Measuring the Marketing Impacts of Initial Public Offering

Abstract An earlier paper (Song, Rhee & Adams, 2001) on initial public offering (IPOs) demonstrated that IPOs have significant marketing effects in terms of an increase in revenue from products and services. This paper presents an estimate of the value of the marketing effects. The substantial magnitude of the marketing effects indicate that the current academic view on the IPO as a financial phenomenon is limited and a broad perspective in the IPO including product market effects is useful in our information age. Considering for non-US firms to offer their stocks in the US markets, the marketing effects can be a significant sources of advantage that to be recognized for international firms. Introduction An initial public offering (IPO) is the first selling of a company's stock to the public. It is considered a major milestone for the company. The IPO provides equity capital from a broad segment of the public and an opportunity to disseminate information on the business by a registration document filed with the U.S. Securities and Exchange Commission (SEC), a prospectus distributed to investors, and road shows to financial institutions. The SEC registration1 and prospectus include information on business, products and services, management, financial status, details of the offering, and relevant risk factors. Recently, broad Internet access and an expanded investor base for IPOs have made the IPO documentation more significant. The additional transparency, publicity, and generally broader stock ownership established by recent IPOs suggest that the IPO may accomplish more than simply raising capital. An earlier paper (Song, Rhee fr Adams, 20013) on the initial public offering (IPO) demonstrated that IPOs have significant marketing effects in terms of an increase in revenue from products and services. Relating the IPO process to product and services marketing is a deviation from the current academic view of treating the IPO as a strictly financial event. Much of the literature on IPOs explains various reasons for the under pricing phenomenon (Ibbotson, Sindelar, & Ritter, 1988; Chemmanur, 1993; Tinic, 1988). Literature on information signaling is related in that the IPO process provides an opportunity to convey signals to the participants in the financial market (Lev, 1992 & 1995). Historically, effects of the IPO process beyond those related directly to the financial markets were not seen as significant. That appears to have changed. We need to estimate the value of these effects that occur outside the financial markets. Using the revenue and sales cost data of a sample of 50 IPOs in high technology companies, the value of marketing impact of the IPO can be estimated. The next section presents the IPO as an information event for consumers of the firm's products and services as well as for potential investors. Sections following are: Data and Sources of Data, Analysis of Data and Results, and Implications and Conclusions. IPO as a Product Market Information Event Typical information contained in the registration document or prospectus includes biographical material on the officers and directors of the company, the amount of shares each insider - officers, directors and shareholders owning more than10% of the securities owns, complete financial statements including existing debts and equity securities and how they are capitalized, uses of proceeds, and any legal proceedings involving the company, including strikes, lawsuits, anti-trust actions, and copyright/ patent infringement suits. This information is of interest to the financial markets. In addition, the documents contain a statement of the business. This can be informative to the non-financial markets as well. The "business" section of the prospectus describes the products and services offered by the IPO company in terms of their uniqueness, superiority, cost effectiveness, and essentiality thereby differentiating the products from their competitors. …