Study: Restaurant brands going public can rake it in with 2-stage IPO
Restaurant leadership mulling over the process of taking brands public would do well to listen to some of the recent findings from a Florida Atlantic University Business College study that uncovered specific effects of the two-stage initial public offering on underpricing and stock volatility.
The researchers found that brands coild potentially benefit by using the alternative IPO mechanism, in which firms are first quoted on the OTC stock market and then upgraded to a national exchange to initially issue public equity. Researchers from FAU, the University of Wisconsin-Milwaukee and the SEC conducted the study published by the Journal of Financial Intermediation.
The study, which found that a two-stage IPO results in lower under-pricing and return volatility than a traditional IPO, said greater disclosure and liquidity during the first stage leads to greater reduction in IPO uncertainty.
"We know that when a firm goes public the underwriters underprice the initial public offering to ensure that all the shares will sell and the underwriter doesn't get stuck with them," study author Rebel Cole, Ph.D., said in the release. The Kaye Family Endowed Professor in Finance at FAU added, "So, if you can minimize that initial underpricing that could be millions, if not tens of millions of dollars more for the firm."
The value-weighted average underpricing for IPOs last year was 15 percent, according to University of Florida Warrington College of Business Professor Jay R. Ritter. For the first 17 years of the current century, the value-weighted average underpricing was 12.9 percent.
A two-stage IPO lowers underpricing by reducing a factor called "informational asymmetry," which occurs in transactions where one party has more or better information than the other, the release said.
"Investors don't know as much about the quality of the firm as do the managers," Cole added in the release. "If the managers can signal or convey that information to investors then they'll be more comfortable, as will the underwriters, and will be willing to price in less of a discount when they go public."
Two-stage IPOs began to pick up following the recovery from the last recession, said Cole, noting that the phenomenon has occurred not only in the U.S. but in the United Kingdom and Taiwan as well.
When firms go on the OTC market, Cole explained, they don't conduct public equity offerings. But they are traded, and they typically file public disclosures. The median time from the firms' first disclosure on the OTC market to upgrading to a national exchange is about four years. A two-stage IPO is particularly appealing to firms that cannot afford the direct cost of an IPO early in their lifespan, Cole said.
"This allows firms to have their shares priced by the market, but more importantly it allows a stream of information to be disseminated by the firms prior to going the traditional IPO path and issuing equity on the NASDAQ or the New York Stock Exchange or American Stock Exchange," Cole said. "Then, when they do, there's less underpricing."