Dual-Class Share Course Work

Q1

Figure 1 shows the numbers of IPOs in America from 1980 to 2107, including gross and net data (excludes Special Purpose Acquisition Companies (SPACs), closed-end funds, Real

Estate Investment Trusts (REITs), unit offers).

[pic 1]

Figure 1. Numbers of IPOs in America from 1980 to 2017.

Possible Explanation:

As one can see from the graph, the numbers of IPOs suffered a structural decline after the peak in 1996. The sudden drop in 1997 could be easily explained by the fact that the new economy bubble busted in 1996. It should also be noted that the drop of numbers is much more serious for IPOs that are smaller than 20 million.

Still, we still need to analyse the structural decline that followed. After reading up on relative papers and materials, we concluded 3 possible factors that can cause the decline.

1.The Regulation Overreach Hypothesis

As Weild and Kim (2010) point out, many of the regulation and legislation that were implemented during or after the bubble could be a major reason for the decline. Figure 2 shows the timeline of the legislation and the decline.

[pic 2]

Figure 2. Timeline of legislations. Reprinted from Market Structure Is Causing

the IPO Crisis — and More (p7), by David Weild and Edward Kim 2010

To fully discuss the content of this legislation and their impact would be outside the scope of our study. It is sufficient for us to know that these legislations employ stricter restrictions on the actions of listed companies and investment banks, which increases the costs of going public. This affects the capability of firms to seek IPOs, especially smaller firms. For example, Regulation Fair Discloser required stricter procedures of disclosing information, which can drive up the cost of being listed.

2.The Economics of Scope Hypothesis

According to Gao, Ritter, and Zhu (2013), another important factor of the decline is the economics of scope. Considering the cost of control dilution when going public and the facts that the process of IPOs may be too long for the new start-ups to bring products to the market, going public may no longer be more favorable than to be acquired by a strategic investor. What’s more, operating as a part of a larger corporation could provide extra edges for new companies to compete in the market.