Impact of Executive Ownership and Usage of IPO Proceeds on Firm Performance

Impact of executive ownership and usage of IPO proceeds on firm performance

A case study for IPO firms in the U.S. during 2006 - 2014

Master Thesis Finance Tilburg School of Economics and Management

Author: Bekir Daglioglu (ANR: 991008 / SNR: U1258863) Supervisor: Dr. M.R.R. van Bremen Second reader: Drs. F. Hosseini Date: July 23rd, 2018

Preface First of all, I would like to express my gratitude to my supervisor Dr. Michel van Bremen for his suggestions, guidance and support during the process of writing this thesis. By finishing this thesis, I will obtain the Master of Science in Finance. The period of writing this thesis was challenging and at the same time it has enabled to further enhance my academic skills regarding research.

Additionally, this paper provides more insight into the movement of firm performance of U.S. companies after their IPO by putting emphasis on executive ownership and usage of IPO proceeds.

Finally, I would like to thank my family, friends and fellow students for providing me the support during my time studying at Tilburg University and writing this thesis.

Bekir Daglioglu

Tilburg, July 23rd, 2018

Abstract I analyze the movement of firm performance of firms in the United States in the 21st century shortly before and in the subsequent years after an IPO by analyzing the impact of the change of executive ownership and usage of IPO proceeds. Both the firm performance and executive ownership decline right after an IPO for firms in the 21st century. Moreover, I have proven and supported that there is a positive impact of executive ownership on firm performance outside the entrenchment range and negative inside the entrenchment range. I find that firms with a high executive ownership that spend the proceeds on capital expenditures, R&D and payout dividends realize higher firm performance. However, the main usage of IPO proceeds for large debt repayments and a decline in executive ownership weight out these benefits and cause the firm performance to decrease in the subsequent years. Paying back large amounts of debt immediately after IPO could cause the liquidity to decrease and this affects the firm performance. Another explanation is that firms realize less growth investments as a result of a large debt repayment after IPO.

Contents Problem set and introduction ...... 5 Research questions, related literature and hypothesis development ...... 7 Chapter 1 Executive Ownership ...... 8 Agency Theory ...... 9 Management Entrenchment ...... 9 Chapter 2 Usage of IPO proceeds ...... 11 Chapter 3 Executive ownership and usage of IPO proceeds ...... 15 Chapter 4 IPO market and developments ...... 16 Research Methodology ...... 17 Executive ownership and firm performance ...... 17 Matched firms ...... 17 Usage of IPO proceeds and executive ownership ...... 19 Excess Cash and IPO proceeds ...... 19 Control Variables ...... 21 Relationship Executive ownership and usage of IPO proceeds ...... 22 Data ...... 23 Main sample ...... 23 Matched firms ...... 24 Results ...... 25 Descriptive Statistics ...... 25 Executive ownership and firm performance...... 27 Impact of executive ownership on firm performance ...... 30 Usage of IPO proceeds, Executive ownership and firm performance ...... 31 Excess cash ...... 31 Impact of usage of IPO proceeds with executive ownership on firm performance ...... 33 Control Variables ...... 34 Usage of IPO proceeds and executive ownership ...... 37 Robustness Check ...... 40 Summary and conclusions ...... 41 Limitations ...... 44 References ...... 45 Appendix ...... 47

Problem set and introduction

In the past, several researches have focused on the post-IPO performance. Overall, the findings are suggesting a decreasing performance of firms in the years after an IPO (Jain & Kini, 1994; Mikkelson et al., 1997; Kim et al., 2004; Coakley et al., 2007). However, not much is known about the performances of IPO firms in the 21st century and what explains the performance of these public firms right after their IPO. Moreover, the proceeds from an IPO mainly increases overall each year. In 1980 the aggregate gross proceeds were $2.020 billion while in 2000 these were $129.363 billion (Ritter & Welch, 2002). This is a different reasoning why the IPO’s in the 21st are of importance.

The change in executive ownership in the years after an IPO for U.S. firms is referred to by some researches as a possible explanation for the decline in performance (Mikkelson et al., 1997; Jain & Kini, 1994). The results were usually controversial and the firms under investigation were from the 20th century. Moreover, the executive ownership declines each year in the years after a firm has gone public (Brennan & Franks, 1997; Mikkelson et al., 1997). Mikkelson et al. (1997) have found no significant relationship of this decrease with the declining firm performance. It is given in their conclusion that one possible explanation is the absence of other incentives such as the ownership from options that indirectly leads to an ownership and increase in alignment with shareholders. Therefore, I analyse the impact of the change of executive ownership directly in the years after an IPO by including the ownership with options. Next to this, I control for non-equity incentive compensations as well in order to rule out the effect of other incentives on firm performance. Moreover, different than Mikkelson et al. (1997), I account for the management entrenchment as well and include one more insider ownership factor in my research as its importance is strengthened by several literature (Kim et al., 2004; Morck et al., 1988; Short & Keasey, 1999).

In addition, the usage of IPO funds could have an impact on firm performance as well since firms can use the funds for different objectives, for example to pay off debts and increase investments (Pagano et al., 1998). Moreover, the importance of the usage of IPO proceeds is strengthened by the fact that the proceeds of an IPO have strongly increased in the past decades as discussed earlier. Next to this, cash holdings of companies differ between private and public companies. Due to agency costs, public firms aim to have lower cash than private companies (Gao et al., 2013). Furthermore, companies with the combination of weak corporate governance measures and excess cash tend to spend cash quickly on investments. When firms have strong corporate governance measures they are more likely to pay back debts or pay out to their shareholders (Gao et al., 2013). This means that the executive ownership is related to the usage of IPO proceeds, since insider ownership is a corporate governance measure. Therefore, I analyze the usage of IPO

5 proceeds by accounting for the executive ownership as well and by analyzing how the IPO proceeds are used under an executive ownership level and how this influences the firm performance. In addition, a high concentration of control in the hands of executive directors reduces the underinvestment problem, meaning that the executive ownership and usage of IPO funds could be related to each other (Goergen & Renneboog, 2001). One of the important developments since the 20th century is the change in the IPO landscape around the world over the past two decades (Doidge et al., 2013). Due to financial globalization during this century, small firm IPO’s are staying behind, compared to other countries. Therefore, analyzing a more recent dataset of U.S. firms in the 21st century about firms going public will enable us to compare the outcomes and to see if the performance and its determinants have changed over time. Besides, IPO firms during the bubble period underperformed in the year 2000 (Coakley et al., 2007). Since my research captures the subprime mortgage crisis, a similar underperformance is accounted for as well.

To sum up, my research focuses on explaining the change in firm performance of U.S. firms in the 21st century after their IPO by analyzing the impact of the change in executive ownership and usage of IPO proceeds. Moreover, by analyzing IPO’s in the 21st century, I account for the change in the IPO environment of U.S. firms due to financial globalization (Doidge et al., 2013). Therefore, my research answers the following question:

What is the impact of the change of executive ownership and the usage of IPO proceeds on the change of the performance of U.S. firms going public in the 21st century?

Research questions, related literature and hypothesis development To answer what the impact of the change of executive ownership and the usage of IPO proceeds is on the change of performance of U.S. firms after an IPO, 3 main research questions needs to be answered first.

Research Questions Research question 1 (chapter 1): What is the impact of the change of executive ownership on the change of firm performance of U.S. IPO’s in the subsequent years?

Research question 2 (chapter 2): What is the impact of the usage of IPO proceeds on the change of firm performance of U.S. IPO’s in the subsequent years when accounting for the executive ownership?

Research question 3 (chapter 3): What is the relationship between the executive ownership and the usage of IPO proceeds?

Related Literature When analyzing the impact of the earlier mentioned factors on the change of performance of IPO firms in the subsequent years, I use multiple related literature. As discussed earlier, when analyzing different literate about IPO’s and their firm performance over time, all of them conclude a decline in firm performance (Jain & Kini, 1994; Mikkelson et al., 1997; Kim et al., 2004; Coakley et al., 2007). The following chapters focus on past literature about the potential determinants of this decrease in firm performance. Moreover, multiple hypotheses are derived by combining their findings and the main purpose of my research. At first, Chapter 1 discusses the impact of the change of executive ownership on the firm performance after an IPO. At second, Chapter 2 discusses the impact of the usage of IPO proceeds when accounting for executive ownership. Furthermore, Chapter 3 discusses the relationship between the executive ownership and the usage of IPO proceeds. At last, Chapter 4 points out the IPO market developments in the 21st century.

Chapter 1 Executive Ownership First of all, the key literature that I use for my research on the change of executive ownership of IPO firms in the U.S. is Mikkelson et al. (1997), Jain & Kini (1994) and Kim et al. (2004). Even though these papers differ in their method of implementing the analysis and focus on the executive ownership before IPO, they contain a part that focuses on the subsequent years as well and contain the change of performance and executive ownership in these years. So, I focus more on the change of the executive ownership in each year after an IPO as this declines yearly (Brennan & Franks, 1997; Mikkelson et al., 1997). Furthermore, I put emphasis on Mikkelson et al. (1997) more than Jain & Kini (1994), since they consider the absolute change in the executive ownership as a measure of executive ownership. Jain & Kini (1994) determine the insider ownership by using the overallotment options with the assumption that they are not exercised. In addition, Jain & Kini (1994) do not consider the change in executive ownership in the subsequent years after an IPO and discover a positive relationship with the change of firm performance after IPO. One of the firm performance measures used by them is the operating income before depreciation divided by total assets. This measures the efficiency of how the assets are used by a firm in each year. Moreover, they assume that the percentage retained after an IPO by original entrepreneurs are not changed in the subsequent years and use this median percentage for all future years after IPO. However, considering that insider ownership in subsequent years do change (Mikkelson et al., 1997; Brennan & Franks, 1997), absolute numbers in executive ownership should be considered. Moreover, Kim et al. (2004) build on the theory of Mikkelson et al. (1997) by analyzing the absolute change in the executive ownership in the subsequent years as well. They support a large part of the research of Mikkelson et al. (1997). However, they find a shortage that might explain one of the reasons why they did not find significant results. This concerns the fact that managers feel entrenched at some point of high ownership (Morck et al., 1988; Kim et al., 2004; Short and Keasey, 1999). At this point, executives feel too much protected by their ownership and are less disciplined by outside shareholders. This eventually negatively affects the firm performance (Morck et al., 1988; Kim et al., 2004; Short and Keasey, 1999). It is also pointed out that at a further point of higher ownership the effect of entrenchment weakens and starts resulting in higher firm performance. Considering that Kim et al. (2004) implemented this on IPO firms in Thailand and that Mikkelson et al. (1997) did not include this effect for U.S. firms, I account for it during my research.

The impact of the executive ownership on firm performance is explained by two theories. Namely the agency theory and management entrenchment theory.

Agency Theory The importance and possible impact of the change of executive ownership on firm performance is explained by the agency theory of Jensen & Meckling (1976). According to their research, a higher executive ownership reduces the incentive to invest in nonvalue maximizing projects, since this will indirectly influence the value of their own stake in the firm. Therefore, considering that according to past research the executive ownership mainly declines in the years after a firm has gone public, this might influence the firm performance in these years as well (Mikkelson et al., 1997; Brennan & Franks, 1997).

Management Entrenchment However, a theory and hypothesis developed by Morck et al. (1988) and strengthened by other researches (Kim et al., 2004; Short & Keasey, 1999) discusses that at some point the management with a substantial control may have a sufficient voting power to guarantee his future employment with the company at an interesting salary. This may cause the management to allow itself for on-the-job consumption. This entrenchment hypothesis of Morck et al. (1988) forecasts that firm performance declines as executives’ ownership realizes an increase above a certain point of control where there is no limitation for the management. Therefore, this might be of importance when considering the effect of the change of insider ownership on firm performance after an IPO.

This research distinguishes itself in two ways from Mikkelson et al. (1997) and adds importance to their research for U.S. IPO firms. At first, as pointed out earlier, Mikkelson et al. (1997) have found no relationship between the declining firm performance and the decline in executive ownership. One explanation for this given by themselves is the existence of other possible incentives for directors. When insider ownership declines, these incentives might influence the firm performance and thus make the decline in executive ownership alone less effective. These incentives could include equity as well as non-equity incentives. This is supported by Morck et al. (1988) who state that large public firms reward their executives in alternative ways. When firms perform well, the executives are paid out more with stock bonuses or have their stock options owned by the executives exercised. For this reason, I focus on the executive ownership including the options since the options lead to an incentive alignment of executives as well (Jensen & Meckling, 1976). Additionally, I control for the effect of non-equity incentive compensations as well to gain a clear insight into the effect of executive ownership.

At second, as mentioned earlier, another potential reason why Mikkelson et al. (1997) have found no significant relationship is that they do not account for three executive ownership ranges in their analysis. The entrenchment hypothesis developed by Morck et al. (1988) and strengthened by other researches (Kim et al., 2004) discusses that at some point the management with a substantial control may have a sufficient voting power to guarantee his future employment with the company at an interesting salary. This entrenchment hypothesis of Morck et al. (1988) forecasts that firm performance declines as executives’ ownership realizes an increase above a certain point of control where there is no limitation for the management. Kim et al. (2004) strengthen this even further when applying it for the first time for Thai firms after their IPO. Moreover, they find a positive impact of executive ownership on firm performance within two ranges of insider ownership. A negative relationship is found between the entrenchment range of executive ownership and firm performance. They point out that one of the reasons why Mikkelson et al. (1997) did not find a significant effect is due to the lack of a third range of executive ownership in their model. Therefore, considering that Kim et al. (2004) did this for IPO firms of Thailand, I allow for three ranges of executive ownership for U.S. firms that have gone public.

In short, now that the options are included and non-equity incentives are controlled, I expect the impact of the change of insider ownership to be positive for a certain range of executive ownership that falls outside the entrenchment range and negative for a range inside the entrenchment range. Therefore, this leads to the following hypothesis:

Hypothesis 1: The impact of a change of executive ownership (including options and outside entrenchment range) on the change of firm performance after IPO is positive for firms in the subsequent years.

Chapter 2 Usage of IPO proceeds Additionally, when analyzing the usage of IPO proceeds I use three academic papers. Gao et al. (2013) and Harford et al. (2012) are used to explain how firms use the excess cash they have. Considering that an IPO goes along with large levels of cash, it is therefore interesting to see how the IPO proceeds are used. Moreover, the findings of Pagano et al. (1998) are considered here as well since it shows why firms go public and to what they spend their proceeds on. For example, firms spend their proceeds right after an IPO on paying back their debts that they have acquired right before an IPO to fund investments. Even though this is for Italian firms, the repayment of debt, issuance of debt and the investments are considered in my research as well.

According to Harford et al. (2012) companies in the U.S. with weaker governance structures tend to hold lower cash reserves. Moreover, when firms have excess cash holdings in combination with weak governance structures they use the excess cash for capital expenditures and acquisitions rather than R&D expenditures. They strengthen this by explaining that large unused cash balances can be observed easily by shareholders and this can cause shareholders to be nervous. In addition, proxy contests are increasing when excess cash reserves increase (Faleye, 2004). Therefore, to prevent such proxy fights, executives often would like to spend these excess cash holdings on investments such as capital expenditures that lead towards the acquisition of real assets. The governance structure that Harford et al. (2012) consider is for example shareholder rights. No relationship between the insider ownership and different investments is founded. However, firms with higher insider ownership have higher cash holdings. Since IPO’s lead firms to obtain large amounts of cash from the proceeds, this excess cash holding could be translated into the usage of IPO proceeds. Moreover, firms that have a high insider ownership and excess cash holdings are more likely to pay out more dividends in the year after the excess holding (Harford et al., 2012). Therefore, it is interesting to see how the excess cash holdings from IPO proceeds is used in this case when considering it together with the executive ownership. Additionally, Harford et al. (2012) measure what the impact of excess cash holdings and the governance structures is on the profitability. When analyzing them separately, a firm’s cash holding does affect its future profitability and the same holds for the governance structures. For example, firms with a high insider ownership have a higher profitability and firms with a lower insider ownership have a lower profitability. Even though the entrenchment theory of Morck et al. (1988) puts a limitation on this finding, it strengthens the finding of Jensen & Meckling (1976) that a higher executive ownership reduces the incentive to invest in nonvalue maximizing projects, since this will indirectly influence the value of their stake in the firm as given earlier in Chapter 1. However, Harford et al. (2012) do not provide enough evidence on the impact of the interaction of the governance structures, such as the effect of insider ownership and excess cash

11 holdings on performance. So there is not enough evidence to conclude in their research that the presence of excess cash strengthens the relationship between governance and profitability. However, they do find that weakly controlled managers choose to spend cash quickly on acquisition and capital expenditures instead of accumulating it (Harford et al., 2012).

Furthermore, a study by Gao et al. (2013) focuses on the difference in cash policies between private and public firms and the difference among the public firms based on governance structure. The key governance structure that they analyze and lies within the interest for this research is the executive ownership. One of their findings is that private firms hold significantly less cash than public firms. This is mainly due to the increasing agency costs that arise from going public according to Gao et al. (2013). These agency costs weight more than the possible financing frictions for private firms that would normally lead to higher cash reserves for them. These financing frictions might occur since private firms bear higher external costs of financing than public firms (Keynes, 1936; Gao et al., 2013). Additionally, one of their key findings for my research is that poorly governed public firms spend most of their cash on investments such as capital expenditures and acquisitions. Due to these large investments with significant consequences for cash levels, the cash reserve drops fast. On contrary, well governed firms make smaller modifications on the cash level by paying back their debts and eventually reduce their leverage. In addition, better governed firms tend to spend more of their excess cash on R&D than poorly governed firms. Moreover, according to Gao et al. (2013) there is consistent evidence that well governed public firms use their excess cash in such a way that firms realize an increase in their performance. The performance here is measured by the return on assets. Poorly governed firms on the other hand realize lower firm performance because they misuse the excess cash by spending it as quickly as possible and end up with poor investment projects. Different than Harford et al. (2012), Gao et al. (2013) do find a significant relationship between the insider ownership and the different usage of excess cash for several investment purposes. Firms with a high insider ownership spend more on R&D expenditures as a percentage of total investments. In addition, firms with a higher executive ownership pay back more debts than firms with a lower executive ownership. Considering that this repayment of debt is not for firms during an IPO, the importance of debt repayment after IPO is strengthened by the fact that firms pay back their debts after an IPO according to Pagano et al. (1998). Even though this is for Italian firms, it emphasizes the relevancy of potential usage of IPO proceeds directly for U.S. firms as well. These Italian companies had borrowed just before their IPO to fund investments and have repaid these debts with the proceeds. Moreover, the governance measures include the insider ownership as well when measuring the impact on the firm performance. Since the governance measures have a positive relationship with firm performance, firms with a higher insider ownership have a higher firm performance than firms with lower insider

12 ownership (Gao et al., 2013). This would strengthen hypothesis 1 from Chapter 1 when analyzing the impact of the change of executive ownership outside the entrenchment range on firm performance. In addition, as given earlier, the cash policy of a firm with a certain level of executive ownership has an impact on the firm performance as well. When combining these two findings together with the assumption that the executive ownership declines in my research as well in the years after an IPO based on previous research (Mikkelson et al., 1997; Brennan & Franks, 1997), this could lead towards expectations about the impact on firm performance in the subsequent years after an IPO. For example, as explained earlier weakly governed firms use their excess cash to spend quickly on acquisitions and capital expenditures and cause the firm performance to decrease. Thus, according to the earlier assumption on the decline in executive ownership in the subsequent years after an IPO, firms after an IPO would invest large amounts in capital expenditures and acquisitions and this would cause the firm performance to decrease. Moreover, management entrenchment is taken into account as well as management entrenchment leads firm performance to decline. Therefore, it is interesting to control for this as well, by analyzing multiple ranges of executive ownership. The following hypothesis can be derived from this:

Hypothesis 2a1: The usage of IPO proceeds for capital expenditures/ acquisitions has a negative impact on the firm performance after IPO when executive ownership is low in the subsequent years.

However, the previous hypothesis is only when the assumption on the declining executive ownership in the subsequent years after an IPO holds. As stated earlier, Mikkelson et al. (1997) did not include the options of the executives when considering the insider ownership and therefore the executive ownership might differ and the assumption for the decline may not hold. Moreover, Mikkelson et al. (1997) have implemented their research for firms in the 20th century whereas I do it for the companies in the 21st century. The latter reason why the IPO’s in the 21st are of importance is explained in Chapter 4. The hypothesis as derived earlier changes when the executive ownership is high in the subsequent years. In addition, as explained earlier, well governed firms invest a large part in their R&D department and this eventually leads towards higher firm performance (Gao et al., 2013). Thus, in a case of a higher executive ownership in the subsequent years after an IPO, companies will invest a larger part of their investments in R&D and this would lead towards higher firm performance.

All together result in the following hypothesis: Hypothesis 2a2: The usage of IPO proceeds for capital expenditures/acquisitions/R&D expenditures has a positive impact on the firm performance after IPO when executive ownership is high in the subsequent years.

Additionally, as explained earlier, well governed firms with a high insider ownership use their excess cash to repay their debts. Different than weakly governed firms with low executive ownership, they choose to spend the excess cash slowly on debt repayments instead of spending it on capital expenditures. Therefore, as in my research the proceeds from an IPO would be partly used to repay debts when the executive ownership is high. This would therefore result towards a higher firm performance and leads towards the following hypothesis:

Hypothesis 2b: The usage of IPO proceeds for a relatively stable increase in debt repayment purposes has a positive impact on the firm performance after IPO when executive ownership is high in the subsequent years.

Furthermore, as illustrated before, according to Harford et al. (2012), firms with a higher executive ownership that hold excess cash are more likely to pay out more dividends in the subsequent years. These executives are this way committing for higher dividend payouts in the future (Harford et al., 2012). This can be realized by a higher firm performance in the future years. Moreover, it is important to take into account that firms with a high insider ownership have higher firm performance according to past research as explained earlier in Chapter 1 (Jensen & Meckling, 1976). Therefore considering that the excess cash holding is comparable towards the proceeds from an IPO and considering the relationship between the executive ownership and firm performance, the usage of the proceeds for dividend payouts has a positive impact on firm performance after IPO for firms with a higher insider ownership. This results in the following hypothesis:

Hypothesis 2c: The usage of IPO proceeds for dividend payouts has a positive impact on firm performance after IPO when executive ownership is high in the subsequent years.

Chapter 3 Executive ownership and usage of IPO proceeds When focusing on both key aspects of this research, it is important to emphasize the fact that executive ownership and usage of IPO proceeds might be related to each other. As discussed earlier in Chapter 2, when firms have excess cash they might use it for different purposes. It is also illustrated that this is related to insider ownership, especially when firms use the funds for the repayment of debts, capital expenditures, R&D expenses and dividend payout. The excess cash can be translated into the proceeds from IPO funds as large amounts of cash is obtained from this process and this can be used for different purposes as well. Additionally, the fact that public firms with high insider ownership have higher excess cash than public firms with low insider ownership shows that the usage of IPO funds and executive ownership might be related to each other since an Initial Public Offering leads to obtaining cash (Harford et al., 2012). Furthermore, the relationship between executive ownership and usage of IPO proceeds is partly strengthened by Goergen & Renneboog (2001). Even though they conclude that there is not much evidence that over- or underinvesting occurs at low levels of insider shareholding, a high concentration of control in the hands of executive directors reduces the underinvestment problem. Moreover, in Chapter 2 it was given that poorly governed firms use the excess cash for capital expenditures and acquisitions instead of paying back the debt- and shareholders. Taking these together, the excess cash in my research could be represented by the IPO proceeds and it is therefore interesting to see what the relationship between these two is. As showed earlier, the usage of IPO proceeds can be divided into different categories. According to Chapter 2, firms with the combination of high insider ownership and excess cash use it for R&D expenses, debt repayments and dividend payouts. In addition, the executive ownership considered here is without considering the entrenchment range. Thus, when interpreting this in terms of IPO funds, the following hypothesis would be derived from this:

Hypothesis 3: Firms with a high executive ownership level use the IPO funds to invest in R&D, pay back debts or payout dividends to shareholders in the subsequent years.

The companies with a combination of excess cash and lower insider ownership would use the funds for capital expenditures and acquisition. Therefore, this would translate into the following hypothesis when considering the usage of IPO proceeds:

Hypothesis 4: Firms with low executive ownership level use the IPO funds to pay back less debts, pay out less dividends and spend more on capital expenditures or acquisitions in the subsequent years.

Chapter 4 IPO market and developments The IPO market has changed since the 20th century all over the world due to financial globalization (Doidge et al., 2013). The IPO’s for U.S. firms are not larger anymore compared to the number of issuances outside the U.S. in other countries. This occurs for the reason that other countries with weak institutions can nowadays benefit from this by having global IPO’s. Thus, these firms do not depend on their own country alone. Even though the U.S. is economically one of the most crucial countries, its IPO’s of especially small- firms are lagging towards foreign IPO’s in both numbers and proceeds (Doidge et al., 2013). Past research on U.S. IPO’s shows a decline in firm performance in the years after an IPO (Jain & Kini, 1994; Mikkelson et al., 1997; Kim et al., 2004; Coakley et al., 2007). However, it is interesting to see if this decline holds for more recent IPO’s due to this financial globalization in the 21st century. Even though the IPO’s for the United States have become less important compared to IPO’s worldwide, the proceeds from an IPO have increased significantly over the past decades. According to Ritter & Welch (2002), the aggregate gross proceeds were $2.020 billion in 1980 while in 2000 these were $129.363 billion. This increase goes together with larger funds available for firms and therefore it is interesting to see how firms use these proceeds in the 21st century.

Additionally, during the 21st century two economic crises have occurred, namely the bubble and the subprime mortgage crisis. According to Coakley et al. (2007) who have analyzed the performance of U.K. IPO’s during the bubble period, IPO firms during this period have underperformed in the years of the bubble period. Their performance remained relatively stable in the other years. However, not much research on IPO’s is done for U.S. IPO’s firms that captures the subprime mortgage crisis. Therefore, it is interesting to capture a large part of the 21st century that includes the subprime mortgage crisis.

Research Methodology Executive ownership and firm performance First of all, the change in executive ownership and firm performance of IPO firms are yearly analysed for the subsequent years. According to past research, the insider ownership and firm performance both decline in the years after an IPO. Even though the options are included in the executive ownership, it is interesting whether this decline still holds for IPO firms in the 21st century. In addition, the distribution of the executive ownership are analysed in order to see what percentage most of the executives in U.S. IPO firms own over time. Moreover, an analysis of the firm performance over time after an IPO is compared to past research as well.

Matched firms Both the executive ownership and firm performance are first analysed for unadjusted firms. However, in order to analyse whether the movement of firm performance and executive ownership is specific to IPO firms, they should be adjusted for industry and total assets just as Mikkelson et al. (1997) have implemented. I realize this by matching firms that have gone public before the 21st century that are operational in the same year as the main sample. The median of these variables are first subtracted by the median of the main sample. Moreover, a Wilcoxon signed rank test is performed in order to check whether these two samples are statistically significantly different from each other. Both the level and percentage change of the firm performance and executive ownership is analysed by this method.

After I have analysed the movement of the executive ownership and firm performance over time, I have measured the impact of the executive ownership on firm performance. This is performed by implementing a panel data regression analysis in order to analyse the movement of the executive ownership and firm performance across time for the same firm. The dependent variable used here is the firm performance for each firm, which consists of the earnings before depreciation, taxes and interest expenses divided by total assets. This is used by multiple past research on IPO firms as firm performance indicator as it measures the efficiency of how the assets are used by a firm in each year (Mikkelson et al., 1997; Jain & Kini, 1994). Moreover, the executive ownership represents the CEO’s/ top executive’s shares as a percentage of common shares outstanding. This is analysed from the year-end of the IPO year until three years after that, meaning that four year-ends regarding the executive ownership are analysed. The impact of the insider ownership solely on firm performance is measured by performing a model which consists of the executive ownership variable together with its squared and cubic forms. As explained earlier, the model used by Mikkelson et al. (1997) consists of the executive ownership and the squared executive ownership and did not lead to any significant results. One possible explanation for this is that their model does not account for

17 the entrenchment theory about a decline in firm performance after a certain increase in executive ownership as explained in Chapter 1. The alternative method to take this into account is by including a cubic executive ownership variable in the model as well. As past research concluded, firm performance first increases when the executive ownership increases, but when the executive feels entrenched it leads to a decline in performance after a certain level of ownership. A further increase in insider ownership would cause the firm performance to increase again (Morck et al., 1988; Kim et al., 2004; Short and Keasey, 1999).

Additionally, to capture the effect of the increase in executive ownership including the options, it is necessary to control for the non-equity incentives as well. The reason for this was pointed out earlier and Mikkelson et al. (1997) have explained that one reason of not having significant results could be that other incentives then shares are positively related to firm performance. Furthermore, the model is controlled for firm size, leverage, cash and net working capital. Firm size is measured by the logarithm of sales. In addition, the long-term debts plus the short-term notes payables divided by total assets represent the leverage. Next to this, the cash is measured by the logarithm of cash and the net working capital is calculated by current assets minus current liabilities divided by total assets. These control variables are in section control variables explicitly explained. In addition to these control variables, as mentioned earlier, the effect of the subprime mortgage crisis is controlled for as well.

The following formula illustrates the model that is implemented:

2 3 (1) PERFORMANCE it = α + β EXECOWNERSHIP it + β EXECOWNERSHIP it + β EXECOWNERSHIP it + β SIZE it + β LEVERAGE it + β CASH it + β NWC it +β Non-Equity INC it + β DSUBPRIME it + v it

For a firm going public, in the year of IPO the t=0, one year after a firm goes public the t = 1 etc.

Usage of IPO proceeds and executive ownership The impact of the usage of IPO proceeds and executive ownership on firm performance is performed by a panel data regression analysis as well in order to analyse the same firms over a period of time. The hypothesises of Chapter 2 concerning the usage of IPO proceeds on capital expenditures, acquisitions, R&D expenses, dividend payment and debt repayment together with the executive ownership are derived with the assumption that there is excess cash or a significant increase in cash due to IPO proceeds (Gao et al., 2013; Harford et al., 2012). The following section first explains the necessary step to prove this assumption.

Excess Cash and IPO proceeds Gao et al. (2013) and Harford et al. (2012) have analysed how firms with insider ownership use the excess cash and how this affects firm performance. The excess cash in my research represents the IPO proceeds that could lead towards large cash holdings. The cash and cash equivalents are analysed for the year before and year-end of the IPO to detect any large increase. Furthermore, an OLS regression is implemented to see if there is an excess cash holding/significant increase as a result of the IPO proceeds. The dependent variable here represents the change in cash and cash equivalents from the year before IPO to the year of IPO. The main independent variable of interest is the IPO proceeds to see if the increase in cash can be justified by the proceeds. The control variables used in this model are firm size, cash and cash equivalents from the year before IPO and the retained earnings. The retained earnings are used as a control variable in order to rule out the effect of an increase in cash as a result of operations. The following formula illustrates this model:

(2) ∆CASHi = α + β IPOProceeds i + β RetainedEarningsi + β FirmSizei + β CASHbeforeIPOi + ɛi

Impact of usage of IPO proceeds and executive ownership on firm performance As mentioned earlier, to measure the impact of the usage of IPO proceeds, I implement a panel data regression analysis. The dependent variable here is the same as in the earlier panel data regression analysis used for the executive ownership formula and is equal to the earnings before interest, tax and depreciation divided by total assets. The independent variables consist of the executive ownership, lagged R&D expenses, lagged acquisitions, lagged net capital expenditures, dividend pay-out and debt repayment. Not each firm spends on research and development in each year and therefore a dummy variable is created. This takes the value of one if a firm spends on R&D expenses and zero otherwise. In addition, the same holds for acquisitions, the dummy variable takes the value of one if it spends on acquisitions and zero otherwise. The net capital expenditures are calculated by subtracting the depreciation from the capital expenditures and dividing this by the total

19 assets. This rules out the replacement investments and captures growth investments (Damodaran, 2010). The one year lagged values are used for all three investment variables in order to catch its effect on firm performance in the year after. Moreover, the dividend pay-out is measured by a dummy variable of the same year as the firm performance (Gao et al., 2013). This takes the value of one if a firm pays out dividends and zero otherwise. In addition, the debt repayment captures the reduction of long-term debts and short- term notes payable divided by the total assets of the same year as the firm performance.

Furthermore, based on the distribution of the executive ownership levels, two dummy variables are created in order to capture three ranges of executive ownership. Each range captures roughly one third of the executive ownership that lies within the 95th percentile and represents low, medium and high executive ownership. These dummy variables are then multiplied with the potential usage of IPO proceeds variables (R&D, acquisitions, net capital expenditures, dividend pay-out, and debt repayment) to create interactive and multiplicative variables. These variables show for example how executives with low ownership that spend the proceeds on R&D expenses or acquisitions affect the firm performance. As explained earlier, the executive ownership and usage of excess cash are both related and could affect the firm performance (Gao et al., 2013). Executives with a low ownership level would like to spend cash as quickly as possible to prevent proxy fights and spend cash often on acquisitions and capital expenditures. This would cause the firm performance to decline and would mean that they invest in bad projects (Gao et al., 2013). Companies with high executive ownership levels and excess cash are more likely to pay back debt, spend on R&D and pay out dividends (Gao et al., 2013). Therefore, this is the right method in capturing the effect of how certain executive ownership levels use the IPO proceeds in a way that it affects firm performance.

The following formula is used in implementing the main model:

(3) PERFORMANCE it = α + β EXECOWNERSHIP it + β Debtrepayment it + β Lag_R&DDumit + β

Lag_NetCapex it + β DivDumit + β Lag_ACQDit + β MediumEXECOWNERSHIPit + β

HighEXECOWNERSHIPit + β MED * Lag_ACQD it + β MED * Lag_NetCapex it + β MED *

Debtrepayment it + β MED * Lag_R&DDum it + β MED * DivDum it + β HIGH * Lag_ACQD it + β HIGH

* Lag_NetCapex it + β HIGH * Debtrepayment it + β HIGH * Lag_R&DDum it + β HIGH * DivDum it +

β NON-EQUITYINC it + β DSUBPRIME it + β NWC it + β CASH it + β FIRMAGE it + β SIZE it + β

LEVERAGE it + v it For a firm going public, in the year of IPO the t=0, one year after a firm goes public the t = 1 etc.

Control Variables The control variables NWC, SIZE, LEVERAGE, CASH, NON-EQUITYINC and FIRMAGE are added to the model as well. First of all, the NWC represents the working capital as a percentage of total assets. This controls for the liquidity effects on firm performance as according to Altman (1968) a firm having shrinking current assets realizes this due to operating losses. Therefore, the expected relationship is positive between the NWC (liquidity-ratio) and firm performance. According to multiple research the working capital is calculated by current assets minus the current liabilities (Altman, 1968; Gao et al., 2013; Harford et al., 2012). Moreover, SIZE is measured by the logarithm of sales and this is according to Pagano et al. (1998) a sufficient control variable in order to control for size differences of IPO firms. In addition, CASH is the logarithm of cash and cash equivalents in the same year as firm performance and is used in order to control for differences in cash holdings of firms and its usage. Gao et al. (2013) used a similar variable as a logarithm in order to explain the excess cash. Next to this, companies that accumulate cash realize this in some cases as a result of a decline in growth prospects (Harford et al., 2012). Therefore, this is another reason why cash is included as a control variable as well. Furthermore, as explained earlier, different than Mikkelson et al. (1997). I control for the non-equity incentive compensation as well. According to Mikkelson et al. (1997) other compensations than equity incentives can have a positive impact on firm performance. This is represented by NON-EQUITYINC in the above formula. Additionally, LEVERAGE is added as a control variable by multiple past researches on IPO firms (Jain & Kini, 1994) and non-IPO firms (Gao et al., 2013). The expected relationship for this is negative with firm performance according to Rajan & Zingales (2002). In addition, FIRMAGE is added to the model as well as Kim et al. (2004) and Mikkelson et al. (1997) both point out that older firms tend to have better firm performance relative to younger firms. At last, a dummy variable named DSUBPRIME is created to control for the effects of the subprime mortgage crisis during the period of 2007-2009 as this could have a negative effect on firm performance as well.

Relationship Executive ownership and usage of IPO proceeds The relationship between the executive ownership and the usage of IPO proceeds is different for certain potential usages of excess cash as was pointed out in Chapter 3. According to hypothesis 3, firms with a high executive ownership use the IPO funds to invest in R&D, pay back debts or payout dividends to shareholders in the subsequent years. In addition, according to hypothesis 4, firms with low executive ownership use the IPO funds to pay back less debts, less dividends and spend more on capital expenditures or on acquisitions. First of all, a correlation-analysis between the usage of IPO proceeds variables and the executive ownership levels of Low, Medium and High are performed. Furthermore, the movement of these variables for which the IPO proceeds could be used for are analyzed right before and in the years after an IPO have occurred. Not all firms pay out dividends or spend on R&D and acquisitions. The level of these variables right before and in the years after an IPO are analyzed and compared with each other as well.

Data Main sample The main sample consists of 137 IPO’s in the U.S. during the period of 2006-2014 that are listed on the NASDAQ or NYSE. I focus on a more recent dataset of IPO firms than past papers. Jain & Kini (1994) have focused on a dataset from 1976 until 1988 and Mikkelson et al. (1997) have used a dataset of firms going public in 1980-1983. Therefore, I use a dataset of firms that went public in the U.S. in the period of 2006-2014. The reason why I am focusing on these years specifically, is because it captures a large part of the 21st century together with the subprime mortgage crisis and further years. This way it incorporates the change in the IPO landscape around the world (Doidge et al., 2013). The data on these IPO’s are retrieved from SDC Platinum. The given ticker symbols are used in WRDS (Wharton Research Data Services) to gain company data. Furthermore, COMPUSTAT in WRDS has provided the financial data, such as firm performance, capital expenditures and debt repayment. Moreover, in S&P Compustat Execucomp of WRDS, data regarding the executive ownership and executive compensation has been retrieved. The data on the main sample consists of two parts. The first part concerns the executive ownership data that is used to retrieve executive ownership and compensation data. The executive ownership is analysed in the consecutive years after an IPO starting at the year-end of the year of IPO and moves until three years after that year-end. The second part of the dataset concerns the financial data of these firms that have gone public. The financial data is also analysed in the year before IPO that goes until three years after the year of IPO. Therefore, for this part there is one year of extra data. One of the reasons is that the one year lagged variables of R&D, capital expenditure and acquisitions are required. Another reason is that in past research the firm performance declined in the years after an IPO compared to the year before. Therefore, the financial data for that year is necessary. This means that for the executive ownership there are four years of data and for the financial data this is five years. It is important to note that not all years are covered for all 137 firms. The minimum number of firms in the year before offering is 114 firms. Only firms with at least IPO proceeds of 1 million dollars are analysed as these firms have more financial and insider ownership data available. The reason why in total for executive ownership four years of data is covered is due to the fact that the decline in ownership is mainly in the subsequent years right after an IPO. Moreover, measuring the usage of IPO proceeds requires not too many years from the year of IPO as in future years the firms generate cash that can be used as well for certain objectives.

Table 1 Sample Construction This table illustrates the main sample construction of U.S. firms gone public during the period of 2006 – 2014. Number of IPO’s in the U.S. during 2006 – 2014: 1740 IPO’s - IPO firms with transactions lower than 1 million dollar -81 Number of firms: 1659 IPO’s - Firms that do not have executive ownership data in the -1517 firms years after an IPO and exclude financial services firms. Number of firms: 142 firms - Firms that do not have any data on EBITDA or Total Assets. -5 firms Number of firms: 137 firms.

Matched firms When analysing the movement of firm performance and executive ownership, the matched firms are used to adjust these variables based on industry and total assets. These firms have gone public in the period of 1990 – 2000 and their data regarding these variables are from the same period of 2006-2014.

Results Descriptive Statistics Table 2 illustrates both the firm characteristics at the year-end of IPO and the median firm characteristics over time of the main sample of U.S. firms that went public. It is noticeable from these firm characteristics that an IPO has occurred due to the large increase in Cash and Cash equivalents in Panel B. The Total Assets and EBITDA increase in the years after an IPO based on these results solely. Further research on the adjusted firm performance focuses on this part in more detail. In addition, it is noticeable that the median debt repayment realizes a significant increase right after the IPO at the end of the offering year (from 9.2 million to 68.5 million dollars). This can be strengthened by the fact that the leverage ratio declines sharply as well from 0.24 to 0.12. Another relevant increase is the capital expenditures. This was before the IPO 9.4 million dollars and right after the IPO 17.3 million dollars. Moreover, the current assets have increased relatively towards the current liabilities. This would mean that companies have invested more in working capital after the IPO.

Table 2 Description of firms that went public during the period of 2006 – 2014. The following table illustrates the firm characteristics and additional statistics of IPO firms at the year-end of offering year and the firm characteristics over time. The information is retrieved from Compustat.

25th percentile Median 75th percentile Mean SD

Panel A: Firm Characteristics and additional statistics at the year of offering

1.Total Assets in 188.4 540.2 2631 5694 18,517 ($ millions) 2.IPO Proceeds 87.5 160.5 400 685.2 2149 ($ millions) 3.Cash and cash 51.7 88.2 223.7 697.4 2993 equivalents ($ millions) 4.Leverage ratio 0.002 0.10 0.40 0.22 0.26 5.Long-term Debts 0.1 64.0 583.3 1330 3957 ($ millions) 6.Short-term Notes 0 0 0 233.3 1639 Payable ($ millions) 7. EBITDA 22.8 71.2 288.4 438.2 1308 ($millions) 8. Sales 140.4 388.4 1529 2607 12,074 ($ millions) 9. Capital 3.9 17.3 87.5 131.2 431.4 Expenditures ($ millions)

Table 2 - Continued

Year before End of year of One year Two years after Three years offering year offering after offering offering year after offering year year

Panel B: Characteristics of median sample firms over time 10. Number of firms 114 134 137 133 115 11. Total Assets ($ millions) 468.9 540.2 694.2 761.6 961.5 12. EBITDA ($ millions) 53.2 71.2 97.7 101.2 120.0 13. Cash and Cash equivalents 40.3 88.2 100.9 107.7 128.0 ($ millions) 14. Leverage ratio 0.24 0.12 0.11 0.11 0.17 15. Current Assets 94.8 158.0 189.7 207.6 267.3 ($ millions) 16 Current Liabilities 72.2 79.3 97.4 101.0 108.9 ($ millions) 17. Long-term Debts 93.1 64.0 95.8 92.2 77.2 ($ millions) 18. Short-term Notes Payables 0 0 0 0 0 ($ millions) 19. Debt Repayment 9.2 68.5 24.3 24 14.7 ($ millions) 20. Capital Expenditures 9.4 17.3 19.9 22.2 28.7 ($ millions) 21. Sales ($ millions) 289.0 388.4 460.8 541.1 620.3

Additionally, table 3 represents the descriptive statistics of the executive ownership characteristics from the start of the year-end of IPO until three years after that. It is noticeable that the median executive ownership declines in each year after IPO. The median CEO/top executive owns 1.7% in the year-end of IPO year and 1.05% three years after that. This represents a decline considering this is in the subsequent years after an IPO. Moreover, it supports past findings of a declining ownership (Brennan & Franks, 1997; Mikkelson et al., 1997). On the other side, the median Non-Equity incentive compensation increases each year together with the base salary.

Table 3 Executives Characteristics This table illustrates executives’ characteristics of the U.S. IPO firms such as executive ownership, non-equity based incentive compensation and base salary over time. Moreover, the distribution and the additional statistics of the executive ownership are shown in Panel B. End of year of One year after Two years after Three years after offering offering year offering year offering year (N= 134) (N=137) (N=133) (N=115) Panel A: Median Executive Ownership and compensation characteristics 1. CEO/ Top 1.7% 1.4% 1.3% 1.05% Executive Ownership* 2. Non-Equity 203.2 252.6 270.6 315 Incentive Plan Compensation ($ thousands) 3. Base Salary 500 531.7 550 561.1 ($ thousands) * % Shares owned Including Options

25th percentile Median 75th percentile 95th percentile Mean SD

Panel B: % Executive Ownership distribution and additional statistics

Year 0 0.5 1.7 4.7 21.2 5.3 0.11 Year 1 0.3 1.4 4.4 21.0 4.3 0.08 Year 2 0.4 1.3 3.9 16.5 3.8 0.07 Year 3 0.3 1.1 3.6 14.8 2.9 0.05

Panel B represents the distribution of the percentage ownership of executives. It can be observed that the ownership ranges from 0.3% until 21.2% between the 25th and 95th percentile. The decrease in executive ownership can be strengthened by the fact that the 95th percentile has decreased from 21.2% to 14.8% in three years.

Executive ownership and firm performance. Table 4 illustrates the level and percentage change movement of firm performance from the year before IPO until three years after the year of IPO. The median unadjusted firm performance level increases slightly each year until year 2 and then drops to 0.115. However after adjusting for industry, it is observable that the firm performance is significantly lower in the year before IPO and year of IPO. In year three the firm performance level is higher. When adjusting for both industry and total assets, the level of firm performance of IPO firms seem higher than the matched firms. However, this was already higher before the IPO and thus is not specific to IPO’s. When analyzing the change of firm performance, the decline in firm performance is more obvious. After adjusting for industry only and ‘industry and total assets’ the firm performance of U.S. IPO firms realize a large decline in firm performance in the consecutive years. From

27 year before to year after IPO, the decline was 18%. From year 2 till year 3 this was 19%. This supports past research of a declining firm performance in the years after an IPO (Jain & Kini, 1994; Mikkelson et al., 1997; Kim et al., 2004; Coakley et al., 2007).

Table 4 Firm Performance level and change over time The firm performance is measured by the EBITDA divided by Total Assets. The first row of firm performance illustrates the median unadjusted firm performance whereas the second and third firm performance are adjusted for industry and ‘industry and size’. The firms are matched within the range of -150, 150 million dollars for Total Assets. This range has been assumed to be reliable since the median of Total Assets at the year-end of the offering was approximately 540 million dollars. At second, the firms are matched according to industry based on Standard Industry Classification code. * Adjusted for Industry by subtracting the median of 256 matched firms that went public before the 21st century. ** Adjusted for Industry and Size by subtracting the median of 92 matched firms that went public before the 21st century.

Levels Firm Year -1 Year 0 Year 1 Year 2 Year 3 Performance Panel A: level of firm performance

1. Unadjusted 0.1 0.107 0.12 0.124 0.115 2. Adjusted for -0.004c -0.01a -0.002 -0.002 0.01b Industry* 3. Adjusted for 0.05b 0.02c 0.02b 0.02 0.02 Industry and Size ** Changes Period: Year -1 to 0 Year -1 to 1 Year 2 to 3

Panel B: change of firm performance

1. Unadjusted -0.03 0.04 0.02 2. Adjusted for -0.24a -0.19a -0.03c Industry * 3. Adjusted for -0.27c -0.18c -0.19c Industry and Size** a Signed rank-test statistic at 1%; b Signed rank-test statistic at 5%; c Signed rank-test statistic at 10%.

The results of table 5 illustrate similar results as in table 4 when solely analyzing the median unadjusted level of executive ownership, the decline as discussed earlier from 1.7% to 1.1% can be observed. After adjusting for industry, the larger insider ownership can be observed for the IPO firms. The matched firms are companies that went public before the 21st century. One of the reasons why the IPO firms could have larger executive ownership is due to the fact that more time has passed since the matched firms went public. Thus, the ownership has been declining for a longer period of time as executive ownership declines in the

28 years after an IPO (Brennan & Franks, 1997; Mikkelson et al., 1997). The higher ownership holds for year 0 and year 1 as well after adjusting for both industry and total assets. Additionally, Panel B shows that executive ownership declines more for firms that went public in the consecutive years than for other firms. After adjusting for industry and total assets, the executive ownership has declined with 14.2% from year 0 till year 1 and with 9% from year 0 till year 3. This also supports the findings of Mikkelson et al. (1997) of a declining executive ownership for U.S. firms in the years after an IPO even when the options are included.

Table 5 Executive ownership level and change over time The executive ownership is measured by executives’ shares owned divided by the common shares outstanding. The first row of firm performance illustrates the median unadjusted executive ownership whereas the second and third executive ownership are adjusted for industry and ‘industry and size’. The firms are matched within the range of -150, 150 million dollars for Total Assets. This range has been assumed to be reliable since the median of Total Assets at the year-end of the offering was approximately 540 million dollars. At second, the firms are matched according to industry based on Standard Industry Classification code.

Levels Executive Year: Year 0 Year 1 Year 2 Year 3 Ownership Panel A: Level of Executive ownership.

1. Unadjusted 0.017 0.014 0.013 0.011 2. Adjusted for 0.003a 0.004a 0.002a 0.002a Industry* 3. Adjusted for 0.017a 0.008b 0.0004 -0.006 Industry and Size **

Changes Period: Year 0 - 1 Year 0 - 2 Year 2 - 3 Year 0 - 3 Panel B: Change of Executive ownership.

1.Unadjusted -0.102 -0.150 -0.033 -0.284 2. Adjusted for -0.130a 0.070a 0.22a 0.138 Industry * 3. Adjusted for -0.142b -0.029b -0.13b -0.090b Industry and Size** aSigned rank-test statistic at 1% level; bSigned rank-test statistic at 5% level ; cSigned rank-test statistic at 10 % level

Impact of executive ownership on firm performance Table 6 shows the results of the impact of executive ownership on firm performance. Model 1 illustrates the impact of the executive ownership itself solely with the control variables on firm performance after IPO. The squared executive ownership is added in model 2 as Mikkelson et al. (1997) included these two in their regression. Moreover, to adjust for the entrenchment theory in Model 3 the cubic executive ownership is added to this as well just as Kim et al. (2004). In model 1, there is already a significant positive relationship between the executive ownership and firm performance. A one percentage point increase in executive ownership leads to a 0.19 percentage point increase in firm performance and is significant at the 1% level. However, once the squared executive ownership is added, the executive ownership drops to a 10% significance level and the squared executive ownership becomes not significant. Once the cubic executive ownership is added, all three variables become significant with executive ownership and cubic ownership having a positive coefficient while squared ownership is negative. This supports the findings of Kim et al. (2004) and research on management entrenchment that at first the firm performance increases with an increase of ownership and at a certain point of ownership level decreases (Morck et al., 1988; Short and Keasey, 1999). In addition, these findings prove hypothesis 1 right and this can therefore not be rejected. Later the firm performance increases again after a further level of ownership and supports the agency theory by Jensen & Meckling (1976). Table 6 Executive Ownership Regressions The results of a multiplicative panel data regression analysis measuring the impact of the executive ownership on firm performance of U.S. IPO firms in the years after an IPO are illustrated in this table. The dependent variable is measured by firm performance (EBITDA/Total Assets). Firm size is calculated by the logarithm of sales and leverage is represented by the short-term debts plus the long-term debts divided by total assets. CASH is measured by the logarithm of cash and cash equivalents. The NWC includes the net working capital (current assets - current liabilities) divided by Total Assets. In addition, ‘Non-equity Inc’ is calculated by the non-equity incentive compensation of CEO’s/ top executives. DSUBPRIME represents a dummy that controls for the crisis effects of year 2007-2009. This takes the value of one if an observation is during this period and zero otherwise. A fixed effects estimator is used here to account for time invariant variables such as industry. Next to this, year dummies are included to control for other year-fixed effects. The t-statistics of the variables are reported in parentheses.

Independent Dependent Variable: Firm Performance Variables Model 1 Model 2 Model 3

Intercept -0.50*** -0.51*** -0.54*** (-4.52) (-4.63) (-4.74)

Executive ownership 0.19*** 0.37* 0.82** (3.19) (1.96) (2.40)

Squared Executive Ownership -0.27 -2.13* (-1.07) (-1.93)

Cubic Executive Ownership 1.70* (1.89)

Table 6 - Continued

Firm Size 0.13*** 0.13*** 0.13*** (6.50) (6.54) (6.58)

Leverage -0.16*** -0.16*** -0.17*** (-2.70) (-2.69) (-2.83) CASH -0.03** -0.03** -0.03** (-2.38) (-2.38) (-2.34)

NWC 0.08* 0.08* 0.08* (1.81) (1.82) (1.96) NON-Equity INC 8.9e-06 9.1e-06 9.1e-06 (1.37) (1.39) (1.37)

DSUBPRIME 0.016 0.01 0.02 (0.36) (0.23) (0.49)

Time Dummies Yes Yes Yes Robustness Check Yes Yes Yes p-value of F-statistic 0.0000 0.0000 0.0000 R2 0.0822 0.0813 0.0815 Number of obs. 518 518 518 Number of firms 137 137 137 * Significant at 10% level; ** Significant at 5% level; *** Significant at 1% level.

Furthermore, the firms during the subprime mortgage crisis do not have a significantly lower performance. In addition, the coefficient of firm size is positive meaning that larger firms have better firm performance which is consistent with the findings of Mikkelson et al. (1997). Moreover, firms with more cash have a lower firm performance. The non-equity incentive compensation has a positive impact on firm performance as Mikkelson at el. (1997) suggested. However, this is not statistically significant.

Usage of IPO proceeds, Executive ownership and firm performance Excess cash The results of whether there is an excess cash as a result of IPO proceeds are reported in table 7. Model 1 represents the model without checking for heteroscedasticity. Once heteroscedasticity is discovered, model 2 is used by including robust standard errors. Here the IPO proceeds have become even more significant at the 1% level. The coefficient of 0.40 means that a $1 million increase in IPO proceeds results in a $400,000 larger increase in cash and cash equivalents. Next to this, in table 8 the percentage changes of cash and cash equivalents are analyzed. Here the change from year before until year of IPO is 109.6% while in the other years until year three this does not exceed 37.6%. Therefore, it is obvious that there is excess cash as a result of IPO proceeds.

Table 7 Excess Cash Regressions The results of a multiplicative linear OLS regression measuring the excess cash after an IPO are illustrated in this table. The dependent variable here is the change of cash and cash equivalents from before to after IPO. The main independent variable is the IPO proceeds. The control variables are retained earnings, firm size and cash and cash equivalents from the year before IPO. The t-statistics of the variables are reported in parentheses.

Independent Dependent Variable: Delta Cash (year before IPO till end of IPO year) Variables Model 1 Model 2

Intercept -627.03 -627.03 (-1.64) (-0.93)

IPO proceeds (in Millions) 0.40*** 0.40 *** (8.28) (26.85)

Retained Earnings end of Year IPO 0.17** 0.17 (t=0) (2.11) (1.05)

Firm Size 122.67* 122.67 (1.93) (0.94)

Cash and Cash Equivalents before IPO -0.39*** -0.39*** year (t=-1) (-10.72) (-12.26)

Robustness check No Yes p-value of F-statistic 0.0000 0.0000 Adjusted R2 0.49 0.49 Sample Size 133 133 * Significant at 10% level; ** Significant at 5% level; *** Significant at 1% level.

Table 8 Cash and Cash Equivalents analysis Level and Change analysis of Cash and Cash Equivalents of IPO firms during 2005-2017.

Year Year -1 Year 0 Year 1 Year 2 Year 3 Panel A: Level of Cash and Cash Equivalents

Level: 40.3 88.2 100.9 107.7 128.0

Period: -1-0 0-1 1 -2 2-3 0-3 Panel B: Change of Cash and Cash equivalents

Change (%): 109.6 11.0 9.9 13.8 37.6

Impact of usage of IPO proceeds with executive ownership on firm performance First of all, as was given earlier, three ranges of executive ownership are determined based on the distribution of executive ownership in table 3 Panel B. Two dummy variables are generated covering three ranges. Low executive ownership covers the range of 0% till 1%, Medium executive ownership the range of 1% till 2.75% and High executive ownership covers the range of 2.75% till 19.5%. With these two dummy variables of MEDEXECOWNSHP and HIGHEXECOWNSHP multiplicative and interactive variables are created with the R&D, acquisitions, dividends, debt repayment and net capital expenditures variables. Table 9 shows the results of the panel data regression. Model 1 and Model 2 are illustrated, but are not discussed since these lack a robustness check and time variables. Model 3 and 4 are of main importance here. The executive ownership has a positive impact on firm performance. This strengthens the first finding about the positive impact on firm performance outside the entrenchment range and again proves hypothesis 1 right. The variables R&D, acquisitions, dividends, debt repayment and capital expenditures are solely not significant and not have a significant impact on firm performance. However, some of the interactive and multiplicative variables of these variables show significant results. First of all, the HIGH * Lag_NetCapex multiplicative variable is positively significant at 5% level. Therefore, the firms with high executive ownership (2.75% - 19.5%) spending on net capital expenditures realize higher increase in firm performance than firms with low executive ownership (0 – 1%) that spend on net capital expenditures as well. In addition, a firm with high executive ownership spending on net capital expenditures generates a higher firm performance than a company with medium executive ownership (1%-2.75%) that spend on net capital expenditures as the coefficient of HIGH * Lag_NetCapex is 0.75 in Model 3 and for Med * Lag_NetCapex 0.42 and both are significant. A ten percentage point increase in the net capital expenditures for firms with a high executive ownership (2.75% - 19.5%) causes the firm performance to increase by 7.5 percentage points higher than firms with a low executive ownership (0% - 1%). This supports hypothesis 2a2 on capital expenditures. Additionally, there is a significant negative impact of HIGH * DebtRepayment and MED * DebtRepayment on firm performance. The coefficient for high executive ownership is -0.13 and for medium ownership -0.06, meaning that this effect is stronger for firms with high executive ownership. The economic interpretation of this is that firms with high executive ownership that pay back one percentage point debt more realize -0.13 percentage point lower firm performance than firms with low executive ownership that also pay back debt. As a result of this outcome, hypothesis 2b has to be rejected for debt repayments. Moreover, there is a significant positive effect of the HIGH * Lag_R&DDum on firm performance at 1% level with a 0.06 coefficient. This would mean that firms with high executive ownership (2.75% - 19.5%) that do spend on R&D have a 0.06 percentage point higher firm performance than firms with low executive ownership. This is not significant with the medium executive ownership. This would strengthen Gao et al.

(2013) that firms with the combination of excess cash and high ownership that use the funds for R&D influence firm performance positively. Next to this, it supports hypothesis 2a2 on R&D as well. In addition, there is a positive impact of MED * DivDum on firm performance with a 0.06 coefficient and significance at 1% level. This would mean that firms within the range of 1% - 2.75% that do pay out dividends create 0.06 percentage point higher firm performance than firms with low executive ownership. This partly supports hypothesis 2c as the effect is more positive than firms with low insider ownership.

Control Variables When interpreting the control variables, expected results are found for Firm Size and Leverage as these are highly significant. Larger firms have a higher firm performance as was expected and firms with higher leverage have lower firm performance. Firm Size having a positive significant impact is the same result as Mikkelson et al. (1997) have discovered. There is not a significant result for the DSUBPRIME crisis dummy. This would mean that during the subprime mortgage crisis firms that went public did not specifically have a lower firm performance than other years. Additionally, the relationship between the NWC and firm performance is strongly positive and means that a higher liquidity ratio improves firm performance. Moreover, there is a negative significant impact of CASH on firm performance. This supports Harford et al. (2012) that firms accumulate cash as a result of a decline in growth prospects. In model 4 the variable age is added. Mikkelson et al. (1997) have found that older firms perform better than younger firms. Kim et al. (2004) also included this variable, but did not find any significant results. However, I find a negative relationship for age and firm performance. This would mean that younger firms have higher firm performance in the period of 2006 – 2017. This is the opposite result of firm age when comparing it to Mikkelson et al. (1997). One possible explanation for this could be the different sample period I use, since Mikkelson et al. (1997) implemented their analysis on IPO’s from 1980 – 1983. Another potential explanation for this is that according to Mikkelson et al. (1997) older firms tend to pay back debt more than younger firms who are more likely to finance growth. This could be related to the large debt repayment occurring right after the IPO and the declining firm performance.

Table 9 Regressions of Executive ownership and usage of IPO proceeds The results of a multiplicative panel data regression analysis measuring the impact of the usage of IPO proceeds and executive ownership on firm performance of U.S. IPO firms in the years after an IPO are illustrated in this table. The dependent variable is measured by firm performance (EBITDA/Total Assets). The Debtrepayment is calculated by the reduction of long-term debts and short-term notes payables as a percentage of total assets. Lag_R&DDum takes the value of one if a firm has spent last year on their R&D department and zero otherwise. The Lag_NetCapex represents the growth capital expenditures from last year minus depreciation divided by total assets. In addition, the Lag_ACQD takes the value of one if a firm has spent on acquisitions last year and zero otherwise. DivDum takes the value of one if a firm pays out dividends and zero otherwise. Moreover, the MEDEXECOWNSHP takes the value of one if the executive ownership falls between 1% and 2.75% and zero otherwise. HIGHEXECOWNSHP takes the value of one if the executive ownership falls between 2.75% and 19.5% and zero otherwise. DSUBPRIME represents a dummy that controls for the crisis effects of year 2007-2009. A fixed effects estimator is used here to account for time invariant variables such as industry. Next to this, year dummies are included to control for other year-fixed effects. The t-statistics of the variables are reported in parentheses.

Independent Dependent Variable: Firm Performance Variables Model 1 Model 2 Model 3 Model 4

Intercept -0.50*** -0.64*** -0.64*** -0.55*** (-7.70) (-8.63) (-5.39) (-4.71)

Executive ownership 0.22*** 0.24*** 0.24*** 0.13** (2.87) (3.00 (6.96) (2.19)

Debtrepayment 0.05* 0.04 0.04 0.03 (1.82) (1.35) (1.60) (1.25)

Lag_R&DDum 0.01 -0.01 -0.01 -0.02 (0.55) (-0.56) (-0.67) (-1.57)

Lag_NetCapex -0.18 -0.17 -0.17 -0.14 (0.28) (-1.06) (-1.59) (-1.35)

DivDum -0.02 -0.01 -0.01 -0.01 (-0.97) (-0.65) (-0.85) (-0.69)

Lag_ACQD -0.01 -0.01 -0.01 -0.002 (-0.48) (-0.45) (-0.65) (-0.25)

MEDEXECOWNSHP -0.01 -0.01 -0.01 -0.01 (-0.28) (-0.47) (-0.63) (-0.58)

HIGHEXECOWNSHP -0.01 -0.02 -0.02 -0.02 (-0.28) (-0.95) (-1.05) (-1.01)

MED * Lag_ACQD 0.004 0.01 0.01 0.003 (0.19) (0.27) (0.41) (0.21)

MED *Lag_NetCapex 0.42** 0.42** 0.42*** 0.37*** (1.98) (2.02) (3.04) (2.69)

MED * DebtRepayment -0.07* -0.06 -0.06** -0.06* (-1.65) (-1.56) (-2.14) (-1.88)

MED * Lag_R&DDum -1.3e-04 0.002 0.002 0.003 (-0.01) (0.12) (0.21) (0.25)

MED * DivDum 0.05* 0.06** 0.06*** 0.06*** (1.86) (2.33) (3.92) (3.62)

Table 9 - Continued

HIGH * Lag_ACQD -0.01 0.001 0.001 0.004 (-0.29) (0.07) (0.10) (0.27)

HIGH * Lag_NetCapex 0.58*** 0.75*** 0.75*** 0.62** (2.62) (3.35) (2.73) (2.31)

HIGH * DebtRepayment -0.16*** -0.15*** -0.15** -0.13** (-3.71) (-3.55) (-2.49) (-2.32)

HIGH * Lag_R&DDum 0.06*** 0.06*** 0.06*** 0.06 *** (2.59) (2.90) (3.42) (3.30)

HIGH * DivDum 0.03 0.04 0.04 0.04 (1.29) (1.54) (1.61) (1.49)

NON-Equity INC 1.34e-05*** 1.09e-05** 1.09e-05 9.89e-06 (2.70) (2.22) (1.65) (1.58)

DSUBPRIME 0.01 0.05* 0.047 0.01 (0.93) (1.84) (1.21) (0.22)

NWC 0.09** 0.11*** 0.11** 0.10** (2.17) (2.67) (2.54) (2.50) CASH -0.04*** -0.03*** -0.03*** -0.03** (-5.82) (-5.42) (-2.39) (-2.32)

Firm Age - - - -0.02** (-2.31) Firm Size 0.12*** 0.14*** 0.14*** 0.15*** (13.40) (14.18) (6.95) (7.23) Leverage -0.15*** -0.17*** -0.17** -0.21*** (-2.77) (-3.18) (-2.50) (-2.78)

Time Dummies No Yes Yes Yes Robustness Check No No Yes Yes p-value of F-statistic 0.0000 0.0000 0.0000 0.0000 R2 0.0834 0.0890 0.0890 0.1242 Number of obs. 492 492 492 492 Number of firms 137 137 137 137 * Significant at 10% level; ** Significant at 5% level; *** Significant at 1% level.

Usage of IPO proceeds and executive ownership

R&D DR&D represents the dummy variable that is used in the panel data regression analysis and shows that firms with a high executive ownership are more likely to spend on R&D. This is strengthened by the fact that it has a -0.3 correlation with low executive ownership, which is statistically significant as well. This can be observed in table 10. Executives within the range of 0 – 1% ownership are more likely not to spend on R&D. This strengthens Gao et al. (2013) that firms with excess cash and high insider ownership are more likely to spend on R&D. There is no relationship between the amount of R&D for companies that spend on R&D and their executive ownership level. Additionally, table 13 in the Appendix shows an increase of R&D expenses by approximately 21%, when comparing for the year before and year-end of the IPO. Any other additional descriptive statistics regarding the usage of the IPO proceeds variables are given in table 14 in the Appendix. Additionally, figure 1 illustrates an increase in R&D as well in these years. Therefore, hypothesis 3 is accepted for R&D. However the dollar amount increase of R&D is small compared to the median proceeds of $160.5 million (table 2). Thus, the proceeds are not only used for the Research and Development department.

Dividends Moreover, when analyzing the level of total dividends (Div. Tot.) for the firms that do pay out dividends, it can be said that a higher insider ownership results in lower amounts of total dividends. Moreover, the dummy (Divdum) for all firms whether they pay out dividends or not has a negative relationship with executive ownership as well. Considering that there is excess cash, this goes against the findings of Gao et al. (2013). However, their research did not particularly focus on dividend payment of companies right after an IPO. This could be one potential explanation. In short, hypothesis 3 is rejected for dividends as there is an opposite relationship than expected.

Acquisitions There is no significant relationship between spending on acquisitions (ACQD) or not and insider ownership. However, when analyzing the level of acquisitions (ACQ), it is found that for firms with low executive ownership (0% - 1%) there exists a positive significant relationship with a correlation coefficient of 0.1. This strengthens the findings of Gao et al. (2013) in terms of relationship. Moreover, it can be observed in both figure 1 and table 13 that the acquisitions have slightly increased after the IPO (10%). So part of the proceeds for firms with low executive ownership are used for acquisitions. This means that hypothesis 4 cannot be rejected on acquisitions.

Net Capital Expenditures There is not a significant relationship between the amount of net capital expenditures (NetCapex) and executive ownership. When analyzing the net capital expenditures itself in table 13, it can be seen that these have increased with 14.6 % after IPO. But the amount is not related to the executive ownership and therefore hypothesis 4 is rejected for net capital expenditures.

Debt Repayment The relationship between High executive ownership and debt repayment is significantly negative and with the low executive ownership positive. This would mean that firms with a high insider ownership would pay back less debts and firms with a low insider ownership more over time. It seems that this is not in line with Gao et al. (2013). However, Gao et al. (2013) measure whether a firms pays back debt or not. As in this research roughly all of the firms pay back debt and therefore I use the amount only. In addition, it is important to note that the debt repayments have increased greatly as can both be observed from figure 1 and table 13 (94.4%). This increase in debt repayment translates itself into a decline in leverage ratio which can be seen in figure 2. Moreover, considering that the increase in dollar terms is large as well, namely from 9.2 million dollars to 68.5 million dollars, it can be said that a large part of the IPO proceeds are relatively used for debt repayments. However, because there is not a positive relationship between debt repayment and executive ownership it can be made clear that hypothesis 3 does not hold for debt repayment. Table 10 Correlation Matrix Pearson’s correlation matrix of the executive ownership and usage of IPO proceeds variables. 1 2 3 4 5 6 7 8 9 10 11 12 1. Exec. 1 Ownshp. 2. High 0.25* 1 Ownershp. 3. Medium -0.16* -0.3* 1 Ownershp. 4. Low -0.42* -0.4* -0.4* 1 Ownershp. 5. DR&D 0.15* 0.09* -0.1* -0.3* 1

6. Div. Tot. 0.01 -.08* -0.1* 0.12* -0.06 1

7. ACQ 0.03 -0.04 -0.03 0.1* -0.07 0.36* 1

8. NetCapex -0.01 -0.05 -0.03 0.05 0.00 0.39* 0.28* 1

9. Debtrep- -0.004 -0.1* -0.00 0.11* -0.1* 0.42* 0.29* 0.37* 1 ayment 10. R&D 0.002 -0.02 -0.06 0.06 0.15* 0.34* 0.34* 0.78* 0.35* 1

11. ACQD 0.04 0.02 -0.01 -0.01 0.1* 0.11* 0.24* 0.12* 0.1* 0.09* 1 12. Div -0.14* -0.3* -0.3* 0.08* 0.00 0.32* 0.08* 0.09* 0.1* 0.1* 0.04 1 Dum * Statistically significant within 10% level.

Figure 1 Usage of IPO proceeds over time Median of firms that spend on net capital expenditures, R&D, Debt Repayment, Acquisitions and Dividends before and after the years of IPO for U.S. firms.

20 0 -1 0 1 2 3 p 50 of NetCapex p 50 of ACQ p 50 of RandD p 50 of DividendsTotal p 50 of DebtRepayment

Figure 2 Leverage over time

Median of the leverage of firms in the year before and years after an IPO for U.S. firms.

.25

.15

p 50 of LEVERAGE50p of

.05 0 -1 0 1 2 3

Robustness Check The models implemented in this research are tested for heteroscedasticity and adjusted if necessary for robust standard errors. Both the models with and without robust standard errors are reported. Moreover, in some models time dummies are left out to see any change in effect. Furthermore, the model with and without firm age are reported in table 9 to illustrate whether the key variables of interest reduce in significance or not as Mikkelson et al. (1997) implemented this in their analysis as well. Additionally, the Wilcoxon test is implemented to compare the IPO firms of the 21st century with other firms that did not go public in the 21st century to see whether the change in firm performance and executive ownership is specific to IPO firms.

Summary and conclusions I investigate what the impact of the change of executive ownership and the usage of IPO proceeds is on the change of firm performance of U.S. firms going public in the 21st century. The decline in firm performance that I find right after an IPO for U.S. firms is consistent with past research (Mikkelson et al., 1997; Jain & Kini, 1994). In addition, this adds to the existing literature that it occurs for firms in the 21st century as well. Moreover, the decline in executive ownership for U.S. firms right after an IPO confirms the analysis of Mikkelson et al. (1997) that the insider ownership declines in the subsequent years after an IPO.

First of all, the impact of the executive ownership solely on firm performance is measured by taking into account the agency theory and management entrenchment theory. This strengthens both theories by past literature (Jensen & Meckling, 1976; Morck et al., 1988; Short & Keasey, 1999). The only research including both theories in their methodology for IPO firms specifically is Kim et al. (2004). Even though the findings are similar, their investigation concerns solely Thai firms. Therefore, this research adds to current literature that the management entrenchment theory holds for U.S. IPO firms. Furthermore, options and non-equity incentive compensations are included to control for other incentives. It can be concluded from the results that there is a positive effect of a change of executive ownership on firm performance. Moreover, it is important to note that this positive relationship holds for insider ownership that lies outside the entrenchment range as this research also proves the management entrenchment theory. At some point of executive ownership the firm performance declines. Therefore, considering that the insider ownership decreases in each year, it can be concluded that the decline in firm performance is partly due to the decreasing executive ownership. This occurs as a result of the declining willingness of top executives to invest in value maximizing projects, because their own stake is less at risk. There are two potential explanations why this analysis does find significant results and Mikkelson et al. (1997) not when measuring the impact of the change of executive ownership on firm performance. First of all, the inclusion of other incentives in the model that could have an impact on firm performance such as equity (options) and non-equity compensations could be one explanation. This was pointed out as a potential explanation by Mikkelson et al. (1997) themselves. At second, the potential impact of management entrenchment on firm performance is not included in their analysis. The comparison with Jain & Kini (1994) regarding the change of executive ownership cannot be made as they did not measure the absolute change of insider ownership when measuring the U.S. IPO firms.

Furthermore, the impact of executive ownership together with how the IPO proceeds are used on firm performance is measured as well. The IPO proceeds are used for multiple purposes as can be observed from the results. These partly strengthen past literature on the use of excess cash (Gao et al., 2013; Harford et al., 2012).

First of all, the largest component of this concerns the debt repayment of firms. Firms use the funds to pay back a large part of their debt right after an IPO. The impact of this is negative on firm performance when the executive ownership is medium or high. The reason why this holds only for medium or high insider ownership could be that the executive ownership is higher right after an IPO than three years after the IPO. Therefore, the low ownership (0 – 1%) is mainly from the subsequent years of IPO and has less impact on the large debt repayment in the first year of IPO. The outcome of firms using the IPO proceeds to pay back large amounts of debts which causes the firm performance to decline is at first sight inconsistent with the findings of Gao et al. (2013). However, they do emphasize the fact that debt repayment has a positive effect on firm performance when reverting down the excess cash slowly (Gao et al., 2013). As in this case the debt repayment was very large and this could go at the cost of future growth investments and cause the firm performance to decline. This could be a potential explanation for the inconsistency with Gao et al. (2013). A further explanation could be that paying back such a large amount of debt can influence the liquidity of a firm negatively and which in turn affects the firm performance to decline (Altman, 1968). Next to this, the main usage of the IPO proceeds for debt repayments is consistent with Pagano et al. (1998). Their analysis concerns Italian firms, meaning that this research adds to current literature that U.S. IPO firms use the proceeds mainly for debt repayment as well.

Moreover, the usage of part of the proceeds for R&D expenditures when a company has high executive ownership could cause the firm to improve its operations. In addition, U.S. companies with high insider ownership that spend on capital expenditures for growth purposes realize higher firm performances compared to firms with low insider ownership. Next to this, there is no relationship between the amount of net capital expenditures and level of executive ownership. Thus, the quality of these investments are obviously better for firms having a combination of high insider ownership and excess cash resulting from the proceeds. Moreover, there is a modest increase in both net capital expenditures and R&D expenses right after an IPO, meaning that part of the funds are used for these investments. These findings confirm Gao et al. (2013), who find similar results on the usage of excess cash for capital expenditures and Research and Development purposes and adds to current literature for the usage of IPO proceeds specifically.

Additionally, there is not a clear effect of expenditure on acquisitions or acquisitions interacting with a level of executive ownership on firm performance. However, firms that do spend on acquisitions invest more on this component when the insider ownership is low. This strengthens part of the research of Gao et al. (2013) and Harford et al. (2012). Different than my analysis, part of their research does find an impact on firm performance. One explanation could be that their research does not focus specifically on firms during their IPO. Another relevant result is that there is a positive impact of paying out dividends on firm performance for medium executive ownership firms. This is also suggested by Harford et al. (2012) as firms with a higher executive ownership that hold excess cash are more likely to pay out more dividends. The executives are committing for higher dividend payouts and can afford this only when firm performance increases in the future. Therefore, this relationship confirms Harford et al. (2012). Moreover, no clear impact of the subprime mortgage crisis on firm performance of IPO firms has been found. So the effect of the subprime mortgage crisis has no effect on the IPO firms when comparing this to the impact of the Bubble as Coakley et al. (2007) had proven. A potential explanation could be due to the differences between the sort of crisis and firms as this research leaves out financial services firms and focuses on non-financial services firms. To sum up, the combination of high executive ownership and usage of IPO proceeds for capital expenditures, R&D expenditures and dividend payment would normally cause the firm performance to increase. However, the declining executive ownership together with the large debt repayments weight out these benefits and cause the firm performance to decline in the subsequent years after IPO (three years).

Limitations Gao et al. (2013) and Harford et al. (2012) have also analyzed other corporate governance measures than insider ownership and executive compensation. For example, Gao et al. (2013) have included the Entrenchment index as well to analyze whether a firm has a strong or weak corporate governance. Moreover, Harford et al. (2012) takes into account the shareholder rights, ownership concentration, antitakeover provisions and the board structure. Further research on IPO firms could take in to account these corporate governance measures as well when trying to explain the firm performance. Additionally, this research only focuses on four years from the IPO on to explain specifically the usage of the proceeds. However, it would also be interesting to see how these firms perform in the long-run. Further research could focus on this part.

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Appendix

Table 11 Variable names, sources and descriptions for regression analysis This table includes the detailed names, sources and descriptions of the variables used in the multiple regression analysis of U.S. IPO firms during the period of 2005-2017

Variable Source Description

Dependent variable: Firm performance WRDS EBITDA/Total Assets Independent variables: EXECOWNERSHIP S&P Compustat Execucomp WRDS Total shares owned by Executives (including options)/ Total Common Shares Outstanding MEDEXECOWNSHP. 1 if EXECOWNSHP within (1% and 2.75%) and 0 otherwise.

HIGHEXECOWNSHP. 1 if EXECOWNSHP within (2.75% and 19.5%) and 0 otherwise.

Lag_Net Capex Compustat WRDS (CAPEX – Depreciation) from last year divided by total assets.

Compustat WRDS Compustat WRDS 1 if firm has spent on R&D last year and 0 otherwise.

Lag_ACQD Compustat WRDS 1 if firm has spent on Acquisitions last year and 0 otherwise.

Debt Repayment Compustat WRDS Reduction of long-term debts and short-term notes payables divided by total assets.

DivDum Compustat WRDS 1 is firm has paid out dividends and 0 otherwise. Control Variables FIRM SIZE Pagano et al. (1998) Log (Net Sales) CASH Compustat WRDS Log (cash & cash equivalents) LEVERAGE Compustat WRDS (Long-term debts +short-terms notes payables)/Total Assets IPO Proceeds SDC Proceeds from Initial Public Offering (in million $) NWC Compustat WRDS (Current Assets – Current Liabilities )/Total assets Compustat WRDS Compustat WRDS Year in which last data is available (SEC-filed) otherwise from year of IPO. Non-Equity INC. S&P Compustat Execucomp WRDS Non-equity incentive compensation for executive. RetainedEarnings Compustat WRDS Retained Earnings

Table 12 Variable names, sources and descriptions for correlation matrix analysis This table includes the detailed names, sources and descriptions of the variables used in the correlation matrix analysis of U.S. IPO firms during the period of 2005-2017

Variable name Source Description Exec. Ownshp. S&P Compustat Execomp WRDS Total shares owned by Executives (including options)/ Total Common Shares Outstanding

High Ownershp. - 1 if EXECOWNSHP within (2.75% and 19.5%) and 0 otherwise. Medium Ownershp. - 1 if EXECOWNSHP within (1% and 2.75%) and 0 otherwise. Low Ownershp. - 1 if EXECOWNSHP within (0% and 1%) and 0 otherwise. DR&D Compustat WRDS 1 if company spend last year on R&D and 0 otherwise. Div. Tot. Compustat WRDS Total amounts of dividends paid (in $ millions). ACQ Compustat WRDS Total amount spend on acquisitions. NetCapex Compustat WRDS Capital expenditures – depreciation of last year. Debt Repayment Compustat WRDS Reduction of debt + short-term notes payables in $. R&D Compustat WRDS Research and Development expense ACQ Dummy Compustat WRDS 1 if firm has spent on acquisitions last year and 0 otherwise. Div. Dumm Compustat WRDS 1 if firm has paid out dividends and 0 otherwise.

Table 13 Level and Change analysis usage of IPO proceeds The median Level and Change analysis of firms that spend Cash on R&D Expenses, Acquisitions, Total Dividends, Net Capital Expenditures and Debt Repayment. The n is the number of observations/firms in that year for the specific variable. Year -1 is the year before IPO year. The year of IPO is represented by 0. Next to this, 1 is referred to as one year after the year of IPO and so on for year 2 and year 3.

R&D Expenses

Year -1 Year 0 Year 1 Year 2 Year 3

Panel A: level of R&D expenses

1. Level 11.58 14.8 (n=53) 16.4 21.0 28.9 ($ millions): (n=48) (n=55) (n=52) (n=46)

Period -1-0 0 - 1 1 - 2 2 - 3 0-3 -1 -3 Panel B: Change of R&D expenses.

2. Change (%) 20.7 9.6 18.1 17 62.2 98 (n=47) (n=53) (n=52) (n=46) (n=45) (n=41)

Acquisitions

Year Year -1 Year 0 Year 1 Year 2 Year 3

Panel A: Level of Acquisitions

1. Level 26.1 27.3 38.41 39.9 28.0 ($ millions): (n=38) (n=47) (n=49) (n=58) (n=46)

Period -1 -0 0 - 1 1 - 2 2 - 3 0-3 -1-3

Panel B: Change of Acquisitions

2. Change (%): 10.5 73.0 -35.0 50.0 127.0 316.0 (n=30) (n=37) (n=37) (n=34) (n=32) (n=23)

Total Dividends

Year: Year -1 Year 0 Year 1 Year 2 Year 3 Panel A: Level of total dividends.

1. Level 50 24.5 52.9 75.7 ($ millions) : (n=45) (n=35) (n=37) (n=38)

Period -1-0 0-1 1-2 2-3 0-3 Panel B: Change of Total Dividends

2. Change (%): - 34.0 16.0 15.0 73.3 (n=27) (n=31) (n=32) (n=23)

Table 13 – Continued

Net Capital Expenditures

Year: Year -1 Year 0 Year 1 Year 2 Year 3 Panel A: Level of net capital expenditures

1. Level 4.6 (n=111) 6.9 (n=130) 10.9 (n=132) 13.1 (n=128) 12.3 (n=112) ($ millions): Period: -1-0 0-1 1-2 2-3 0-3 -1-3 Panel B: Change of net capital expenditures 2 .Change (%): 14.6 31.0 15.0 2.6 44.7 64.0 (n=109) (n=129) (n=126) (n=110) (n=108) (n=94)

Debt Repayment

Year: Year -1 Year 0 Year 1 Year 2 Year 3 Panel A: Level of debt repayment

1. Level 9.2 (114) 68.5 (107) 24.3 (130) 24 (125) 14.7 (106) ($ millions):

Period: -1-0 0-1 1-2 2-3 0-3 -1-3 Panel B: change of debt repayment 2. Change (%): 94.4 -55.9 -4.0 -6.0 -56.0 41.8 (n=85) (n=91) (n=98) (n=83) (n=74) (n=72)

Table 14 Additional Descriptive Statistics of usage of IPO proceeds per year The following tables illustrate the 25th percentile, Median, 75th percentile, Mean and Standard Deviation of U.S. IPO firms that pay back debt, pay out dividends, spend on net capital expenditures, acquisitions and R&D during the period of 2005 - 2017. The reported values of these variables are in millions of dollars. 25th percentile Median 75th percentile Mean SD Panel A: Year before IPO Debt Repayment 0.4 9.2 202 386.55 1128.5 Total Dividends - - - - - Acquisitions 2.5 26.1 111.8 127.4 353.4 R&D Expenses 6.4 11.6 24.0 161.9 872.3 Net Capital 1.3 4.6 41 111.3 539.2 Expenditures

Table 14 - Continued 25th percentile Median 75th percentile Mean SD Panel B: Year-end of IPO year Debt Repayment 3.5 68.5 366 1067.6 3258.4 Total Dividends 8.7 50 133.08 193 560.84 Acquisitions 4.8 27.3 61.4 197.6 634.6 R&D Expenses 9.0 14.8 25 186.1 969.1 Net Capital 1.8 6.9 49.6 53.5 127.7 Expenditures

25th percentile Median 75th percentile Mean SD Panel C: Year after IPO year Debt Repayment 0.26 24.3 187.8 630 2005 Total Dividends 6.5 24.5 137.6 202.1 566 Acquisitions 10.8 38.4 168.9 265.9 779.8 R&D Expenses 11.9 16.4 30.5 204.5 1105.3 Net Capital 3 10.9 60.3 86.1 290.5 Expenditures

25th percentile Median 75th percentile Mean SD Panel D: Second year after IPO year Debt Repayment 0.1 24 243 632.8 1827 Total Dividends 15.7 52.9 150.5 151.5 294.8 Acquisitions 10 39.9 113.3 170.1 352.6 R&D Expenses 15.8 21.0 34 229 1075 Net Capital 3.01 13.1 54.2 115.5 460.4 Expenditures

25th percentile Median 75th percentile Mean SD Panel E: Third year after IPO year Debt Repayment 0 14.7 316.5 921.1 2654.3 Total Dividends 10.6 75.7 198.5 187.4 372.5 Acquisitions 6.95 28.0 170.0 213.3 470.0 R&D Expenses 18.4 28.9 47.7 305.5 1256.6 Net Capital 3.3 12.3 52.7 142.7 554.3 Expenditures