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Initial Public Offerings on the London Stock Exchange Initial Public Offerings on the London Stock Exchange A thesis submitted to The University of Manchester for the degree of Doctor of Philosophy in the Faculty of Humanities 2014 Dimitris Kostas Manchester Business School Table of Contents Abstract 4 Declaration 5 Copyright statement 6 Dedication 7 Acknowledgements 8 Chapter 1 Introduction 1 Motivation 9 2 Institutional framework 13 3 Thesis overview and contributions 14 4 Thesis structure 17 References 18 Chapter 2 The Use of Warrants in Non-Underwritten Initial Public Offerings Abstract 20 1 Introduction 21 2 Literature review & hypotheses 23 3 The Alternative Investment Market 29 3.1 The role of the broker 30 3.2 Broker’s compensation structure 31 4 Data 32 4.1 Pricing of warrants 33 5 Methodology 35 6 Empirical results 44 6.1 Descriptive statistics - univariate analysis 44 6.2 Warrant characteristics 45 6.3 Test of the cost minimisation hypothesis 46 6.3.1 Probit regression model 46 6.3.2 Second stage regression estimates 47 6.3.3 Robustness tests 50 7 Conclusion 51 References 53 Chapter 3 Warrants in Underwritten IPOs Abstract 68 1 Introduction 69 2 Literature review 71 Non-cash and broker/underwriter compensation regulations between the UK 3 72 and the US markets 4 Hypotheses 74 5 Data 76 6 Methodology 77 7 Results 84 7.1 Descriptive statistics - univariate analysis 84 2 7.2 Warrant characteristics 87 7.3 Test of the cost minimisation hypothesis 88 7.4 Robustness tests 92 8 Conclusion 94 References 96 Chapter 4 The IPO when-issued market Abstract 110 1 Introduction 111 2 Literature review & hypotheses 113 3 When-issued dealing 117 Differences of the when-issued dealing among the UK and other developed 3.1 119 markets 4 Data 122 5 Methodology 123 5.1 When-issued market price accuracy 123 Determinants of the when-issued market and how the conditional trading 5.2 124 affects the offer price? 5.3 Volume in the first day of trading 131 6 Results 132 6.1 Descriptive statistics 132 6.2 Univariate analysis 133 6.3 Informational accuracy of the when-issued market 136 6.3.1 The when-issued market facilitates price formation 138 The when-issued market allows investors the earliest opportunity to 6.3.2 139 agree an entry or exit price 6.4 Probit regressions 140 6.5 Does the decision to have a when-issued market affect the offer price? 142 6.6 Volume in the first day of trading 144 6.7 Robustness tests 145 6.7.1 Heckman two stage model 145 6.7.2 Volume OLS regression 146 7 Conclusion 146 References 148 Chapter 5 Conclusion 1 Summary of results 165 2 Future research 167 References 170 This thesis contains 60088 words including title page, tables, and footnotes. 3 Abstract The University of Manchester Dimitris Kostas Doctor of Philosophy (PhD) Initial Public Offerings on the London Stock Exchange April 2014 This thesis examines the non-cash compensation paid to the underwriters/brokers during the flotation process and the IPO when-issued dealing market in one of the most successful and international stock exchanges around the world, the London Stock Exchange (LSE). The thesis consists of three essays that try to answer the following questions: Do IPO firms minimise their costs of going public by issuing warrants to their financial advisers? Does the when-issued dealing affect the setting of the offer price? The first essay examines the issue of warrants to brokers as part of their compensation package in non-underwritten offerings on the Alternative Investment Market of the LSE. The main finding is that IPO firms are able to make efficient decisions and choose the contract that minimises their costs. For companies that issue warrants to their brokers the total costs of going public are 22.74% (as a percentage of gross proceeds), but would have been 25.61% had they not issued them. This 2.87% reduction in costs is equivalent to 70.34% of the commission paid to the brokers by the IPO firms. The main source of this decrease in the costs is the lower underpricing the companies incur by granting warrants to their brokers. The second essay examines the use of non-cash compensation in underwritten IPOs. The findings suggest that firms that are cash constrained are more likely to issue warrants to their underwriters. In addition, underwriters appear to have the ability to time the issue of warrants because they include them as part of their compensation package when the market is doing well. Interestingly, warrant issuers are still able to minimise their costs of going public even under a very light regulatory setting underlying the use of non-cash compensation. The third essay examines the when-issued dealing in the Main Market of the LSE for an extensive period of time, 1996 to 2012. The main finding is that, in an institutional setting in which the when-issued dealing commences only after the allocation of shares and the offer price are announced, investors pay ‘rents’ to the underwriters in order to acquire IPO shares that will trade within the when-issued dealing. These ‘rents’ take the form of a higher offer price. In other words the when-issued dealing affects the setting of the offer price. For companies that have a when issued dealing the offer price is £3.4 but would have been 54% lower (£1.55) had these firms not had a when issued dealing. 4 Declaration I, Dimitris Kostas, declare that no portion of the work referred to in the thesis has been submitted in support of an application for another degree or qualification of this or any other university or other institute of learning. 5 Copyright statement i. The author of this thesis (including any appendices and/or schedules to this thesis) owns certain copyright or related rights in it (the “Copyright”) and s/he has given The University of Manchester certain rights to use such Copyright, including for administrative purposes. ii. Copies of this thesis, either in full or in extracts and whether in hard or electronic copy, may be made only in accordance with the Copyright, Designs and Patents Act 1988 (as amended) and regulations issued under it or, where appropriate, in accordance with licensing agreements which the University has from time to time. This page must form part of any such copies made. iii. The ownership of certain Copyright, patents, designs, trade marks and other intellectual property (the “Intellectual Property”) and any reproductions of copyright works in the thesis, for example graphs and tables (“Reproductions”), which may be described in this thesis, may not be owned by the author and may be owned by third parties. Such Intellectual Property and Reproductions cannot and must not be made available for use without the prior written permission of the owner(s) of the relevant Intellectual Property and/or Reproductions. iv. Further information on the conditions under which disclosure, publication and commercialisation of this thesis, the Copyright and any Intellectual Property and/or Reproductions described in it may take place is available in the University IP Policy (see http://documents.manchester.ac.uk/DocuInfo.aspx?DocID=487), in any relevant Thesis restriction declarations deposited in the University Library, The University Library’s regulations (see http://www.manchester.ac.uk/library/aboutus/regulations) and in The University’s policy on Presentation of Theses 6 Dedication This thesis is dedicated to my family 7 Acknowledgements I am very grateful to my supervisors, Prof. Arif Khurshed and Mr. Brahim Saadouni, who gave me the opportunity and freedom to conduct my research in the area of my interest. Their continuous encouragement and guidance motivated me throughout the PhD programme to always try to improve my work. I would like to thank my PhD examiners Dr. Susanne Espenlaub and Prof. Ranko Jelic for their valuable comments and feedback during my viva. I would also like to thank other committee members, university staff and colleagues, such as Dr. Konstantinos Stathopoulos, Prof. Stuart Hyde, Dr. Maria Marchica, Dr. Ning Gao, Prof. Norman Strong, Dr. George Christodoulakis, Prof. Ser-Huang Poon, Prof. Richard Stapleton, Dr. Edward Lee, Dr. Marie Dutordoir, Dr. Roberto Mura, Dr. Abdulkadir Mohamed and Dr. Shuxing Yin. In addition, I would like to thank all my friends in Manchester, and especially Zhe Wen and Huixin Zhang, who provided me with unforgettable memories of joy and laughter. Furthermore, I would like to thank the UK regulator, the Financial Conduct Authority, who invited me to present my research findings. Finally, I would like to thank the participants of the 15th Annual Conference on Money and Finance, 2013 "Merton H. Miller" Doctoral Seminar and World Finance and Banking Symposium. 8 Chapter 1 Introduction 1 Motivation Recently there has been mounting shareholders’ concern related to the fees paid to intermediaries during the flotation process. The Institutional Investor Committee (IIC)1, reports that many issuers were reluctant to challenge the total underwriting fees paid to their advisers because they were not familiar with the equity capital raising process (Institutional Investor Committee, 2011). One of the proposals of the IIC was that the boards of the companies should not only require a full breakdown of the fees paid to their advisers, but also ensure that they understand the purpose of each part of the underwriting fees that is paid for. In addition, PricewaterhouseCoopers’s (PwC) survey (PricewaterhouseCoopers, 2012) documented that 48% of the chief financial officers of the companies that have gone public said that the costs of an initial public offering (IPO) were higher that what they initially expected. According to PwC one of the main factors that affects the cost of an IPO is the underwriting fees.
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