This paper aims to divide the US financial markets into their three main components: the corporate sector, investment banking and institutional investors, represented by the asset management industry. This cross-disciplinary and holistic approach is based on an understanding of the IPO market as the intersection of these three main forces.
This paper seeks to broaden the current debate and extend the traditional issuer-underwriter-investor model beyond the immediate ecosystem of IPO markets. The main objective of this paper is to provide a comprehensive assessment of the key, systemic and underlying trends in these three underlying disciplines and to identify potential areas for regulatory action.
This paper finds academic evidence in the area of public equity offerings that regulatory initiatives can be effective and tilt the balance between private and public equity finance towards more regulated and transparent markets. It is also essential to acknowledge that this rebalancing was supported by financial innovation and it remains doubtful whether the JOBS Act can be as effective in the absence of similar innovation at the core of the IPO product, which remains locked between excessive underwriting fees and unresolved conflicts of interest in the analyst community, a key support function. These areas require further and immediate regulatory action to restore the competitiveness of the IPO product and to preserve the integrity of the IPO market as a whole.
Table of Contents
1. INTRODUCTION
2. CORPORATE SECTOR
2.1. CORPORATE FINANCE
2.1.1. Valuation
2.1.2. Innovation
2.1.3. Diversification
2.2. CORPORATE GOVERNANCE
2.2.1. Board of directors
2.2.2. CEOs pay
2.2.3. Stock options
3. INVESTMENT BANKING
3.1. LENDING
3.1.1. Syndicated loans
3.1.2. Structured debt
3.1.3. Corporate bonds
3.2. UNDERWRITING
3.2.1. Consolidation
3.2.2. Accelerated offerings
3.2.3. Analyst research
3.3. TRADING
3.3.1. Liquidity
3.3.2. Dark pools
3.3.3. High-frequency trading
4. ASSET MANAGEMENT
4.1. MAINSTREAM STRATEGIES
4.1.1. Institutional investors
4.1.2. Foreign investors
4.1.3. Passive investors
4.2. ALTERNATIVE STRATEGIES
4.2.1. Private equity
4.2.2. Hedge funds
4.2.3. Insider trading
5. CONCLUSION
Objectives and Research Themes
This thesis investigates whether the U.S. IPO market requires further regulatory support by analyzing external and internal factors that have led to a decline in new public listings. The research examines the intersection of corporate finance, investment banking, and the asset management industry to identify systemic barriers and potential legislative gaps.
- The impact of the JOBS Act on IPO activity and its relative effectiveness.
- Changes in corporate governance and their influence on innovation and going-public decisions.
- The evolution of the investment banking industry, specifically lending, underwriting, and secondary market trading.
- The shifting influence of institutional ownership—ranging from mainstream strategies to private equity and hedge funds.
- Systemic risks associated with insider trading as a channel for information transmission.
Excerpt from the Thesis
1. Introduction
At its peak in 1996, there were more than eight thousand domestically incorporated companies listed on U.S. stock exchanges according to a recent paper by Doidge, Karolyi and Stulz (2017). This number was reduced by nearly a half by 2012 while the number of listed companies outside the U.S. increased on average. This listing deficit amounts to more than five thousand companies and started to materialise after the turn of the century. The authors attribute 54% of the listing deficit to a low rate of new listings, which they measure in comparison to historic averages and to other countries. This research puts the U.S. market for initial public offerings (IPOs) under the spotlight in search for potential explanations.
Declining IPO activity, especially among small companies, has been on the radar of regulators for some time now and new legislation in form of Jumpstart Our Business Startups (JOBS) Act has been signed into law in 2012 to counteract this development. Preliminary findings by Dambra, Field and Gustafson (2015) indicate that while IPO activity picked up following the implementation of the JOBS Act, the increase is highly concentrated on the pharmaceutical industry. The authors also admit that IPO activity remains subdued compared to historical average and that it is challenging to provide solid empirical evidence in the absence of changing market conditions. Hence, the debate about the health of the U.S. IPO market continues.
Doidge et al. (2017) conclude their paper by highlighting the importance of capital markets for the U.S. economy. Historically, it has been widely believed in the U.S. that going public is just the result of a successful business strategy and that an IPO is simply something you naturally do once a company has reached a certain size or growth rate. Now this view is being challenged by the struggling IPO market. It appears that the evolution of financial markets makes it possible for companies to gain access to capital outside of public ownership and without being listed. Other than being bad for business from the perspective of stock exchanges, the question remains whether this phenomenon can and should be addressed with regulatory action.
Summary of Chapters
1. INTRODUCTION: Outlines the decline of listed companies in the U.S. since 1996 and introduces the primary research question regarding the necessity of regulatory intervention in the IPO market.
2. CORPORATE SECTOR: Examines how internal firm factors—specifically financial structure, innovation strategies, and corporate governance—influence the decision to stay private versus seeking an IPO.
3. INVESTMENT BANKING: Reviews traditional banking disciplines including syndicated lending, equity underwriting, and electronic trading, analyzing how these sectors have structurally changed and potentially hindered IPO appeal.
4. ASSET MANAGEMENT: Discusses the shifting dynamics of institutional investors, including the impact of mainstream, foreign, and passive strategies, as well as alternative investment vehicles like private equity and hedge funds.
5. CONCLUSION: Synthesizes the findings, concluding that while regulation successfully promotes transparency, innovation in the IPO core remains stagnant, necessitating further concerted policy responses.
Keywords
Initial Public Offerings, IPO, JOBS Act, Corporate Governance, Investment Banking, Stock Market Liquidity, Private Equity, Hedge Funds, Financial Innovation, Market Regulation, Insider Trading, Capital Markets, Equity Underwriting, Asset Management, Information Asymmetry.
Frequently Asked Questions
What is the primary objective of this thesis?
The research aims to explain the long-term decline in U.S. IPO activity by evaluating whether existing or further regulatory measures are required to regain the competitiveness of the public equity market.
What are the three main constituents of the U.S. financial market analyzed in the paper?
The paper divides the financial ecosystem into the corporate sector, the investment banking industry, and institutional investors represented by the asset management sector.
Does the JOBS Act receive a positive assessment in the paper?
The assessment is mixed; while the act encouraged some market participation, preliminary findings are inconclusive, and the paper argues that the lack of innovation at the core of the IPO product limits the act's effectiveness.
Is there evidence that private equity funds engage in manipulative reporting?
The paper discusses findings that some private equity funds, particularly those with less track record, may inflate net asset values (NAV) to secure future capital allocations.
What is the relationship between hedge funds and takeover probability?
Research cited indicates a positive link; companies with hedge fund ownership stakes have a significantly higher probability of receiving acquisition offers within two years of investment.
How has the role of analyst research changed for IPOs?
The paper highlights that despite the Global Analyst Research Settlement of 2003, unresolved conflicts of interest and pressures to support underwriting business persist, requiring further regulatory monitoring.
How does stock market liquidity affect default risk?
The analysis shows that increased liquidity typically correlates with reduced default risk, as it promotes better informed management decisions and improves information efficiency.
What role do "Dark Pools" play in the modern market?
The paper explores the rise of off-exchange trading platforms and notes the trade-off between the cost-efficiency they offer and the potential loss of market transparency and best execution principles.
- Arbeit zitieren
- Konstantin Dombrowski (Autor:in), 2018, Does the U.S. IPO market require further regulatory support?, München, GRIN Verlag, https://www.grin.com/document/1446291
