The Pricing and Performance of Supercharged IPOs

Alexander S. Edwards, Michelle Hutchens, Sonja O. Rego

Research output: Working paper

Abstract

This study examines a new form of initial public offerings colloquially referred to as “Supercharged IPOs.” In a supercharged IPO, a series of transactions are performed as part of the IPO process that eventually generate new tax assets (i.e., greater future tax deductions) for the firm, and a concurrent tax liability for the pre-IPO owners. The benefits (i.e., future tax deductions) from the new tax assets are then split between the pre-IPO owners, who enter into a tax receivable agreement based on those assets, and new IPO investors. The net result of the transaction to the pre-IPO owners is the triggering of a tax liability in exchange for a contingent stream of future benefits. This transaction will only be worthwhile for the pre-IPO owners if the firm has sufficient future performance to realize the tax assets, thereby acting as a commitment mechanism between the pre-IPO owners and the firm. As a result, we hypothesize, and find evidence of higher final offer prices and stronger future performance of “supercharging” IPO firms. We also examine future stock returns and do not find significant differences between traditional and supercharged IPO firms, consistent with the higher offer price for supercharged IPO firms not reversing. Our results contrast critics’ claims that tax receivable agreements allow pre-IPO owners and advisors to extract rents from new IPO investors.
Original languageEnglish (US)
Number of pages58
DOIs
StatePublished - Feb 2 2016

Publication series

NameKelley School of Business Research Paper
No.16-14

Fingerprint

Tax
Pricing
Owners
Assets
Investors
Liability
Tax deduction
Initial public offerings
Stock returns
Rent
Advisors

Keywords

  • Initial public offering
  • IPO
  • supercharged
  • tax receivable agreement
  • underpricing
  • rent extraction

Cite this

Edwards, A. S., Hutchens, M., & Rego, S. O. (2016). The Pricing and Performance of Supercharged IPOs. (Kelley School of Business Research Paper; No. 16-14). https://doi.org/10.2139/ssrn.2725531

The Pricing and Performance of Supercharged IPOs. / Edwards, Alexander S.; Hutchens, Michelle; Rego, Sonja O.

2016. (Kelley School of Business Research Paper; No. 16-14).

Research output: Working paper

Edwards, AS, Hutchens, M & Rego, SO 2016 'The Pricing and Performance of Supercharged IPOs' Kelley School of Business Research Paper, no. 16-14. https://doi.org/10.2139/ssrn.2725531
Edwards AS, Hutchens M, Rego SO. The Pricing and Performance of Supercharged IPOs. 2016 Feb 2. (Kelley School of Business Research Paper; 16-14). https://doi.org/10.2139/ssrn.2725531
Edwards, Alexander S. ; Hutchens, Michelle ; Rego, Sonja O. / The Pricing and Performance of Supercharged IPOs. 2016. (Kelley School of Business Research Paper; 16-14).
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