Issue Cost and Method of IPO Underwriting: Japan's Change from Auction Method Pricing to Book Building

In 1997, Japan introduced book building an alternative to an auction method of IPO pricing that had been required since 1989. Shortly after its authorization, all IPOs in Japan were priced by book building. The shift occurred despite economic arguments and evidence suggesting that the auction method reduced underpricing. We attribute the shift to creation of an information-based pooling equilibrium where low quality firms that benefit from the imposed auction regime lose the benefit if high quality firms are free to select book building. We examine the effects of the regime change on total issue cost and characteristics of IPO firms. We find that, on average, total issue cost during the auction period would have been similar under book building, but that the regimes have differential effects. For large well-established issuers, book building reduced total issue cost. Small issuers had lower cost under the auction method, but high-quality small firms appear to have been foreclosed from issuing. Ignoring the effect of pricing method on underinvestment, our estimates of the simple average cost advantage of the auction method range from 6.9 percent of aftermarket value to –1.8 percent. Because, from a cost standpoint, book building benefits large issuers, the value-weighted effect of the book building method is unambiguously positive, averaging 136 million Yen per issuer in our sample, or 3.5 percent of aftermarket value. In aggregate, we estimate that reliance on the auction method from 1995 through late 1997 cost JASDAQ issuers 61 billion Yen more than book building would have cost. This estimate does not include any additional costs associated with underinvestment.

Investor Activism in Japan: The First 10 Years

This paper provides a comprehensive examination of the first decade of investor activism in Japan. In the context of a remarkable transformation of the Japanese capital market, we document the rise of hedge fund and other investors with a total of 916 filings of block acquisitions by activists in the period from 1998 to 2009. We show that there is, on average, a (modest) positive stock price reaction to the announcement of an activist investment. These effects, however, are concentrated in events involving hostile funds. When we examine returns to activism in the long run we find that gains are not significant overall, except on positions in large target firms. We find that target firms tend to increase their payouts relative to peer firms in response to activist campaigns but we fail to find evidence that activists force target firm managers to institute major operational improvements. Finally we document the explosion in the adoption of "poison pills" by Japanese firms. We find that firms targeted by activists were more likely to adopt defense mechanisms. Since 2007 there has been a substantial reduction in activity by activist funds. Our paper contributes to the literature on investor activism by illustrating the limits to the success of activist funds in a market setting where the takeover market is thin and cannot be used by the activist investor as an "exit" strategy

Investor Activism in Japan: The First 10 Years

This paper provides a comprehensive examination of the first decade of investor activism in Japan. In the context of a remarkable transformation of the Japanese capital market, we document the rise of hedge fund and other investors with a total of 916 filings of block acquisitions by activists in the period from 1998 to 2009. We show that there is, on average, a (modest) positive stock price reaction to the announcement of an activist investment. These effects, however, are concentrated in events involving hostile funds. When we examine returns to activism in the long run we find that gains are not significant overall, except on positions in large target firms. We find that target firms tend to increase their payouts relative to peer firms in response to activist campaigns but we fail to find evidence that activists force target firm managers to institute major operational improvements. Finally we document the explosion in the adoption of "poison pills" by Japanese firms. We find that firms targeted by activists were more likely to adopt defense mechanisms. Since 2007 there has been a substantial reduction in activity by activist funds. Our paper contributes to the literature on investor activism by illustrating the limits to the success of activist funds in a market setting where the takeover market is thin and cannot be used by the activist investor as an "exit" strategy

The Determinant of University Spin-off Ventures that Went Public in the Short Term : A qualitative comparative analysis for management resources

We performed the qualitative comparative analysis to test which interaction among founding team characteristics and other management resources affect the short-term initial public offerings (IPOs). We used data from the Ministry of Economy, Trade and Industry (METI), 65 university-launched ventures with IPO. We found three causal pathways for achieving IPO rapidly from establishment. The first pathway is founded by experienced top management personnel and the filing of patent applications. The second pathway is a student-founded company with patent applications and university VC raised fund. And the third is a founding team of researchers and management personnel with university VC raised fund. This research contributed to imprinting theory by investigating the relationship of achieving IPO from establishment quickly and the combination of founding team and the other management resources of university-launched ventures in Japan. In addition, practical implications were presented for VCs and support organizations regarding the composition of the founding team and the nature of support for achieving IPO rapidly

Construction of Eco-system for NTBFs to Thrive, Grow and Agglomerate (Japanese)

Boston, Massachusetts in the U.S. was able to rejuvenate its economy after WWП through the thrift, growth and agglomeration of MIT-born New Technology-based Firms (NTBFs), which have been categorized as the origin of new venture firms. This paper will explain why some areas like Boston, Silicon Valley, and Austin TX in the U.S. and Cambridge in the UK, were able to construct successful Eco-systems for NTBFs to thrive, grow and agglomerate, while others were unsuccessful, by applying the Eco-system Construction Model deducted from previous studies. Based on the research findings of this paper, we also outline our recommendations for a revision of the U.S. innovation model by clarifying its advantages and disadvantages. The U.S. model was introduced in Japan at the end of the 1990s and prompted a number of new innovation policy projects including the '1000 University Start-up Venture Scheme', the 'Industrial Cluster Project' and the 'Knowledge Cluster Initiative.'

Initial Public Offerings and the Firm Location

The firm geographic location matters in IPOs because investors have a strong preference for newly issued local stocks and provide abnormal demand in local offerings. Using equity holdings data for more than 53,000 households, we show the probability to participate to the stock market and the proportion of the equity wealth is abnormally increasing with the volume of the IPOs inside the investor region. Upon nearly the universe of the 167,515 going public and private domestic manufacturing firms, we provide consistent evidence that the isolated private firms have higher probability to go public, larger IPO underpricing cross-sectional average and volatility, and less pronounced long-run under-performance. Similar but opposite evidence holds for the local concentration of the investor wealth. These effects are economically relevant and robust to local delistings, IPO market timing, agglomeration economies, firm location endogeneity, self-selection bias, and information asymmetries, among others. Findings suggest IPO waves have a strong geographic component, highlight that underwriters significantly under-estimate the local demand component thus leaving unexpected money on the table, and support state-contingent but constant investor propensity for risk

Why Does Book Building Drive Out Auction Methods of IPO Issuance? Evidence from Japan

We examine Japan's 1997 introduction of book building as an alternative to a previously required hybrid auction method. Despite higher cost for some issuers, all issuers in Japan now select book building. Book building enables more accurate valuation of firms, but gains from accurate valuation are partly redistributive. Thus book building can drive auction-method offerings from the market even if it yields no aggregate benefit. Compared to the auction regime, book building reduces issue costs for large issuers. Auctioning is less costly for small issuers, but appears to foreclose some small firms from issuing. The aggregate costs of book building and auctioning are similar. Copyright 2004, Oxford University Press.