Ownershio Structure Pre and Post IPO and Operating Performance of Jasdaq Comp

8/11/2019 Ownershio Structure Pre and Post IPO and Operating Performance of Jasdaq Comp

1/19

Ownership structure pre- and post-IPOs and the

operating performance of JASDAQ companies

Kenji Kutsuna a,*, Hideo Okamura b, Marc Cowling c

a

Institute for Economic Research, Osaka City University, Sumiyoshi, Osaka 558-8585, JapanbSchool of Business Administration, Kwansei Gakuin University, Nishinomiya, Hyogo 662-8501, JapancResearch Centre for Industrial Strategy, Department of Commerce, University of Birmingham,

Birmingham B15 2TT, UK

Received 21 April 2000; accepted 14 November 2001

Abstract

This paper considers how the operating performance of JASDAQ companies is affected by the

ownership structure pre- and post-IPOs. We document that operating performance varies according

to managerial ownership in addition to the age and size of the firm. Our results on JASDAQ contrast

with evidence from Cai and Wei [Pacific-Basin Finance Journal 5 (1997) 389], who analyze the

operating performance of companies newly listed on the Tokyo Stock Exchange (TSE). They

indicate the post-IPO deterioration in operating performance cannot be attributed to the reduced

managerial ownership. D 2002 Elsevier Science B.V. All rights reserved.

JEL classification:G15; G32; G38; F21

Keywords: Initial public offerings; Bank monitoring; Venture capital investment; Managers incentive;

Operating performance; Ownership structure

1. Introduction

There is a long tradition of research concerning the relationship between ownership

structure and company performance. First, the conflict of interest between managers and

shareholders has been discussed in various studies (McConnell and Servaes, 1990;

Craswell et al., 1997; Short and Keasey, 1999; Palia and Lichtenberg, 1999). Jensen

0927-538X/02/$ - see front matterD 2002 Elsevier Science B.V. All rights reserved.

PII: S 0 9 2 7 - 5 3 8 X ( 0 1 ) 0 0 0 4 1 - 5

* Corresponding author. Tel.: +81-6-6605-2471; fax: +81-6-6605-2475.

E-mail address:[email protected] (K. Kutsuna).

www.elsevier.com/locate/econbase

Pacific-Basin Finance Journal 10 (2002) 163181


2/19

and Meckling (1976) point out that the interest of managers and shareholders diverge as

managers stakes decrease and ownership is dispersed. This implies that the firms

operating performance will decline after an initial public offering (IPO). Regarding the

relationship between changes in ownership structure and operating performance ofcompanies that go public, Jain and Kini (1994) report a significant decline in operating

performance post-IPO and argue that this is partly explained by a decrease in the

managers incentives. In a similar vein, Cai and Wei (1997) and Cai and Laughran

(1998) analyze the subsequent performance of seasoned and unseasoned equity offerings

on the Tokyo Stock Exchange, but argue that the post-issue deterioration in operating

performance cannot be attributed to reduced managerial ownership. Yet, the evidence is

not conclusive. For example, Mikkelson et al. (1997) find no relationship between

operating performance and ownership of officers and directors in IPO companies. This

result is confirmed by Hirota (1996). By contrast, Yonezawa and Miyazaki (1996) find that

the performance of Japanese firms rises as the ownership structure becomes concentrated

and the managers stake increases.

Second, in relation to monitoring, venture capital firms (VCs) are expected to play an

important role in adding value to investee companies, thus producing high growth

companies (Gorman and Sahlman, 1989; Sapienza, 1992; Lerner, 1994; Sapienza et al.,

1996). Jain and Kini (1995) considered the relationship between venture capitalist

participation and the post-issue operating performance of IPO firms, and found that VC-

backed IPO firms showed superior post-issue operating performance compared to non-

VC-backed IPO firms. Concerning stock price performance, Brav and Gompers (1997)

investigated the long-run underperformance of IPOs documented by Ritter (1991) andLoughran and Ritter (1995). They found that VC-backed IPOs out-performed non-VC-

backed IPOs and that the overall underperformance of IPOs is driven by small, non-VC-

backed IPOs. Empirical results from Barry et al. (1990) and Megginson and Weiss

(1991) also show that venture capital backing results in significantly lower initial

returns.

In contrast to prior research in the US, investment from venture capital firms in

Japanese firms did not favorably influence short-run stock price performance after

flotation. For example, Kutsuna et al. (2000) find that companies in which venture capital

firms were involved before flotation have lower stock prices than those with no VC

involvement. Furthermore, companies in which venture capital firms sold their equitystakes shortly after flotation underperform compared to companies in which VCs did not

invest or maintain their equity stakes after flotation.

Third, bankfirm relationships, in particular the Japanese banking system, have been a

focal point for research (see example, Prowse, 1992; Aoki and Patrick, 1994; Kang and

Shivdasani, 1995, 1999). Here, the focus is on the effectiveness of bank monitoring via

shareholding, lending, and the appointment of directors. Yonezawa and Miyazaki (1996)

report a significant and positive relationship between bank shareholding and firms

productivity. Moreover, Packer (1995) investigates whether bank shareholding affects

the degree of underpricing of initial public offerings in Japan, and finds that either direct

bank shareholding or through venture capital subsidiaries reduces underpricing. Inaddition, Packer (1995) concludes that bank shareholding reduces agency costs associated

with asymmetric information. In contrast, Hirota (1996) reports that bank shareholding is

K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181164


3/19

unrelated to managerial effectiveness. Weinstein and Yafeh (1998) also point out that in

Japan, main banks client firms report lower profitability.

The explicit aim of this paper is to examine the relationship between the ownership

structure pre- and post-IPOs, and the operating performance of JASDAQ companies. Therest of the paper is organized as follows. First, we discuss the data source and descriptive

statistics of our sample firms. Second, we analyze ownership structure in the pre- and

post-flotation period. Third, we examine the operating performance of JASDAQ

companies using a number of measures. These include net sales, ordinary profits, and

net profits. Fourth, the relationship between ownership structure and the operating

performance of JASDAQ companies is analyzed by estimating a series of cross-sectional

OLS regressions. Last, we summarize our findings and present some suggestions for

further research.

2. Data and descriptive statistics of sample firms

The total number on the Japanese OTC market (JASDAQ) increased eight-fold over the

15-year period to 2000. The total figure is currently in excess of 850 companies. The

number of JASDAQ IPOs in 1995 and 1996 was 137 and 110, respectively. In this section,

we will present our data sources and some descriptive statistics from the 247 JASDAQ

registered companies, and compare them with the 27 IPO firms on the Tokyo Stock

Exchange (TSE) in 19951996.

This paper uses three main sources of data on the 247 JASDAQ companies.(1) Research Group for Disclosure (1996, 1997) provides detailed financial data for

the 247 JASDAQ companies, together with issue data. The financial data includes net

sales, ordinary profits and net profits for only 1 year prior to flotation. The issue data

includes the date, amount raised, usage of raised capital, the issue price and amount of

issued stock.

(2) Annual reports of each IPO company provide the financial and ownership structure

data after flotation.

(3) Japan Securities Dealers Association (JSDA) provides the ownership structure data

just prior to the IPO and the financial data covering the five fiscal years before flotation for

each company.The descriptive statistics of the 247 JASDAQ companies are shown in Table 1.

JASDAQ companies are substantially different in terms of size, age, industrial sector, and

profitability from their NASDAQ and EASDAQ counterparts1 (Kutsuna, 1997; Kutsuna et

al., 2000). They tend to be both older and larger. The characteristics of the sample firms

are as follows:

Agethe mean age of firms is 31 years (founded in 1965), although the range is from 5

years, early-stage small firms, to over 70 years, established firms. Employmentthe sample

1 In terms of average net sales growth, in a comparative study of the top 20 high growth JASDAQ and

NASDAQ companies, Sano and Kitachi (1994) found that JASDAQ companies averaged growth rates of 32.9%,

compared to rates of 182.5% for their NASDAQ counterparts.

K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 165


4/19

mean is 475 employees, and ranges from 25 to 4150. Type of business JASDAQ IPO

firms by industrial sector tend to be concentrated in mature industries. As shown in Table

2, 35.2% are in manufacturing and 30.0% in wholesale and retail trade (others are services19.0%, finance and insurance 5.3%, transport and communication 4.9%, construction

4.5%, and real estate 1.2%).

Total capital raised (public offering and offer for sale) A unique feature of JASDAQ,

which sets it apart from its American counterpart NASDAQ and EASDAQ in Europe, is

that it is dominated by relatively old, established firms. The average capital raised by

public offering, and offer for sale by owners, is w1.9 billion and w1.0 billion, respectively.

Here we observe that an average 34.4% of the total capital raised by JASDAQ companies

is through owners sale of shares. Offer for sale indicates secondary share offerings that do

not raise any money for the issuing companies. The money is simply passed on to the

issuing shareholders.Net salesthe mean net sales is w18.5 billion, and ranges from w2 billion to w246

billion. Ordinary profits the sample mean is w1.4 billion. The smallest firm to achieve

Table 1

Descriptive statistics of JASDAQ and TSE IPO firms in 19951996

JASDAQ Tokyo Stock Exchange (TSE) MW-test

Mean Median Min Max Mean Median Min Max Z-statistic p-value

Years of operating

history

31 32 5 78 39 40 7 72 2.516 0.012**

Number of

employees

475 325 25 4,150 1,374 735 211 9,572 4.763 0.000***

Issued stocks

outstanding

7,671 5,566 2,200 108,304 27,471 14,960 6,000 200,000 6.843 0.000***

Total offered stocks

(thousand)

1,232 1,000 550 5,000 7,196 3,550 1,600 67,000 7.915 0.000***

(Public offering) 746 600 200 5,000 3,581 2,000 800 20,000 7.461 0.000***

(Offer for sale) 486 410 0 2,400 3,615 1,750 0 47,000 5.005 0.000***

Total capital raised(million yen)

2,941 2,002 439 48,453 15,301 3,857 923 188,811

5.236 0.000***

(Public offering) 1,928 1,146 180 48,453 9,323 2,565 703 140,511 4.739 0.000***

(Offer for sale) 1,012 754 0 6,790 5,978 1,806 0 50,323 3.238 0.001***

Net sales

(million yen)

18,546 12,224 2,021 246,223 104,765 55,428 11,166 538,612 6.483 0.000***

Ordinary profits

(million yen)

1,430 701 171 110,772 3,842 1,739 900 28,076 6.287 0.000***

Net profits

(million yen)

662 332 41 48,004 1,790 879 291 14,690 6.038 0.000***

The sample in our analysis is 247 IPO firms in JASDAQ in 1995 (137 firms) and 1996 (110 firms). The number

of IPOs that are directly listed on the Tokyo Stock Exchange is 27 in 1995 1996 (excluding JR-West). This table

provides summary statistics for Japanese IPOs and compares the characteristics of JASDAQ and TSE IPO firms.

The results of Mann Whitney test are indicated in the last two columns of the table. Offer for Sale indicates

secondary share offerings that do not raise any money for the issuing companies. The money is simply passed on

to the issuing shareholders. Data are based on Research Group for Disclosure (1996, 1997).

** 5% significance level.

*** 1% significance level.



5/19

flotation has w171 million ordinary profits. Net profits the sample mean net profits is

w662 million, although the range is from w41 million to w48 billion.

Furthermore, Table 1 demonstrates that there are large differences between theJASDAQ and TSE offerings, regarding firm size and profitability. Analyzed by firm

and issue characteristics of JASDAQ and TSE IPOs, using a MannWhitney test, there

are statistically significant differences at the 1% or 5% level, for all the measures presented

in Table 1.

3. Ownership structure of JASDAQ companies before and after IPOs

In this section, we document the changes of ownership structure before and after IPOs.

Data on the ownership structure just prior to the IPO are obtained from the JapanSecurities Dealers Association (JSDA). Data after the IPO are based on the financial

statement of each company.

Table 2

Distribution of JASDAQ IPO companies by industry

Industry

classification

JASDAQ IPO

companies in19951996

Percentage

(%)

All JASDAQ

companies(based on Nikkei

Needs Corporate

Financial Data)

Percentage

(%)

Manufacturing 87 35.2 353 40.3

Foodstuffs 5 2.0 33 3.8

Textile products 5 2.0 14 1.6

Chemicals 20 8.1 51 5.8

Rubber and ceramics 9 3.6 23 2.6

Steel and metal 9 3.6 37 4.2

Machinery 7 2.8 48 5.5

Electrical machinery 15 6.1 72 8.2

Transportation equipment 5 2.0 23 2.6

Precision instruments 4 1.6 13 1.5

Other manufacturing 8 3.2 39 4.5

Construction 11 4.5 58 6.6

Transport 12 4.9 23 2.6

Wholesale and retail trade 74 30.0 242 27.6

Finance and insurance 13 5.3 12 1.4

Real estate 3 1.2 15 1.7

Services 47 19.0 173 19.7

Total 247 100.0 876 100

This table shows the distribution of 247 JASDAQ IPO companies by industry. Industry classification is based onNikkei Shimbun. In addition, the distribution of all JASDAQ-registered companies in June 2000 is also indicated

in the last two columns. However, Bank of Japan and Japan Air System (JAS) are not included. In our following

analysis, we examine both raw and industry-median-adjusted operating performance, based on Nikkei Needs

Annual Corporate Financial Data.



6/19

We categorize ownership stakes of IPO firms into six groups2: (1) top shareholders

stake, (2) top 10 shareholders total stakes, (3) top banks stake (defined as the share-

holdings by the bank that has the largest share among banks on the top 10 Shareholders

List), (4) banks total stakes on the top 10 Shareholders List, (5) venture capital firmsstake (defined as the shareholdings by the venture capital firm that has the largest share

among VCs on the List), (6) venture capital firms total stakes on the List. Furthermore,

the results of the Wilcoxon Matched-Pairs Signed-Ranks Test are presented in the last

column of Table 3. Statistically significant differences between the ownership structure

before and after IPOs can be confirmed.

The first row of Table 3 shows the ownership of the top shareholder. The median stake

of the top shareholder is 29.82% before the offering, and falls by 6.95% to 22.87% 1 year

after the offering. This result implies, in many cases, that firms owners realize capital

gains but still hold relatively large stakes. Although the total stakes of the top 10

shareholders show a significant decline 1 year after the offering, ownership is still

concentrated among the top 10 shareholders, as shown in row 2 of Table 3. The median

stake of the top 10 shareholders decreases by 16.84%, from 80.54% before the offering, to

63.70%, 1 year after the offering.

Contrary to the decrease in the top 10 shareholders stakes, banks increase their

shareholding after the offering. In row 3 of Table 3, the median stake of the top bank

before the offering is 2.79%, and it rises by 0.62% to 3.41%, 1 year after the offering.

Banks total stakes, the collective stakes of banks on the top 10 Shareholders List, also

increase 1 year after the offering, as described in row 4 of Table 3. The median stake of

banks rises from 4.29% before IPO to 6.66% after IPO. Among 247 total sample firms,194 firms have one or more bank shareholders on their top 10 Shareholders List; 113 out

of 194 firms (58%) experience an increase in their top banks shareholdings, and 145 of

194 firms (75%), experience an increase in banks total stakes.

In contrast to banks, most of the venture capital firms decrease their stakes after IPO.

We report the equity stake of the top venture capital firm in row 5 of Table 3, defined as

the shareholding by the venture capital firm, which has the largest share among VCs on the

top 10 Shareholders List. The median stake of the top venture capital firm declines from

2.73% before IPO to 0.77% after the offering. In addition, we document venture capital

firms total stakes in row 6 of Table 3. The median stake of all VCs on the List is 4.69%

before the offering but decreases dramatically to 0.66%. In fact, while venture capital firmsare on the top 10 Shareholders List of 123 IPO firms before the offering, only four IPO

firms experience an increase in the top VCs shareholdings, while three firms experience

an increase in VCs total stakes. Furthermore, in 61 IPO firms (50%), venture capital firms

sell off their stakes to zero to realize capital gains. On the contrary, US venture capital

firms maintain their holdings after the IPO (Megginson and Weiss, 1991). According to

2 In addition, we can get the data on equity ownership of directors and the employee stock ownership plan

(ESOP) before IPO from the Research Group for Disclosure (1996, 1997). However, these data are not available

after the IPO. The median stake of directors before the offering is 32.1%. This is considerably lower than found

by Mikkelson et al. (1997). They report that the median stake of officers and directors as a group is 67.9% before

the offering, and 43.7% after the offering. In addition, the median stake of the ESOP before the offering is 4.30%,

although it ranges from 0% to 29.8%.



7/19

Mikkelson et al. (1997), the median stake of venture capital firms after the offering is

12.5%, while it is 20% before the offering.

Our evidence also shows that the top 10 shareholders decrease their shareholdings 1

year after the offering, but retain more than 60% of the stake so that ownership is still

concentrated. Banks increase their holdings after the offering, while venture capital firms

decrease theirs. It is worth noting that venture capital firms immediately sold out in half of

the companies.

4. Operating performance of IPO firms

In this section, we analyze the operating performance from five fiscal years before

IPO (Year 5, 4, 3, 2, and 1) to four fiscal years after IPO (Year 0, + 1, + 2

and + 3). We use three measures of operating performance. First is net sales, ordinary

profits, and net profits for each fiscal year. Secondly, we examine ordinary profits and

net profits divided by end-of-year net sales to control for variation in sales revenue.

Thirdly, the growth rates of net sales, ordinary profits, and net profits are explored. Theoperating performance is adjusted by the industry median as in Jain and Kini (1994),

Mikkelson et al. (1997), and Cai and Wei (1997). In our analysis, we examine both raw

Table 3

Ownership structure of JASDAQ firms before and after IPO: Shareholdings of top shareholder, top 10

shareholders, banks and VCs

Samplesize

BeforeIPO

AfterIPO

Changes inshareholdings

Wilcoxon-testsZ-statistic

(1) Top shareholders 247 Median 29.82 22.87 6.95 13.563***

stake (a) Mean 34.44 27.13 7.31

(2) Top 10 shareholders 247 Median 80.54 63.7 16.84 13.624***

stakes (b) Mean 78.89 63.45 15.44

(3) Top banks stake (c) 194 Median 2.79 3.41 0.62 8.695***

Mean 2.83 3.29 0.46

(4) Banks total stakes (d) 194 Median 4.29 6.66 2.37 10.415***

Mean 5.23 7.39 2.16

(5) Top VCs stake (e) 123 Median 2.73 0.77 1.96 9.258***

Mean 4.08 1.58 2.5

(6) VCs total stakes (f) 123 Median 4.69 0.66

4.03

9.533***

Mean 6.72 1.91 4.81

(a) Shareholdings by top shareholder on the top 10 Shareholders List. (b) Shareholdings by top 10 shareholders

on the top 10 Shareholders List. (c) Shareholdings by the bank that has the largest share among banks on the top

10 Shareholders List. (d) Shareholdings by all banks on the top 10 Shareholders List. (e) Shareholdings by the

venture capital firm (VC) that has the largest share among VCs on the List. (f) Shareholdings by all VCs on the

List.

Data before IPO are obtained from Japan Securities Dealers Association (JSDA), and data after IPO are based on

financial statements of each firm. The results of the Wilcoxon Matched-Pairs Signed-Ranks Test are presented at

the last column of this table. Statistically significant differences between the ownership structure before and after

IPOs can be confirmed.




8/19

Table 4

Operating performance of JASDAQ IPO companies (net sales, ordinary profits, and net profits before and after IPO)

Operating performance Before IPO After

Year 5 Year 4 Year 3 Year 2 Year 1 Year

Net sales Mean (million yen) 14,736 16,034 16,190 17,547 18,569 20,28

Median (million yen) 9,792 10,467 11,588 11,651 12,224 13,46

S.D. (million yen) 14,870 15,544 14,641 19,800 21,592 23,99

Ordinary profits Mean (million yen) 785 748 740 1,083 1,430 1,65

Median (million yen) 456 452 505 567 701 76

S.D. (million yen) 1,154 978 840 4,527 7,039 7,79

Negative ordinary profits

(number of companies)

5 6 4 0 0

Percent to sample size (%) 2.7 2.9 1.7 0.0 0.0

Net profits Mean (million yen) 358 313 305 489 663 77

Median (million yen) 205 201 202 239 333 38

S.D. (million yen) 562 430 413 2,658 3,052 3,59

Negative net profits

(number of companies)

8 7 5 5 0

Percent to sample size (%) 4.3 3.3 2.2 2.0 0.0

Sample size 188 209 230 246 247 24

This table summarizes the operating performance for JASDAQ IPO firms for 5 years before IPO and 4 years after IPO. Year

offering. Operating performance includes net sales, ordinary profits, and net profits for each year. In addition, the numbers of co

net profits for each year are indicated. There are no companies with negative ordinary profits and net profits in Year 1.


9/19

and industry-median-adjusted operating performance, based on Nikkei Needs Annual

Corporate Financial Data (see Table 2).

Table 4 presents the operating performance of IPO firms for 9 years before and after

flotation (Year 1 indicates the fiscal year just prior to the offering). As shown in Table

4, operating performance tends to decrease after flotation. For example, the median net

profits increased from w205 million for Year 5 to w384 for Year 0, and decreased to

w316 for Year + 3. These results are consistent with Jinza (1995), who analyzed the

operating performance of JASDAQ companies registered between 1990 and 19943.

Moreover, we observed that the number of JASDAQ companies with negative ordinary

profits and net profits decreased from Year 5 to Year 1, and then sharply increased

after IPO. Minimum ordinary profits and net profits for Year 1 are w171 million and

w41 million, respectively, while most figures besides Year 1 are negative. For

example, in terms of net profits, the percentage of companies with negative net profits

for Year + 3 was more than 10%. This result hints at the possibility of owner managers,

venture capitalists, underwriters, banks and auditors attempting to Window-dress prior

3 Regarding the profitability of JASDAQ companies, Jinza (1995), analyzing newly registered JASDAQ

companies between 1990 and 1994, found that net profits peaked 1 year prior to flotation and subsequently

decreased. Furthermore, average 5-year growth rates of profits post-flotation for 132 newly registered JASDAQ

companies in 1988/1989 are comparatively lower than for companies listed on the first division of the Tokyo

Stock Exchange. The average growth rates were 9.5% and 8.3%, respectively.

Fig. 1. Ratio of ordinary profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes

vary due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both

raw and industry-median-adjusted operating performance. The industry-median-adjusted operating performance

is calculated as the difference between its raw ratio of ordinary profits to net sales and the median ratio of all

JASDAQ-registered firms in its industry.



10/19

to going public (DeGeorge and Zeckhauser, 1993; Jain and Kini, 1994; Teoh et al.,

1998a,b).

Figs. 1 and 2 present the ratio of ordinary profits and net profits to net sales for 9

years. The median raw ratio of ordinary profits to net sales increased from 4.65% for

Year 5 to 6.25% for Year 1, and decreased to 4.50% for Year + 3. The median

industry-median-adjusted ratio of ordinary profits to net sales also increased from

0.06% for Year 5 to 1.21% for Year 1, and decreased to 0.53% for Year + 3. The

industry-median-adjusted operating performance is calculated as the difference betweenits raw ratio of ordinary profits to net sales and the median ratio of all JASDAQ-

registered firms in its industry. In addition, the median raw ratio of net profits to net

sales increased from 2.00% for Year 5 to 2.99% for Year 0, and decreased to 1.90%

for Year + 3. The median industry-median-adjusted ratio of net profits to net sales also

increased from 0.16% for Year 5 to 0.72% for Year 1, and decreased to 0.21%

for Year + 3.

Fig. 3 and Table 5 show the raw and industry-median-adjusted changes in the growth

rates of net sales, ordinary profits and net profits for 9 years before and after flotation4. The

industry-median-adjusted operating performance is calculated as the difference between its

Fig. 2. Ratio of net profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes vary

due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and

industry-median-adjusted operating performance. The industry-median-adjusted operating performance is

calculated as the difference between its raw ratio of net profits to net sales and the median ratio of all

JASDAQ-registered firms in its industry.

4 As shown in Table 4, there are no companies with negative ordinary profits and net profits in Year 1.



11/19

change in operating performance and the median change in operating performance of all

JASDAQ-registered firms in its industry. In Fig. 3, the change in growth rate is calculated

to the prior year. The average growth rates for four periods before and after IPO are

compared in Panel A of Table 5. The pre-IPO growth rate indicates the average of four

periods; Year 5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1. The

post-IPO growth rate means the average rate of Year 1 to 0, Year 0 to + 1, Year + 1 to

+2, and Year +2 to +3.

Again, we find a significant decline in the post-issue operating performance. As shownin Fig. 3, industry-median-adjusted growth rate of net sales increases from 5.29% in the

Year 5 to 4, to 6.84% in the Year 2 to 1, and declines to 0.24% in the Year

+ 2 to + 3. Furthermore, Panel A of Table 5 confirms that industry-median-adjusted

growth rate of net sales for four periods after IPO is 0.96%, compared to 7.39% for four

periods before IPO. The trend is confirmed by the Wilcoxon Matched-Pairs Signed-Ranks

Test as described in the last column of Table 5. The Z-statistics are calculated to be

7.580, implying significant differences at the 1% level before and after flotation.

In addition, growth rates of ordinary profits and net profits tend to decrease after

flotation. According to Panel B of Table 5, industry-median-adjusted growth rates of

ordinary profits and net profits in Year

1 to + 1 are 4.17% and

3.58%, respectively.However, industry-median-adjusted growth rates of ordinary profits and net profits sharply

declined to 0.18% and 9.16%, respectively, in Year 1 to + 3.

Fig. 3. Growth rates of net sales before and after IPO. Sample sizes are in parentheses. Sample sizes vary due to

missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and

industry-median-adjusted operating performance. The industry-median-adjusted operating performance is

calculated as the difference between its raw change in growth rate of net sales and the median change in

operating performance of all JASDAQ-registered firms in its industry.



12/19

Table 5

A comparison of the operating performance before and after IPO

Panel A: The ratio of ordinary profits to net sales,

and growth rates of net sales before and after IPO

Sample

size

Mean

(%)

Median

(%)

Wilcoxon

Z-statisticOrdinary profits/net sales

(average for 5 years before IPO): raw

247 6.78 5.38 0.929

Ordinary profits/net sales

(average for 4 years after IPO): raw

247 6.49 5.14


(average for 5 years before IPO):

industry-median-adjusted

247 1.83 0.62 0.930


(average for 4 years after IPO):


247 1.75 0.42

Sales growth

(average for four periods before IPO): raw

246 8.87 5.65

3.739***

Sales growth

(average for four periods after IPO): raw

247 5.23 3.10

Sales growth

(average for four periods before IPO):


246 9.69 7.39 7.580***

Sales growth

(average for four periods after IPO):


247 2.44 0.96

Panel B: Growth rates of net sales,ordinary profits, and net profits after IPO

Samplesize

Mean(%)

Median(%)

S.D.(%)

Sales growth

(average from Year 1 to Year + 1): raw

241 18.08 12.85 34.32

Sales growth


230 26.81 8.88 82.40

Sales growth

(average from Year 1 to Year + 1):


241 11.43 5.05 36.09

Sales growth



230 16.42 2.04 84.08

Ordinary profits growth


241 8.33 12.12 77.18



230 21.37 5.90 144.88




241 0.52 4.17 77.87




230 15.53 0.18 146.19

Net profits growth


241 2.56 15.48 122.56



13/19

Thus, we found evidence that JASDAQ companies showed sharply decreasing

operating performance after flotation.

5. Cross-sectional OLS regressions: On the relationship between ownership structure

and operating performance

In this section, we analyze the relationship between the ownership structure and

operating performance before and after IPO by estimating cross-sectional OLS regres-

sions. Operating performance before IPO is measured first in terms of the average

industry-median-adjusted growth rates of net sales for four periods before IPO (Year

5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1). In addition, average

industry-median-adjusted ratios of ordinary profits to net sales for five years before IPO

(Year

5, Year

4, Year

3, Year

2 and Year

1) are also used. Operatingperformance after IPO is measured in terms of the average industry-median-adjusted

growth rates of net sales for four periods (Year 1 to 0, Year 0 to + 1, Year + 1 to + 2,

and Year + 2 to + 3). Average industry-median-adjusted ratios of ordinary profits to net

sales for 4 years after IPO (Year 0, Year + 1, Year + 2, and Year + 3) are also explored. In

addition, industry-median-adjusted growth rates of net sales and ordinary profits from

Year 1 to Year + 3 are examined.

Firstly, we analyze the relationship between operating performance before IPO and

ownership structure just prior to IPO by using the following eight independent variables.

T1BF and T10BF indicate the ownership stake before IPO by top shareholder and top 10

shareholders, respectively. VCBF_D and BKBF_D are dummy variables taking on thevalue 1 if venture capital firm and bank invested before IPO and 0 otherwise. MANU_D is

a dummy variable taking on the value 1 if the company is manufacturing and 0 otherwise.

Panel B: Growth rates of net sales,

ordinary profits, and net profits after IPO

Sample

size

Mean

(%)

Median

(%)

S.D.

(%)

Net profits growth(average from Year 1 to Year + 3): raw

230 3.94

9.14 189.27

Net profits growth



241 10.49 3.58 123.60

Net profits growth



230 5.93 9.16 190.20

This table summarizes the raw and industry-median-adjusted operating performance before and after IPO.

Operating performance includes the ratio of ordinary profits to net sales, and growth rates of net sales, ordinary

profits, and net profits. First, operating performance before and after IPO is compared in Panel A. Five years

before IPO mean from Year

5 to Year

1. Four years after IPO mean from Year 0 to Year + 3. The pre-IPOgrowth rate indicates the average of four periods for Year 5 to 4, Year 4 to 3, Year 3 to 2, and

Year 2 to 1. The post-IPO growth rate means the average of four periods for Year 1 to 0, Year 0 to + 1,

Year + 1 to + 2, and Year + 2 to + 3. TheZ-statistics is based on the Wilcoxon signed rank test. Second, growth

rates of net sales, ordinary profits, and net profits after IPO are examined in Panel B.


Table 5 (continued)



14/19

Table 6Cross-sectional OLS regressions of operating performance before and after IPO on ownership structure and firm characteris

Dependent variables Independent variables

Panel A: Before IPO Intercept T1BF T10BF VCBF_D BKBF_D MANU_D Ln(MCAP) Ln(AG

Sales growth 11.31 0.07 2.69 1.28 1.33 1.92 11.99

(average for four periods 0.59 1.63 1.63 0.67 0.79 1.74 * 6.76

before IPO): 8.10 0.05 2.71 1.45 1.41 2.02 12.23

industry-median-adjusted 0.39 0.83 1.64 0.76 0.84 1.83 * 6.76

Ordinary profits/net sales 38.57 0.02 0.35 0.85 0.65 3.11 0.55

(average for 5 years before IPO): 5.97*** 1.57 0.63 1.32 1.16 8.40*** 0.93


40.12 0.01 0.36

0.91

0.61 3.10 0.82 5.82*** 0.30 0.66 1.41 1.08 8.31*** 1.35

Panel B: After IPO (1) Intercept T1AF T10AF VCAF_D BKAF_D MANU_D Ln(MCAP) Ln(AG

Sales growth 8.72 0.03 1.03 2.08 1.65 2.30 8.85

(average for four periods 0.53 0.74 0.66 0.87 1.17 2.48** 5.96

after IPO): 6.03 0.02 1.11 2.14 1.70 2.30 9.23

industry-median-adjusted 0.35 0.36 0.71 0.90 1.21 2.48** 6.15

Ordinary profits/net sales 60.74 0.00 2.33 0.96 0.09 4.23 1.10

(average for 4 years after IPO): 6.00*** 0.11 2.40** 0.66 0.10 7.38*** 1.20


67.15 0.07 2.47

0.88 0.16 4.31 1.56 6.40*** 2.04** 2.56** 0.60 0.19 7.57*** 1.70

Sales growth 128.08 0.72 10.56 17.04 8.68 18.12 50.0

(average from Year 1 to 1.00 2.10** 0.86 0.93 0.79 2.52** 4.35

Year + 3): 134.33 0.28 10.97 18.92 9.68 18.80 53.20

industry-median-adjusted 0.99 0.67 0.89 1.02 0.87 2.58*** 4.54


15/19


16/19

Ln(MCAP), Ln(AGE), and Ln(EMP) indicate the natural logarithms of market capital-

ization at the date of IPO, years of operating history, and number of employees before IPO.

Secondly, the following 10 variables are used to explore the relationship between post-

IPO operating performance and the change in ownership structure. T1AF and T10AFindicate the ownership stake after IPO by top shareholder and top 10 shareholders,

respectively. T1CHG and T10CHG indicate the change in shareholdings before and after

IPO (i.e. percentage of shareholdings after IPO minus before IPO). VCAF_D and

BKAF_D are dummy variables taking on the value 1 if venture capital firm and bank

have invested 1 year after IPO and 0 otherwise. The definition of MANU_D, Ln(MCAP),

Ln(AGE), and Ln(EMP) is the same as before.

The results in Panel A of Table 6 suggest that sales growth before IPO is significantly

and positively related to market capitalization (Ln(MCAP)) and negatively related to years

of operating history (Ln(AGE)). The ratios of ordinary profits to net sales before IPO are

significantly and positively related to market capitalization (Ln(MCAP)) and negatively

related to number of employees (Ln(EMP)). We do not observe a statistically significant

relationship between ownership structure and operating performance before IPO.

The results in Panels B and C of Table 6 suggest that operating performance after IPO

is significantly and positively related to Ln(MCAP), and negatively related to Ln(AGE)

and Ln(EMP). In addition, operating performance after IPO is significantly positive

related to top shareholders stake after IPO(T1AF). The change in top shareholders stake

(T1CHG) is positively related to the ratio of ordinary profits to net sales. Also, venture

capital investments (VCAF_D) are positively related to the ratio of ordinary profits to net

sales.

6. Conclusion and further research

In this paper, we considered how the operating performance of JASDAQ companies is

affected by the ownership structure in the pre- and post-flotation period.

Our evidence shows that the top 10 shareholders decrease their stakes after IPO, but

retain more than 60%, so that ownership is still concentrated. Banks increase their stakes

after the offering, in contrast to venture capital firms.

Regarding operating performance measured pre-flotation and post-flotation, we find anumber of interesting results. We found evidence that JASDAQ companies showed

sharply decreasing sales, ordinary profits and net profits growth after flotation. Our results

are consistent with Matsuda et al. (1994), Jinza (1995) and Kutsuna et al. (2000).

On the relationship between ownership structure and operating performance, a further

set of interesting results occurs. Firstly, the percentage held by the top shareholder is

closely related to post-IPO operating performance. Top shareholders stake positively

influences the growth rates of net sales and ordinary profits. Also, on changes in

ownership structure after IPO, the coefficient on T1CHG is significantly and positively

related to post-IPO operating performance (ordinary profits/net sales). Firms in which the

top shareholder decreased ownership stakes after IPO show poorer performance. Fur-thermore, top 10 shareholders stakes after IPO are positively related to the ratio of

ordinary profits to net sales, and ordinary profits growth rates. Our evidence supports the



17/19

view that the post-IPO deterioration in operating performance is partly attributable to the

reduced managerial ownership. Although we are not using identical performance measures

as Cai and Wei (1997)5, our results on JASDAQ broadly contrast with theirs, which

analyze the operating performance of companies newly listed on the Tokyo StockExchange. They indicated that the deterioration of post-IPO profitability cannot be

associated with the reduced managerial shareholdings.

Secondly, on the role of banks shareholdings, all coefficients (BKBF_D and

BKAF_D) are statistically insignificant. On the role of VC investment, the coefficient

on VCAF_D is statistically significant. Our evidence is partially in accord with Jain and

Kini (1995), who found that VC backing resulted in relatively superior operating perfor-

mance through a monitoring process. However, the coefficient on VCBF_D is not sta-

tistically significant. In this respect, further research concerning the Japanese VC invest-

ment would seem to be appropriate.

Thirdly, market capitalization is positively related to pre-IPO operating performance

while the size (number of employees) and the firms age (years of operating history) is

negatively related. Furthermore, age of firm and number of employees negatively

influence the aftermarket operating performance, while market capitalization exerts a

positive influence. Our regression analysis shows that poor operating performance before

and after IPO is associated with large and established companies.

Finally, in as much as we have established a series of important and interesting findings

concerning the operating performance of Japanese IPO companies and ownership

structure, there are many unanswered questions. Another potentially interesting avenue

of research is the comparison of operating performance of new or existing listedcompanies on stock exchanges to distinguish whether these trends are peculiar to newly

registered OTC companies (Hebner and Hiraki, 1993; Cai and Wei, 1997). Also, we may

need further analysis using another performance measure, for example, operating perform-

ance per capita or per assets, or stock price performance.

Acknowledgements

We are grateful to Professor S. Ghon Rhee and anonymous referees for valuable

comments and suggestions. This paper was presented for the International Conference heldin Osaka City University at 7 9 August 1999. We thank Richard Smith (Claremont

Graduate School) and Leslie Marx (University of Rochester) for helpful comments. We are

grateful to the Zengin Foundation for Studies on Economics and Finance, and the Ministry

of Education for providing financial support. A part of this research is financially

supported by Japan Society for the Promotion of Science Grant-in-Aid for Encouragement

of Young Scientists.

5 Cai and Wei (1997) use six operating performance measures of (1) ordinary income/total assets, (2)

operating income/total assets, (3) operating cash flow/total assets, (4) growth rate of capital expenditure, (5)

growth rate of net sales, and (6) growth rate of operating income. Also, in their regression analysis, the changes in

ordinary income relative to total assets from Year 1 to + 1, + 3, and + 5 are used as the independent variables.



18/19

References

Aoki, M., Patrick, H. (Eds.), 1994. The Japanese Main Bank System: Its Relevance for Developing and Trans-

forming Economies. Oxford University Press, Oxford.Barry, C.B., Muscarella, C.J., Peavy III, J.W., Vetsuypens, M.R., 1990. The role of venture capital in the creation

of public companies: Evidence from the going-public process. Journal of Financial Economics 27, 447 471.

Brav, A., Gompers, P.A., 1997. Myth or reality? The long-run underperformance of initial public offerings:

Evidence from venture and nonventure capital-backed companies. Journal of Finance 52, 17911821.

Cai, J., Laughran, T., 1998. The performance of Japanese seasoned equity offerings, 19711992. Pacific-Basin

Finance Journal 6, 395425.

Cai, J., Wei, K.C.J., 1997. The investment and operating performance of Japanese initial offerings. Pacific-Basin

Finance Journal 5, 389417.

Craswell, A.T., Taylor, S.L., Saywell, R.A., 1997. Ownership structure and corporate performance: Australian

evidence. Pacific-Basin Finance Journal 5, 301 323.

DeGeorge, F., Zeckhauser, R., 1993. The reverse LBO decision and firm performance: Theory and evidence.

Journal of Finance 48, 13231348.Gorman, M., Sahlman, W.A., 1989. What do venture capitalists do? Journal of Business Venturing 4, 231248.

Hebner, K.J., Hiraki, T., 1993. Japanese initial public offerings. In: Walter, I., Hiraki, T. (Eds.), Restructuring

Japans Financial Markets. Business One/Irwin, Homewood, IL, pp. 79113.

Hirota, S., 1996. Japans financial and equity markets, and corporate governance. In: Tachibanaki, T., Tsutsui, Y.

(Eds.), Japans Capital Markets. Nihon-hyoronsha, Tokyo, pp. 247267 (in Japanese).

Jain, B.A., Kini, O., 1994. The post-issue operating performance of IPO firms. Journal of Finance 49, 1699

1726.

Jain, B.A., Kini, O., 1995. Venture capitalist participation and the post-issue operation performance of IPO firms.

Managerial and Decision Economics 16, 593606.

Jensen, M., Meckling, W., 1976. Theory of the firm: managerial behavior, agency costs and ownership structure.

Journal of Financial Economics 3, 305360.

Jinza, Y., 1995. Price formation on Japanese OTC markets. Securities Analyst Journal, March, 2 12 (in

Japanese).

Kang, J.K., Shivdasani, A., 1995. Firm performance, corporate governance, and top executive turnover in Japan.

Journal of Financial Economics 38, 2958.

Kang, J.K., Shivdasani, A., 1999. Alternative mechanisms for corporate governance in Japan: An analysis of

independent and bank-affiliated firms. Pacific-Basin Finance Journal 7, 122.

Kutsuna, K., 1997. Small Business Financing and Venture Financing in Japan: An International Perspective. Toyo

Keizai, Tokyo (in Japanese).

Kutsuna, K., Cowling, M., Westhead, P., 2000. The short-run performance of JASDAQ companies and venture

capital involvement before and after IPO. Venture Capital: An International Journal of Entrepreneurial

Finance 2, 125.

Lerner, J., 1994. Venture capitalists and the decision to go public. Journal of Financial Economics 35, 293 316.Loughran, T., Ritter, J.R., 1995. The new issue puzzle. Journal of Finance 50, 2351.

Matsuda, S., Vanderwerf, P., Scarbrough, P., 1994. A comparison of Japanese and U.S. firms completing initial

public offerings. Journal of Business Venturing 9, 205 222.

McConnell, J.J., Servaes, H., 1990. Additional evidence on equity ownership and corporate values. Journal of

Financial Economics 27, 595612.

Megginson, W.L., Weiss, K.A., 1991. Venture capitalist certification in initial public offerings. Journal of Finance

46, 879903.

Mikkelson, W.H., Partch, M.M., Shah, K., 1997. Ownership and operating performance of companies that go

public. Journal of Financial Economics 44, 281 307.

Packer, F., 1995. What improves the credibility for the offering price? Empirical results on Japanese OTC

markets. Securities Analyst Journal, March, 3653 (in Japanese).

Palia, D., Lichtenberg, F., 1999. Managerial ownership and firm performance: A re-examination using produc-tivity measurement. Journal of Corporate Finance 5, 323339.

Prowse, S.D., 1992. The structure of corporate ownership in Japan. Journal of Finance 47, 1121 1140.



19/19

Research Group for Disclosure, 1996, 1997. White Papers of Initial Public Offerings (in Japanese).

Ritter, J.R., 1991. The long-run performance of initial public offerings. Journal of Finance 46, 327.

Sano, M., Kitachi, T., 1994. The characteristics of venture management. In: Matsuda, S. (Ed.), Support System for

Venture Management. Nihon Keizai Shinbun-sha, Tokyo, pp. 91121 (in Japanese).

Sapienza, H.J., 1992. When do venture capitalists add value? Journal of Business Venturing 7, 927.

Sapienza, H.J., Manigart, S., Vermeir, W., 1996. Venture capitalist governance and value added in four countries.

Journal of Business Venturing 11, 439469.

Short, H., Keasey, K., 1999. Managerial ownership and the performance of firms: Evidence from the UK. Journal

of Corporate Finance 5, 79101.

Teoh, S.H., Welch, I., Wong, T.J., 1998a. Earnings management and the long-run market performance of initial

public offerings. Journal of Finance 53, 1935 1974.

Teoh, S.H., Welch, I., Wong, T.J., 1998b. Earnings management and the underperformance of seasoned equity

offerings. Journal of Financial Economics 50, 6399.

Weinstein, D.E., Yafeh, Y., 1998. On the costs of a bank-centered financial system: Evidence from the changing

main bank system in Japan. Journal of Finance 53, 635672.

Yonezawa, Y., Miyazaki, M., 1996. Japans corporate governance and productivity. In: Tachibanaki, T., Tsutsui,Y. (Eds.), Japans Capital Markets. Nihon-hyoronsha, Tokyo, pp. 222 246 (in Japanese).


Documents

Ownershio Structure Pre and Post IPO and Operating Performance of Jasdaq Comp