,
we have a rich and reputable history built on leading-edge research
and publications. The diversity of our membership creates a fertile
environment for collaboration and innovation. Collectively, we
shape the future of accounting through teaching, research and a
powerful network, ensuring our position as thought leaders in
accounting.
Media Contacts: Mark Ma, 382367@email4pr.com
David Twiddy, 382367@email4pr.com,
941-556-4115
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SOURCE American Accounting Association