political money contributions of us ipos dec 01 · this lobbying investment came complementary to...
TRANSCRIPT
Political Money Contributions of US IPOs
Dimitrios Gounopoulos1, Konstantinos Kallias
December 2013
Abstract
We produce the first study to explore the effect of political donations on IPO
performance. Employing a large and comprehensive sample of US IPO deals, we provide
evidence that monetary contributions to politics pay off on the floatation day by means of
significantly less underpricing. With much of the literature attributing to the merits stemming
from ‘political connections’ a contingent character, our research shows how a lister can reap
immediate and measurable benefits by signaling access to Congress. Given the contribution
alternatives, political donations may fulfill their role as a signaling mechanism upon a carefully
crafted strategy, only. This necessitates spending on both lobbying and PAC campaigns and
further caution for PAC recipients’ affiliation. In devising the optimal spending pattern, we find
that the effect on IPO return is maximized by targeting candidates identifying with the
Republican Party, representing the firm’s State and exhibiting the greatest geographic
dispersion in case of non-local candidacies. Notably, we register no incremental effect for
Congress Chamber affiliation.
Keywords: Initial public offering; IPO underpricing; Political connections
JEL classification: G10, G14, G39.
Dimitrios Gounopoulos is from School of Business, Management and Economics, University of Sussex; Kostadinos
Kallias School of Business, Management and Economics, University of Sussex;
2
Introduction
In the last week of October 2013, with barely 15 days remaining to the planned IPO,
Twitter Inc was intensifying effort to finalize a price range for its offering. Interestingly, the
firm chose this busy week to file its first lobbying report. The issues lobbied for comprise a
long agenda, mainly, pertaining to consumer matters, foreign relations, technology and
copyright. This lobbying investment came complementary to Twitter’s newly formed federal
political action committee (‘Twitter#PAC’) in a timely and coordinated effort to reach
Washington just before the company’s equity reaches the New York Stock Exchange.
Twitter, hardly pioneered the practice of political money spending in light of an imminent
IPO. The rival social media network, Facebook, also established its own political action
committee in the year preceding its IPO and, within a similar time frame, Google began
contributing to lobbying.
While the list of prospective issuers with a record of political money contributions
(PMC) goes on, the corporate finance literature has yet to draw the line to IPO performance.
Considering the numerous studies advocating the information flow, or signaling, in favor of
the least informed party in an IPO sale (e.g. Beatty, (1989); Megginson and Weiss, (1991);
Carter et al., (1998); Certo et al., (2003); Chemmanur and Paeglis, (2005) and Francis et al,
(2010)), it is surprising that PMC activity has not been explored as a means of the firm to
communicate access to the highest echelon of Government. The present study explores the
impact of such cash flows on a company’s IPO endeavor by raising questions of broader
public interest. Is the level of a firm’s PMC spending a suitable proxy for ‘political
connectedness’? If yes, do PMC mitigate uncertainty low enough for investors to require
significantly lower premia for their capital? Further, how do the two main PMC types,
namely lobbying and PACs, compare in terms of their signaling value and overall effect on
the IPO process? Finally, which groups of recipients should PMC firms be targeting at in
terms of political party (i.e. Democrats or Republicans), House (i.e. Representatives or
Senators) and US State affiliations? After all, is there such a thing as an ‘ideal’ PMC
strategy?
In an important departure from prior studies that focus on the potential benefits
accruing to public firms maintaining connections with prominent political figures (see, e.g.,
Cooper et al., 2010; Ramanna and Roychowdhury, 2010; Yu and Yu, 2010 and Chaney et al.,
2011), we investigate new issuers’ possibility to mitigate some of the uncertainty burden in
the going public process by means of political donations. We conjecture that contributions to
3
lobbying and PAC campaigns, within a reasonably short period before the floatation day,
constitute a time-and-cost effective way to signal firm’s ‘political connectedness’, even as a
work in progress. Being both traceable and publicly available, a record of PMC activity can
be plausibly associated with access to the upmost decision-making bodies. As a consequence,
IPO investors confide in the firm’s ability to maneuver with less friction in the institutional
environment and require smaller premia for purchasing its equity. This means that the listing
firm can hit the ground running as a public company, having left as little money on the table
as possible during its IPO day.
To test our conjecture, we assemble a large and comprehensive sample of US IPO
deals spanning the period 1 January, 1998 to 30 June, 2013. We manually investigate each
firm in the archives of the US Federal Election Commission (FEC) for evidence of PMC
activity within a period of 5 years prior to the listing date2. This way, we come up with our
special sample of interest, PMC firms. Comparing PMC firms’ mean underpricing of 19%
with the rest of the firms’ mean underpricing of 29%, we obtain strong preliminary evidence
for our hypothesized effect of political donation on IPO returns. Most importantly, assessing
the fundamentals of PMC firms, we find these issuers to be associated with superior quality
as proxied by market share, profitability, leverage, and years of operational experience. It
becomes, thus, apparent that PMC firms rather than seeking a life jacket in politics, they are
involved in order to manage, promptly, for the legal and institutional environment risks lying
ahead.
Our empirical findings show that this strategy becomes discernible by market
investors and pays off on the IPO day. Regressing underpricing on the level of PMC activity,
we confirm the inverse relation; lobbying money, PAC contributions and any combination of
these two PMC routes result in leaving significantly less money on the table during the first
day of trade. The evidence from our special PMC firms’ sample is even more compelling.
Having registered the direction of the relation, we conduct further testings in order to identify
the spending manner producing the most constraining effect upon underpricing. Interestingly,
we find that lobbying expenditure alone, without the support of PAC money, will, simply, not
do the job. Firms that realize the least underpricing in the going public process have
employed a mix of lobbying and PAC spending. On these grounds, we conclude that PMC
activity in order to fulfill its role as a signaling mechanism needs to be both sizable and
2 We expect the effect of PMC on IPO performance to be more pronounced with increased time proximity to the IPO day. Approximately, 81% of PMC firms have exhibited their spending within the 12-month period preceding the IPO. In our robustness checks section we also test the validity of our results in this special sub-sample.
4
targeted. Lobbying contributions cater for the size factor by being uncapped. PAC
contributions entail the more personalized dimension by entering directly into candidates’
campaign coffers.
In addition, we take advantage of the traceable nature of PAC contributions (as
opposed to lobbying opaqueness) and study the differential effect on IPO return by the
various groups of PAC money recipients. First, we split across party lines and, in consistency
with the popular view surrounding the Republican Party as the ‘pro-business party’, we find
that IPO firms contributing more to Republican campaigns realize the least underpricing.
Second, we draw a distinction between the two Congress Chambers and test for an
incremental Senate effect. The findings, in this case, run contrary to common wisdom which
attaches special prestige to US Senators. PAC contributing firms need not consider a
candidate’s particular electoral race; sponsoring campaigns for the House of Senate does not
signal any different, in the IPO process, than sponsoring campaigns for the House of
Representatives. Third, we show that an effective PAC strategy prioritizes candidates
representing the State of IPO firm’s headquarters, even more so for firms with an extended
operational base in the home State or heavily relying on government contracts. Outside the
local State’s borders, firms attain the lowest IPO return with contributions to candidates
exhibiting the largest geographical dispersion in terms of the US States they represent.
To further corroborate our findings on the information revelation role of political
donations, we visit the book-building period. Following both the magnitude and the direction
of filing price revisions, we explore how a PMC record weighs in the derivation of the
offering price. According to the information production theory (as in Benveniste and Spindt,
1989 and Hanley, 1993) a greater deal of positive information disclosed by informed
investors triggers more upward revisions. Intuitively, it follows that a publicly available
record of PMC activity levels the informational playing field and mitigates the need for
extracting costly private information. We, therefore, conjecture that apart from first-day
market return, PMC spending also constrains the extent of upward filing price revisions.
Indeed, running a battery of regression tests, we confirm the negative association of PMC
level to underwriter’s revisions. Political donations, thus, are not only associated with
market-based returns but also constitute an input in the IPO valuation process per se.
To test the validity of our results we employ a series of robustness checks. First, we
validate our proposed effect of PMC on underpricing by rerunning all tests excluding the
firms with PMC activity dating older than 12 months from the IPO time. Second, we
substitute dollar value with number of actual recipients for all of our PAC contribution
5
variables. Registering a similar constraining effect on IPO returns, we confirm that political
donations are a suitable proxy for ‘political connectedness’, i.e. the market weighs more
proximity to people, with the precise dollar magnitude of contributions being of lesser
importance. Third, we test and confirm our no endogeneity assumption.
This study makes important contributions to IPO and corporate finance literature
while addressing concerns of broader public interest such as the symbiotic relation between
the corporate world and politics. First, we illustrate that a firm’s political donations,
commonly associated with uncertain and indirect benefits, generate an immediate and
measurable gain in the special context of an IPO. No matter the precise dollar magnitude,
such contributions have a profound effect on mitigating issuer-specific uncertainty; for
market investors are shown to factor in a firm’s Washington strategy and consent to provide
their capital at a lower return. Second, we contrast lobbying and PAC spending, as the two
main PMC types, and disentangle their effect on IPO performance. Highlighting special
strengths and weaknesses for each strategy, we make a case about their complementary
nature towards an effective signaling mechanism. Third, differentiating among PAC money
recipients by Congress Chamber, political party and US State affiliation, we devise an
optimal target group for the most constraining effect upon underpricing. The implications for
prospective listers are unambiguous; a dollar spent on PMC activity, in the pre-IPO period,
saves many more on the actual listing day. Sure enough, uncertainty-driven underpricing can
be fought with alternative tools; most commonly, marketing campaigns. In that case,
however, the advantage of PMC practicing would be twofold as: (1) it entails a dramatically
lower investment; and (2) any likely benefits are expected to accrue over long past the IPO.
Our study relates to the works of Beatty (1989), Megginson and Weiss (1991), Carter
et al., (1998), Certo (2003), Faccio (2006), An and Chan (2008), Francis et al. (2009), Cooper
et al. (2010), Ramanna and Roychowdhury (2010), and Yu and Yu (2010). A focal point in
the IPO literature has been issuers’ effort to overcome what Certo (2003) calls “the market
newness liability”, i.e. the perceived uncertainty surrounding their future prospects. The
relevant studies confirm that firms, exhibiting notable resourcefulness, employ a plethora of
means in order to signal quality. In a non-exhaustive list of such works, issuers claim prestige
for themselves by: (1) hiring reputable auditors (Beatty, 1989), (2) inviting VCs with a
proven record of successful IPOs (Megginson and Weiss, 1991), (3) employing top-notch
underwriters (Carter et al., 1998), (4) infusing the management team with prestigious
executives (Certo, 2003), and (5) seeking a credit rating (An and Chan, 2008). Expanding
further this literature, we produce the fist study to relate political donations to IPO
6
performance and we propose PMC activity as an alternative signaling mechanism. Another
strand of literature stemming from the interplay of politics with business (Faccio, 2006;
Cooper et al., 2010; Ramanna and Roychowdhury, 2010 and Yu and Yu, 2010), draws
evidence from firms with several years of experience as public corporations that have,
similarly, built their connections over a large time span. Our study, instead, advocates firm’s
possibility to promulgate such connections in the pre-IPO period, so that it cashes in the
benefits as early as its first day of trade.
The rest of the paper has the following structure. Section I discusses the relevant
literature. Section II develops our hypotheses. Section III provides insight of the alternative
PMC types and describes our sample. Section IV examines the effect of PMC activity on the
going public process. We test the robustness of our results in Section V. Finally, Section VI
concludes the paper.
I. Related Literature
A. Theoretical Framework
The price discovery for new equity offerings is an inherently uncertain process. The
relevant literature invariably quantifies uncertainty magnitude by means of the listing day
market performance. Since the seminal works of Stoll and Curley (1970), Logue (1973) and
Ibbotson (1975) have revealed a definite pattern of abnormal positive returns, a plethora of
theories attempt to explain the conundrum of IPO first-day return, or underpricing.
Information asymmetries between the various parties involved in the IPO process serve as a
focal point for most explanations offered. Thus, Rock (1986) and Beatty and Ritter (1986)
suggest that in light of a de facto informational disadvantage, risk averse investors are
inclined to push for a discount price. At the same time, effective book building requires
unbiased feedback from engaged investors and, if available, private information; this critical
input to IPO pricing comes at a cost, to account for which, underwriters need to mark the
offer price downwards (see Benveniste and Spindt, (1989); Benveniste and Wilhelm, (1990),
and Spatt and Srivastava, (1991)).
Another strand of literature, also stemming from the asymmetric information
framework, assigns value to underpricing and conjectures that issuers may proactively allow
for it. Far from the market friction view, Welch (1992), Habib and Ljungqvist (2001) and
Demers and Lewellen (2003) consider a low offer price, under conditions, as a cost-effective
7
marketing tool which will attract investors and, ultimately, recoup any money left on the table
during the IPO day. Chemmanur (1993) adds increased analyst coverage to the merits of a
high initial return while a number of studies assessing the legal implications for IPO issuers,
highlight the lawsuit deterrence effect of a strong first-day close (Hughes and Thakor (1992),
Drake and Vetsuypens (1993), Lowry and Shu, (2002)).
Lastly, Loughran and Ritter (2002), making a notable turn from signaling to prospect
theory, describe underpricing as a rather harmless vice suggesting that the initial investors,
already being in a prosperous state by the amassment of IPO proceeds, rarely reckon the
marginal prosperity they forego leaving money on the table. Yet, it is Jay Ritter, in his
website, to estimate the global cost of IPO underpricing at $135.12 billion, over the period
1998-2012, and, thus, it is the mere magnitude of this amount to foster skepticism against any
behavioral explanations assigning a lesser importance to efficient pricing.
B. Political Connections as a Value Adding Strategy
The value adding component of corporate political connections is explored in
literature via two main routes; that is either tracing company insiders’ interpersonal
relationships or applying a ‘follow-the-money’ approach focusing on cash flows directed
form corporate pockets to politics.
Within an international or cross-country context, poor data availability or deliberately
opaque interrelations between corporate world and local governments typically leave no
option but to directly investigate the individual profiles of corporate officials; in which cases,
companies derive their connections through directors either actively engaging in politics or
being closely related to others who do. Faccio (2006) applies this methodology in a
comparative study of 47 countries and finds that connected firms are able to sustain larger
market shares while this benefit may not necessarily be reflected on the company’s bottom
line (also Boubakri et al. (2008)). The study also observes that connected firms afford to
operate with significantly more leveraged capital structures as they enjoy preferential access
to debt financing (e.g. by lenient debt covenants), even though, there is no evidence of
incurring a smaller interest expense than their peers. Chaney et al. (2011) assessing the
reporting quality of more than 4,500 firms in 19 countries reach the conclusion that
politically connected firms are not penalized for consistently delivering subpar output.
Apparently, in light of political reach, accounting data shrinks in value relevance.
Tracing political connections in the US at the director’s level similar to the above
8
studies would likely produce less enlightening results. In the Faccio (2006) database out of a
total of 6,007 US firms examined, merely 13 firms qualify to be classified as politically
connected. US-centering literature circumvents this research limitation by expanding the
concept of political connectedness in order to encompass corporate expenditure for political
purposes (overwhelmingly coming in the form of lobbying or PAC contributions). Within
this methodological framework, Chen et al. (2010) and Cooper et al. (2010) set out from
different starting points, lobbying spending and PAC contributions, respectively, to meet into
the same conclusion; political money spending firms enjoy, robustly, superior financial and
accounting returns. Besides performance, political money expenditure has been documented
to facilitate more questionable ends. Indicatively, Correia (2012) finds that political money
contributions lower the probability of an SEC enforcement action and even if the firm is
subjected to one the financial penalty is expected to be considerably moderate. Yu and Yu
(2010) take this argument one step further and stress the immunity to fraud that lobbying may
provide “firms that lobby on average have a significantly lower hazard rate of being detected
for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by
regulators”.
C. Political Connections in the Going-Public Process
Recent evidence from China shows that political connections can play a decisive role
towards a successful IPO. For example, Fan et al. (2007), focusing on the (partial)
privatizations of firms with CEOs incumbent or past government officials, record
significantly less underpricing during the floatation day. Corroborating this research, Francis
et al. (2009) discuss on the threefold benefit that a strong association with the government
entails by supporting premium valuations, imposing discipline on first-day returns and
reducing issuance costs all the way. Yet, the distinct character of the Chinese economy
cripples the robustness of these findings in a cross-country framework. Resorting to the
international privatization literature, the studies of Jenkinson and Mayer (1988) and Perroti
and Guney (1993) find that state-owned enterprises (SOEs) induce greater underpricing than
the average private company issuer; a conjecture that is challenged in Dewenter and
Malatesta (1997). Even so, any links to be drawn from SOEs to the typical corporate issuer
remain, at best, dubious, as the ex ante uncertainty that investors face is fundamentally
different when the state is a counterparty.
9
Within a US context, Colak et al. (2013) explore the upset factor that gubernatorial
elections impose upon equity issuance activity. In a state (than federal) level, they find the
12-month period preceding gubernatorial elections to attract weak IPO activity by local
issuers. The brave few, systematically, undergo a downward mean revision of their offering
price as the political uncertainty casts its shadow on the book-building process. The
reservation sentiment extends equally to the floatation day and moderate investors’ demand
allow for moderate returns, only. The present study, takes this research one step further by
exploring a framework in which prospective issuers are not simply carried away by political
uncertainty but plan well before the IPO time and proactively establish links to politics via
monetary contributions. Within this context, we conjecture that elections need not be an
external shock but a window of opportunity for prospective issuers to invest in political
reach; and, even though, the actual benefits of these contributions can be vague, in nature,
and accrue over many fiscal periods post-issuance, their transparent and easily-traceable
character can signal to market investors the company’s ability to maneuver smoothly within
the institutional environment.
II. Hypotheses Development
Since the seminal work of Spence (1973) made a case about the incremental value of
signals in mitigating labor market frictions, the corporate finance literature resorts extensively
to signaling theory in order to explain firm’s behavior in light of informational asymmetries.
On these grounds, high quality firms have been claimed to communicate above par financial
standing by means of a leveraged capital structure (Ross, (1977)), or dividend issuance
(Bhattacharrya, (Bhattacharya 1979)). In either case, the signal is both readily identifiable
and costly to imitate, fulfilling, also, Certo’s (2003) two basic requirements pertaining to an
efficient signal. The going public process generates inherent informational disparities and,
thus, a unique testing environment for signaling practices. Carter et al., (1998) contend that
IPO firms hire prestigious underwriters with the implicit purpose of gaining in prestige
themselves. For the same purpose, issuers favor reputable auditors (Beatty, (1989)) or try to
affiliate with established venture capital firms (Megginson & Weiss, (1991)).
The long list of signaling mechanisms employed by IPO firms goes on in the
literature, yet, the firm’s own political activity is, surprisingly, excluded from it. Addressing
this gap, our study holds that a firm’s political footprint, evidenced by political money
10
contributions in the pre-IPO period, should, similarly, alleviate ex ante uncertainty by giving
up proximity, if not influence, to legislative and other key decision-making bodies.
Consistent with Ritter and Welch ((2002)) stating that “all theories of underpricing based on
asymmetric information share the prediction that underpricing is positively related to the
degree of asymmetric information”, we contend that a traceable and publicly available record
of PMC activity should also limit first day returns.
H.1. Underpricing is negatively related to the aggregate dollar level of contributions made to politics
by IPO firms.
Considering the alternative routes available to reach political coffers, we expect PAC
spending to exert direct influence on IPO performance due its personalized nature (also
registered in Durden et al., 1991; Stratmann 1991, 1995, 1998 and Kroszner and Stratmann,
1998). On the other hand lobbying, by being uncapped, comes in multiples of a typical PAC
contribution (see also Descriptive Statistics). As such, it entails the most substantial cash
flows made by corporations to the Congress Chambers. We conjecture that PMC, in order to
constitute an effective signaling mechanism, necessitate contributions that are both sizable
and strategically targeted. Therefore, a blend of lobbying and PAC money is required for both
leveraging the strengths of each contribution type and signaling ‘political connectedness’ in
the most unambiguous manner.
H.2. The least underpriced IPOs are more likely to have engaged in both lobbying and PAC
contributions in the pre-IPO period.
If lobbying and PAC contributions are complementary PMC types, the firm has to
devise an efficient portfolio of PAC recipient candidates. Considering the cash-constrained
environment in which a typical pre-IPO firm operates, the candidates’ targeting in terms of
House, political party, and US State affiliation merits further study.
The Senate is commonly surrounded with greater prestige than the House of
Representatives. Two plausible reasons can be Senate’s filibuster prerogative (the right to
delay or postpone a proposal by extending debate indefinitely) as well as its right “to advice
and consent” to major presidential appointments (U.S. Const. Art. II, sec. 2). Yet, the
majority of studies simply point to the size differential between the 100 Senatorial seats and
the 435 (voting) seats available in the House of Representatives in order to make a case about
11
the Senate’s prevalence (e.g. Grier et al., 1990 and Grier and Munger, 1993). Given the
above, we expect additional prestige accruing to firms contributing more generously to
Senate candidates. In turn, the merits of being associated with the more privileged Congress
Chamber should be apparent on the IPO day.
H.3.a. Underpricing decreases with larger PAC contributions to Senate rather than House
candidates.
Disentangling the effect of PAC contributions across political party lines is a more
complex task. The relevant studies highlight firms’ strategy to target incumbents, irrespective
of party affiliation, converging to the conclusion that firms spend for ensuring access rather
than influencing the elections outcome or other ideological reasons (Stigler, 1971; Grossman
and Helpman, 1994 and Milyo et al., 2000). Thus, Lowery and Brasher (2004: 133) explain
that “most of the economic sectors do not put all of their eggs in one partisan basket. They
give to both parties; or, more specifically they give to incumbents, which means that they
give to both parties”. Given the corporate donors’ indifference, literature has turned its
attention to the partisan orientation weighing, potentially, more favorably in the US markets.
For instance, some early evidence from Niederhoffer et al. (1970) and Riley and Luksetich
(1980) associates a bullish market with the aftermath of Republican victories. At the firm
level, however, the evidence is mixed. Goldman et al. (2009) tracing corporate political
contributions from the 2000 election cycle refute altogether an association of the elections
outcome with firm’s post-election market returns. On the contrary, Shon (2010), using
evidence from the turbulent period of the 2000 Florida recount, evidences significant relation
between campaign donations and stock performance. With a much broader time window,
Cooper et al. (2010) conclude that PAC contributions have a strong positive relation with
both market and accounting measures of performance, documenting an incremental
contribution effect for Democrats. Overall, considering the puzzling empirical findings, we
hypothesize that a recipient candidate’s partisan camp is associated with special signaling
value in the IPO process. However, contrary to the popular view, Republicans may not be,
necessarily, perceived by the market investors as the definite ’pro-business’ party.
H.3.b. Underpricing is associated with larger PAC contributions to Republican rather than Democrat
candidates
12
Faccio and Parsley (2009), in a provocative manner of pinpointing the interdependent
relations between firms and local politicians, register the decrease in value for firms
headquartered in a politician’s home town upon the announcement of her unexpected death.
Within a US context, Roberts (1990) had already witnessed a similar effect for Washington-
located firms subsequently to Senator’s Henry" Scoop" Jackson death in September of 1983.
Cooper et al. (2010) confirm the positive impact of PAC money on firm’s performance with a
larger number of candidates representing the donor’s state. The literature, thus, accords with
the intuitive appealing hypothesis for a symbiotic relation between the local pillars of power.
Government contracts, labor union politics and state-level authorities, for instance,
necessitate interventions from same state politicians, not less than the latter ones require
corporate contributions in order to come into office in the first place. We therefore,
conjecture that candidates representing the state of the IPO firm should rank high in the PAC
recipients list, especially for firms maintaining an extended operational base in the
headquarters’ state.
H.3.c. Underpricing decreases with larger PAC contributions to candidates from the state of firm’s
headquarters.
Underpricing is the dominant surrogate for investor demand in IPO literature but need
not be the only proxy. Price revisions in the book-building process (i.e. the percentage
difference of the offering price from the midpoint of the initial filing range) capture
underwriter’s effort to gauge relevant feedback from informed investors. Information
revelation, however, comes at a cost. As per Cornelli and Goldreich (2001, 2003) and
Aggarwal et al. (2002), underwriters compensate positive news about a firm’s prospects by
means of the allocation of under-priced shares. Alternatively, investors lack any incentive to
disclose their private information. Thus, the information production theory (as introduced by
Benveniste and Spindt, 1989 and confirmed by Hanley, 1993) predicts that the extent of price
revisions increases in proportion with informational asymmetries. On these grounds, we pose
that a publicly available record of PMC activity, levels the informational playing field and
mitigates the need for extracting costly private information. Ceteris paribus, PMC activity
should inversely relate to filing price revisions.
H.4.Filimg price revisions are negatively associated with the aggregate dollar level of contributions
made to politics by IPO firms.
13
III. Data and Sample
A. Sample Selection Criteria
To assemble our sample we retrieve information from the Securities Data Company
(SDC) covering the entire population of IPOs that have been floated on US exchanges for the
period 1 January, 1998 to 30 June, 2013. Consistent with prior literature (e.g. Loughran and
Ritter, 2002) , we eliminate those IPOs priced less than $5 per share, limited partnerships,
reverse LBOs, ADRs, and foreign issuers whose shares may be already trading in local
markets. In addition, even though we allow for financial firms, we exercise caution not to
include closed-end funds, REITs, royalty trusts and special purpose investment vehicles. To
this end, we do not consider firms with SIC codes between 6723 and 6999 as well as
companies which even though bypass Thomson Reuters filters for closed-end funds, they still
operate as such. At last, we restrict corporate spin-offs; these firms have typically been parts
of large, mature businesses and, thus, entail considerably less uncertainty than the average
issuer. The remaining sample is merged with the databases of Compustat and the Center for
Research in Security Prices (CRSP) from which we obtain IPO firms’ accounting
fundamentals and aftermarket performance, respectively. With these interventions, we end up
with a final sample of 1,578 unique IPO deals.
We investigate political money spent by IPO firms within a time frame of up to five
years before the IPO date by means of lobbying expenditure and / or PAC contributions. This
methodology generates our special sample of interest of 273 IPO companies with PMC.
Lobbying expenditure data comes from the files of Center for Responsive Politics
(CRP). CRP derives information directly from the semi-annual lobbying disclosure reports
filed with the Secretary of the Senate’s office of Public Records (SORP) and initiates
coverage of corporate lobbying in the year of 1998 (inclusively). Matching the IPO deals
with the CRP database, we are able to identify 244 IPO firms that have reportedly engaged in
lobbying.
We utilize as a source for PAC contributions data the Federal Election Commission
(FEC) electronic archive. To make the most out of the enhanced transparency that PAC
money offers compared to lobbying expenditure we manually search for each IPO firm
within the “Candidate Master” and “Contributions to Candidates from Committees” files so
that we capture, besides the PAC timing, the detailed profiles of the cash flow recipients
(party affiliation, house membership, state of origin etc). Our search yields 89 IPO firms that
14
have contributed to PACs.
Notably, the discernible pattern for both lobbying and PAC spender firms is towards
multiple election cycle contributions. More often than not, once firms have contributed any
form of political money, they tend to repeat their contributions in the election cycles to
follow, with significant consistency as to the contribution type and magnitude. Thus, out of
the 244 lobbying IPO firms, 184 firms have engaged in multiple lobbying activity while
almost the totality of PAC IPO firms (81out of 89) have supported candidacies in prior
period(s).
B. The Two Alternate Routes to PMC: Lobbying & PAC
Lobbying and PAC contributions comprise the two main avenues available for US
corporations to reach to the Congress chambers. The decision to engage in either of the above
activities is made by a firm’s top-echelon executives.
Lobbying is the prevalent means in terms of both frequency and dollar magnitude of
contributions by which US companies interfere in the making of politics (de Figueiredo and
Richter, 2014). A dollar spent in lobbying aims to advocate firm’s perspective about the
institutional framework it operates. As such, lobby expenditure, rather than being directed at
specific politicians, pertains to the essence of the policy making process per se. The fact that
lobbying money does not enter candidates’ campaign coffers, makes lobbying a blurred
proxy for ‘political connections’ traceable down to the individual level. For instance, the
disclosure document acknowledging a lobbying contribution briefly mentions that the firm
lobbied the “U.S. House of Representatives” or the “U.S. Senate.” Yet, the contribution
amount (publicly disclosed under the Lobbying Disclosure Act of 1995) evidences the level
of firm’s political involvement.
PACs (political action committees) with the explicit purpose of supporting or fighting
against a candidate’s political campaign are commonly set up by firms within election cycle
periods. The firm is eligible to provide for the PAC’s operating expenses but may not engage
in additional financial support. For this purpose, the firm invites solicits key stakeholders
(management, employees, and stockholders) to contribute. Most U.S. studies look at PAC
contributions as a proxy for political connections (see Milyo et al., 2000 for an overview of
these studies).
15
C. Descriptive statistics & sample identification
Table 1 provides a preliminary description of our full sample (N=1,578) of companies
as well as the subsample (N=273) of politically connected firms. The period 1 January, 1998
to 30 June, 2013 spans 8 elections cycles which we set as time frames for the IPO deals. With
this grouping, we show that the number of PMC firms need not fluctuate in proportion with
overall IPO activity. For example, 2004-2005 was the election cycle with the most PMC
firms (60) but the total IPOs (271) were almost half of the IPOs in the1998-1999 cycle (465).
The latter cycle, coinciding with the bubble period of late 90s’, gave rise to the majority of
IPOs (29.47% of our full sample), but, notably, the number of PMC firms (30), from that
period, equals the number registered in the most recent election cycle of 2012 - 30 June,
2013. There is, thus, evidence that the numbers of issuers contributing money to politicians
close to the IPO time is on the rise.
Breaking down further by the Standard Industrial Classification (SIC) code we find
most PMC firms (34.8%) to fall within the manufacturing division followed by the service
division (26.74%) and finance, insurance and real estate division (15.02%). These findings
appear plausible in light of the heavy regulatory frameworks accompanying a lot of industries
within the above divisions (see Appendix A). On the contrary, divisions experiencing
minimal regulations are more frugal towards PMC activity (e.g. wholesale and retail trade
division accounting for a mere 5.49% of total PMC firms). Intuitively, then, firms most
directly affected by legislation are inclined to make payments towards the legislators more
frequently.
This trend also reflects on the third panel of Table 1. PMC firms compared to full
sample are less likely to be associated with Internet or technology, venture capital financing,
and the NASDAQ exchange. Yet, 29.30% of PMC firms come from regulated industries
while the respective percentage for the full sample drops to 21.36%. Lastly, Table 1 assesses
the market value of the two samples in terms of both market capitalization and Tobin’s Q
(taken as market capitalization over the replacement cost of assets). Measured in market
capitalization, PCM firms worth 3 times more ($ 2,441 million) compared to the full sample
mean ($ 835 million). Yet, PCM firms are not overvalued as proven by a lower Tobin’s Q of
2.33 compared to the full sample Tobin’s Q of 2.87.
Table 2 provides basic descriptive statistics and mean comparisons between IPOs
with PMC sample (N=273) and IPOs without PMC sample (N=1305) for key variables used
in this study. Panel A offers preliminary evidence in support of our main hypothesis that
16
PMC firms experience less underpricing. In numerical terms, IPOs with PMC are
underpriced, on average, by 19% compared to 29% for IPOs without PMC, and the difference
is significant at the 1% level.
Panel B reports the descriptives for the PMC variables used in this study. The mean
PMC expenditure (measured by aggregating any spending for lobbying and PAC) reached $
300 thousand while the median $ 90 thousand. The implied skewness can also be attributed to
the fact that lobbying contributions are uncapped. The mean lobbying contribution for the
IPOs with PMC sample has been about $ 270 thousand with a median of $ 60 thousand and a
maximum as high as $ 9.57 million that can be traced to General Motors Co and the 2010-
2011 election cycle. The mean PAC contribution for the IPOs with PMC sample at $ 30
thousand seems to be dwarfed by lobbying spending, yet it is important to remember that this
amount ends up directly at candidates’ coffers. In addition, PAC contributions need not be
small. Notably, UPS, in the election cycle 1998-1999, spared on PACs $ 1.53 million. PAC
contributions, as is the case with lobbying contributions, typically tend to be repeated by
PMC firms over multiple election cycles. Interestingly, the correlation of the two different
types of PMC is a modest 0.47 which reveals that lobbying and PAC money do not,
necessarily, come out of the same pockets.
Tracing PACs down to the recipient level, we obtain further insight as to the targets of
these contributions. First, the mean PAC contribution towards the Congress is $ 20 thousand
or double the size of PAC contribution towards the Senate. The same means apply for PAC
contribution towards the Republican ($ 20 thousand) and the Democratic party ($ 10
thousand). In total, PMC firms support PACs for about 12 candidates representing 4 different
US States. As for the spending manner, ‘lobby only’ firms dominate those active in ‘both
lobby and PAC’ and even more so PMC firms exhibiting ‘PAC only’ contributions.
Panel C sheds lights on the individual characteristics of issuers. On a comparative
basis, PMC firms are considerably larger organizations as evidenced by gross proceeds ($
354 million), total assets ($ 4,483 million) and revenues ($ 1,514) which all score multiple
figures compared to the mean values of the IPOs without PMC sample ($ 61 million, $ 301
million, and $ 156 million, respectively). They also deliver superior profitability (proxied by
both return on assets and earnings per share), rely less on leverage, and are less likely to have
resorted to venture capital financing. PMC firms less often come from the Internet or the
broader technology sector and more often from regulated industries. More characteristically,
PMC firms have been longer in business with a mean age close to 25, or ten years more than
the average firm from the IPOs without PMC sample. Interestingly, the credit crunch period
17
of 2007-2009 witnessed more PMC firms than the bubble ‘dot.com’ period of 1998-1999 in
spite of record IPO activity in the latter period.
Tables 3 and 4 take advantage of the enhanced transparency and traceability that PAC
contributions offer providing greater detail on the subsample of PAC contributing firms
(N=89). Sampling as such, the mean PAC contribution per election cycle becomes $ 88,108
with a median of $ 21,000. In terms of candidates, there are, on average, 38 PAC recipients
per election cycle with a median of 12. Republicans attract a mean contribution of $ 54,385
(median $ 15,000) which is to be split among 23 candidates (median 8). Democratic
campaigns come second in PAC spenders’ preferences with a mean of $ 33,380 (median $
6,500) for 15 candidates, on average (median 4). The mean contribution to candidates for
Congress (regardless of party affiliation) is $ 63,538 (median 13,550) for 29 candidates, on
average (median 9). Respectively, the mean contribution to candidates for Senate is $ 24,570
(median 8,000) for 9 candidates, on average (median 4). Once these contributions, however,
are adjusted for the different number of seats available in Congress and Senate, (435 and 100,
respectively), it becomes apparent that Senate attracts both larger and more frequent
contributions.
Table 4 identifies the full activity of PMC firms both chronologically (per election
cycle) and geographically (per state). Over the eight election cycles under study, PMC firms
have channeled $ 73.5 million towards lobbying and $ 7.84 million to PAC, approximating a
1 to 10 dollar spending relation. The number of contributor firms varies each election cycle as
does the level of contributions. In fact, what confirms itself in each election cycle is the
universal nature of PAC contributions across the US territory. It is noteworthy that no US
state was deprived PAC money within the period of our study, even though some of the least
populous states experienced election cycles of zero PAC contributions (e.g. Vermont or
Wyoming). Unsurprisingly, the states targeted more heavily by PAC contributors are those
occupying the largest number of seats in the Congress (as each state is granted exactly two
seats in Senate). Therefore, California, New York, and Texas top the list of recipient states
with the amassment of $ 690.3 thousand, $ 478.3 thousand and $ 440.8 thousand,
respectively, over 1 January, 1998 to 30 June, 2013.
18
IV. Empirical Results A. The effect of PMC on IPO underpricing
Table 5 reports our empirical results explaining underpricing for the full sample of
firms (N=1,578). The dependent variable is the IPO-day return estimated as the percent
difference between the listing day closing price and the offer price. Among the regressors, we
include key variables that have been found in the relevant literature to account for much of
the variability in IPO returns. Specifically, we use:
Pre-IPO assets. A broad asset base offers firms increased visibility as larger
companies, inevitably, leave a bigger footprint within the investor community. Therefore, the
latter one can relate with more clarity to the firm and issuer-specific uncertainty diminishes.
Proceeds raised by the IPO is our alternative proxy for size.
Pre-IPO leverage. We estimate leverage as the ratio of pre-IPO total liabilities to pre-
IPO total assets. A high value of pre-IPO leverage is expected to impose discipline on
management consistent with the mechanisms described in Jensen (1986). Ceteris paribus, we
expect firms relying heavily on debt financing to leave less money on the table.
Pre-IPO ROA (return on assets) is defined as the pre-IPO net income over pre-IPO
assets. We choose ROA as a proxy for profitability. Firms consistently reporting a sizeable
accounting return should be associated with less uncertainty and, thus, lower first-day returns.
At the same time, the profitability, in the pre-IPO period, comes second to presenting a
convincing vision for sustainable profitability in the post-IPO period. At the extreme,
Trueman et al. (2000) find that, in the case of internet stocks, non-financial measures of
performance such as number of unique visitors and pageviews dominate net income in value
relevance. Consequently, we have mixed expectations about the sign of the ROA coefficient.
Venture-capital affiliation. Hsu, (2004) demonstrates how “VCs ‘extra-financial’
value may be more distinctive than their functionally equivalent financial capital”. Reputable
venture capital financiers, with a proven record of successful IPOs, lend credibility to their
investment portfolio firms. Also, Megginson and Weiss (1991), note that they are typically
there to stay as opposed to cashing out at the IPO time. This long-term horizon makes venture
capitalists extra cautious against any excesses on the amount of money to be left on the table
during the floatation day.
Underwriter rank pertains to the perceived quality of the agent underwriting the issue.
Carter and Manaster (1990) evidence significant underpricing by firms engaging prestigious
19
underwriters and attribute it to the positive signals that this strategy disseminates. Arguably,
an established underwriter would not risk impairing his reputational capital by facilitating an
offering of dubious quality.
Overhang, defined as the ratio of shares retained by pre-IPO shareholders to the total
equity given up in IPO (refer also to Bradley and Jordan, 2002), reflects the natural dilution
caused by the offering. The cost doe to dilution is incurred proportionately by all
shareholders who retain equity post-offering. Therefore, with a large number of new shares
(low overhang ratio), the costs increase making incentives to underprice less compelling.
Firm age is set equal to the years elapsing from firm’s incorporation day to the IPO
day. Prior literature frequently (Carter et al., 1998; Ritter, 1984, 1991; Schultz, 1993) uses
age as a surrogate for IPO firm’s risk. The conjecture is that firms with operations dating
back a larger number of years have proven their resilience against market swings and, thus,
constitute safer investments. Acknowledging the lesser degree of uncertainty surrounding the
long lived corporate organizations, we expect to record smaller underpricing in such cases.
Market return is estimated as the average return realized on the value-weighted CRSP
index over the last 20 days preceding the offering. It is a measure of overall market sentiment
prevailing at the time of the IPO, and as per prior research ((Hanley, 1993; Logue, 1973;
Loughran and Ritter, 2002; Lowry and Schwert, 2004), it is expected to positively relate to
underpricing.
Market condition controls capture the impact of the hot period of 1999-2000
(thoroughly described in Ljungqvist and Wilhelmand, 2003) and the 2007-2009 turbulence in
financial markets caused by the credit-crunch crisis.
Industry controls enter our model by means of indicator variables for technology and
Internet IPOs to account for the excessive underpricing that these firms typically experience
(e.g. Aggarwal 2002). We also use an indicator variable for Regulated to capture the potential
effect of operating in a regulated industry on the IPO return (refer to appendix A for industry
identification by regulatory environment). Lastly, we control for the exchange by means of a
NASDAQ dummy, as this has historically been the preferred marketplace for the majority of
IPOs.
Columns 1, 2, and 3 of Table 5 list the coefficients of regressing IPO returns
(underpricing) on the variables of political money (i.e., any combination of lobbying and
PAC contributions), lobby money, and PAC money as well as the covariates from the
literature discussed above. All of the variables of interest exhibit significance at the 5% level
and confirm the predicted (negative) sign. The political money coefficient, in column 1,
20
shows that a 10% increase in spending reduces underpricing by about 0.29%. In particular,
intensifying lobbying and PAC contributions by 10% results in a lower initial return by
0.28% (Column 2) and 0.55% (Column 3), respectively. The above results, even though small
in percentage terms, obtain substantial economic significance once viewed in conjunction
with the median political money expenditure which does not surpass $ 70,000 thousand.
The results obtained for the control variables accord with the relevant literature. Size,
proxied by proceeds, is significant at all conventional levels of significance and, inversely,
relates to underpricing. Similarly, the coefficient on age (significant and negative)
corroborates previous research showing long-lived companies to be associated with more
chances of survivorship and, thus, less uncertainty. Further, consistent with Bradley and
Jordan (2002), we register the constraining effect of ownership given, on underpricing, due to
high dilution costs. On the contrary, underpricing, significantly, increases with Internet and
technology stocks as per Ljungqvist and Wilhelm (2003). This explanation may, righteously,
extend to the coefficient (also positive and significant) on NASDAQ for being the preferred
listing place for technology issuers. Intuitively, the coefficient on the ‘DotcomPeriod’ is
positive and highly significant evidencing the excessive funds that has been left on the table
in the bullish period of 1998-1999. The fact that the overall market sentiment reflects on
initial returns is also captured by the coefficient on market return (positive and significant at
all levels). The positive and significant coefficients on venture capital and underwriter rank
contradict the findings from Carter and Manaster (1990) and Megginson and Weiss (1991)
but, are strongly aligned with the evidence from Beatty and Welch (1996), Loughran and
Ritter (2004), and Lowry and Murphy (2007). Lastly, we register no significant effect on
underpricing for firm’s leverage, return on assets and level of regulations confirming our
conjecture about the mixed signals that all of the above may disseminate to market investors.
In Table 6, we focus on the PMC sample (N=273) in order to gauge further the effect
of PMC related variables on underpricing. Including the same control variables as previously,
we now scale political money (Column 1), lobbying (Column 2), and PAC (Column 3)
variables by the amount of proceeds raised from the IPO in order to account for differences in
size. The coefficients on our variables of interest have now become significant at all
conventional levels of significance while maintaining their negative sign. Therefore, the
preliminary findings from the full sample have pointed to the right direction; the evidence
from the PMC firms’ sample fully supports the impact that a dollar invested in politics can
have on underpricing. In column 4, we run one additional regression in order to test the effect
of the geographic dispersion of PAC contributions measured by the number of US states that
21
their recipient candidates represent. This coefficient, too, turns out significant (p=5%), and
with the right sign (negative) alluding that PMC firms should plan strategically their spending
in order to reap the maximum benefits; a fact of paramount importance in light of the cash-
constrained environment in which the typical IPO firm operates.
B. The differential effect of lobbying and PAC contributions on IPO return
Having proved the mitigating impact of PMC on underpricing, we now turn our
attention to the various alternatives open to firms to exhibit PMC activity and seek to
determine if there is such thing as an optimal PMC strategy. Specifically, we ask whether
lobbying, PAC contributions or, any particular combination of the two, is rewarded by less
money left on the table or it is, rather, the mere involvement in PMC (no matter the chosen
route) that suffices to signal less uncertainty to investors. For this purpose, in Table 7, we run
three probit regressions with the dependent variable being the firm’s preferred spending
pattern. Column 1 is headed by the indicator variable ‘Bothlobbypac’ pertaining to firms
active in both lobbying and PAC contributions. Column 2 considers the same firms as in
column 1 but in the special sample of PMC firms (N=273) instead of the full IPO sample.
Finally, column 3 uses the categorical variable ‘Justlobby’ for those firms with a registered
lobbying, but no PAC, record.
The results disentangle the differential impact of lobbying and PAC spending on IPO
return. Interestingly, it comes out that only PMC firms employing both contribution types
reap the benefit of less underpricing. This is evidenced by a negative (and significant at
p=5%) coefficient on underpricing for the full as well as the PMC samples. Yet, Column 3
reports a positive coefficient on underpricing (also significant at p=5%) implying that
lobbying contributions, only, do not favor the issuer on the IPO date. It becomes evident,
then, that in the context of an imminent IPO, lobbying and PAC spending do not substitute
but complement each other. We speculate that the personal nature of PAC contributions
reinforces and guarantees more effective lobbying, in the sense, that it creates more ‘eager
ears’ for the issues the company lobbies for. Alternatively, lobbying, without the support of
PAC money, is perceived by market investors as a substantially riskier investment.
22
C. Devising an efficient PMC plan & targeting strategically for less money left on the table
With the above analysis concluding that any PMC strategy aspiring to reduce
underpricing should involve PAC contributions, we, subsequently, explore whether there is a
differential effect based on candidates’ individual characteristics (i.e. House, party and State
affiliation). To this end, on Table 8 Column 1, we regress IPO underpricing on the same
control variables and; (1) on an indicator variable set to 1 for PMC firms spending a larger
amount towards candidates from the Republican Party (2) an indicator variable set to 1 for
PMC firms spending more dollars on Senate candidates and (3) an interaction variable for
money to candidates representing the state of the PMC firm. The negative and significant
(p=5%) coefficient on the ‘RepublicanIPO’ confirms the ‘pro-business’ orientation that
traditionally surrounds the Republican Party reputation. The coefficient on ‘SenateIPO’ also
comes out negative but statistically insignificant. The Senate, despite being associated with
more prestige, does not give an edge over Congress consistent with the findings of Cooper et
al. (2010) as well as the US Constitution commanding all revenue and appropriations bills to
be originated in the House. On these grounds, Cooper et al. (2010) speculate that “firms may
find that it is more expedient to support House members, where potential firm value–
increasing actions may be more suitably created”. The (negative) coefficient on the
interaction term of ‘samestate*political money’ is significant (p=5%) demonstrating the
commonsensical conjecture that politicians representing the state of the IPO firm constitute
critical relational capital, especially for firms with extended operational base in the home
state.
Columns 2 and 3 assess the additional dimension of multiple PMC activity. The
variables of interest are indicator variables (‘multiPC’ in column 2 and ‘multiPAC’ in column
3) that are set to 1 for any firm possessing previous experience from the PMC arena.
The test in this case pertains to the timing of PMC and assesses whether a past record of PMC
is incrementally significant as a signal of established, long(er) lasting ties with politics or if it
is only the latest cash flows that are of any value relevance to IPO investors. The resulting
regression coefficients support the former over the later conjecture (old, established
relationships do matter). Yet, there is a somewhat puzzling angle given that ‘multiPC’
demonstrates significance at all levels while ‘multiPAC’ at p=10%. This finding, however,
may again hint to the previously shown market preference towards the combination of
contributions (i.e. both lobbying and PAC) rather than any specific contribution in isolation.
23
D. The effect of PMC activity on the book-building process.
Lastly, we test our hypothesis about the negative impact of PMC on filing price
revisions. To this end, we employ the full IPO sample to regress revision on political money
(lobbying or PAC) scaled by IPO proceeds. We use the same set of controls as previously.
The resulting coefficient on the ‘PMBYP’ variable (Table 9, Column 1), negative and
significant, confirms our predicted relation. We reiterate the same procedure in Column 2 for
the PMC firms’ sample. The association between revisions and political money spent by
dollar raised in IPO proceeds now becomes significant at all conventional levels of
significance. In order to further illustrate the direction of the relation (and treat outliers) we
run two probit regression with the dependent variable being the direction of the revision (1
for an upward revision, 0 otherwise) while we leave unchanged the regressors. The results in
Columns 3 and 4 for the full and PMC firms’ samples, respectively, corroborate the findings
from the OLS regressions. Thus, in light of a traceable PMC activity investors have less
positive information to reveal about the firm. This reflects in book building as increased
probability of a downward price revision.
V. Additional Robustness Tests
This far in the study, we have been assessing the phenomenon of IPO underpricing
applying ‘a follow-the-money’ approach tracing monetary contributions to politics. To test
the validity of our results, we replicate our main regression (Table 9) substituting the
variables of interest in a way that they express number of physical PAC recipients, instead of
the dollar value of PAC contributions. Thus, total recipients (Column 1), Republican
recipients (Column 3), Democrat recipients (Column 4), House recipients (Column 5), and
Senate recipients (Column 6) are all groups of candidates, proximity to whom is conjectured
to mitigate IPO uncertainty. Running five regressions, one for each of the above variables, we
obtain strong evidence pertaining to the robustness of our results. Specifically, all of the
regression coefficients are significant at all conventional levels of significance and confirm
the predicted (negative) sign.
Motivated by the numerous IPO performance studies documenting an endogenous
relation of underpricing with a plethora of covariates such as venture capital backing (Lee
and Wahal, 2004), litigation risk (Lowry and Shu, 2002) disclosure quality (Leone et al.
24
2007) executive option granting (Lowry and Murphy, 2007 and Chahine and Goergen, 2011),
we run the omitted-variable version of Hausman’s (1978) procedure in order to test our
assumption about the exogeneity of the PMC variables. The results (not tabulated) do not
provide sufficient evidence in order to reject the null hypothesis. We attribute the absence of
a simultaneous relation between underpricing and political donations to the highly
discretionary nature and modest size, typically, entailing these cash flows.
It has been well-documented that firms exhibit extraversion and seek to expand their
sphere of influence as they prepare to solicit equity financing. The fact that 81% of our PMC
firms have engaged in donations 12 months or closer to the IPO period reflects management’s
effort to fine-tune these cash flows with the listing project. We use this narrower PMC
sample characterized by the upmost proximity to the IPO and rerun all of our previous
testings. Once again, our findings remain intact.
We have decided to consider for our analysis PMC activity within a time frame of 5
years or more recent to the IPO time. We believe that cash flows made in even earlier
periods can hardly be associated with an issuer’s IPO strategy. A useful illustration would
entail the longest-tenured (6 years) representatives, i.e. US Senators. Given the staggered-
terms structure, one-third of the Senate seats are up for election every two years. Therefore, a
donation dating longer than five years may pertain to Senate’s oldest third, only. But even
this minority of incumbent Senators would be, by that point, amidst their new electoral
campaign requiring fresh funding.
VI. Discussion and Concluding Remarks
In the first study to relate a firm’s political donations record to IPO performance, we
show that issuers with a prior established record of political donations experience
significantly lower underpricing in the first day of trade. Being both traceable and publicly
available, a record of PMC activity can be plausibly associated with access to the upmost
decision-making bodies. As a consequence, IPO investors confide in the firm’s ability to
maneuver with less friction in the institutional environment and require smaller premia for
purchasing its equity. This means that the listing firm can hit the ground running as a public
company, having left as little money on the table as possible during its IPO day.
In response to the questions raised in the introduction the study shows that a PMC
record constitutes a suitable proxy for firm’s ‘political connectedness’ on the premise that it
25
is both substantial and traceable to specific politicians. To this end, the study makes a case
about the twofold nature of the effective PMC strategy as it necessitates lobbying expenditure
for size and PAC contributions for identification. In devising the optimal spending pattern,
we find that the effect on IPO returns is maximized by targeting candidates identifying with
the Republican Party, representing the firm’s State and exhibiting the greatest geographic
dispersion in terms of States’ representation in the case of non-local candidates. Notably,
there is no incremental effect for Congress Chamber affiliation.
Most importantly, assessing the fundamentals of PMC firms, we find these issuers to
be associated with superior quality as proxied by market share, profitability, leverage, and
years of operational experience. It becomes, thus, apparent that PMC firms rather than
seeking a life jacket in politics, they are involved in order to manage, promptly, for the legal
and institutional environment risks lying ahead. Consequently, we anticipate with genuine
interest future studies drawing evidence from the long-term performance of these IPOs in
order to determine how diversifiable, risks of this nature, truly are.
26
References Aggarwal, R., L. Krigman, et al. (2002). Strategic IPO underpricing, information momentum, and lockup expiration selling. Journal of Financial Economics. 66: 105-137. An, H. and K. C. Chan (2008). "Credit ratings and IPO pricing." Journal of Corporate Finance 14(5): 584-595. Beatty, R. (1989). "Auditor reputation and the pricing of IPO's." Accounting Review 64(4): 693-709. Beatty, R. and J. Ritter (1986). "Investment banking, reputation, and the underpricing of initial public
offerings." Journal of Financial Economics 15(1-2): 213-232. Beatty, R. and I. Welch (1996). "Issuer expenses and legal liability in Initial Public Offerings." Journal of Law
and Economics 34(2): 542-602. Benveniste, L. and P. Spindt (1989). "How investment bankers determine the offer price and allocate new
issues." Journal of Financial Economics 24(2): 343-361. Benveniste, L. and W. Wilhelm (1990). "A comparative analysis of IPO proceeds under alternative regulatory
environments." Journal of Financial Economics 28(1-2): 173-207. Bhattacharya, S. (1979). "Imperfect information, dividend policy, and ‘The bird in the hand’ fallacy." Bell
Journal of Economics 10: 259-270. Boubakri, N., J.-C. Cosset, et al. (2008). "Political connections of newly privatized firms." Journal of Corporate
Finance 14(5): 654-673. Bradley, D. and B. D. Jordan (2002). "Partial adjustement to public information and IPO undepricing." Journal
of Financial & Quantitative Analysis 37(4): 595-616. Carter, R., F. Dark, et al. (1998). Underwriter reputation, initial returns, and the long-run performance of IPO
stocks. The Journal of Finance. 53: 285-311. Carter, B. and S. Manaster (1990). "Initial Public Offerings and the underwriter reputation." Journal of Finance
45: 1045-1067. Certo, T. S., M. C. Daily, et al. (2003). "Giving money to get money: How CEO stock options and CEO equity
enhance IPO valuations." Academy of Management 46(5): 643-653. Chahine, S. and M. Goergen (2011). "The two sides of CEO option grants at the IPO." Journal of Corporate
Finance 17: 1116–1131. Chaney, P., M. Faccio, et al. (2011). "The quality of accounting information in politically connected firms."
Journal of Accounting & Economics 51(1-2): 58-76. Chemmanur, T. (1993). "The pricing of Initial Public Offerings: A dynamic model with information
production." Journal of Finance 48: 285-304. Chemmanur, T. J. and I. Paeglis (2005). "Management quality, certification, and initial public offerings."
Journal of Financial Economics 76(2): 331-368. Chen, H., D. C. Parsley, et al. (2010). "Corporate lobbying and firm performance. ." University of Colorado at
Boulder, Working paper. Colak, G., A. Durnev, et al. (2013). "Derailed by the Election: IPO Activity Under Election Uncertainty."
Working Paper. Cooper, M., H. Gulen, et al. (2010). "Corporate political contributions and stock returns." Journal of Finance 65:
687-724. Cornelli, F. and D. Goldreich (2001). "Bookbuilding and strategic allocation." Journal of Finance 56(6): 2337-
2369. Cornelli, F. and G. D. (2003). "Bookbuilding: How informative is the order book?" Journal of Finance 58(4):
1415-1443. Correia, M. M. (2012). "Political Connections, SEC Enforcement and Accounting Quality,." Working Paper,
London Business School. . Demers, E. and K. Lewellen (2003). "The marketing role of IPOs: evidence from internet stocks." Journal of
Financial Economics 68(1): 413-437. Dewenter, K. L. and P. Maletesta (1997). "Public offerings of state-owned and privately-owned enterprises: An
International comparison." Journal of Finance 4: 1659-1679. Drake, K. and M. Vetsuypens (1993). "IPO Underpricing and insurance against legal liability." Journal of
Financial Management 22: 64-73. Durben, G., J. F. Shogren, et al. (1991). "The effects of interest group pressure on coal strip-mining legislation."
Social Science Quarterly 72(2): 239-250. Faccio, M. (2006). "Politically connected firms." American Economic Review 96(1): 369-386. Faccio, M. and D. C. Parsley (2009). "Sudden Deaths: Taking Stock of Geographic Ties." Journal of Financial
and Quantitative Analysis 44(03): 683-718. Fan, J., T. J. Wong, et al. (2007). "Politically-connected CEOs, corporate governance and post-IPO performance
of China’s newly partially privatized firms." Journal of Financial Economics 84: 330–357.
27
Francis, B., I. Hasan, et al. (2010). "The effect of state antitakeover laws on the firm’s bondholders." Journal of Financial Economics 96: 127-154.
Francis, B. B., I. Hasan, et al. (2009). "Political connections and the process of going public: Evidence from China." Journal of International Money and Finance 28(4): 696-719.
Grier, K. B. and M. C. Munger (1993). "Comparing Interest Group PAC Contributions to House and Senate Incumbents, 1980–1986." The Journal of Politics 55(03): 615-643.
Grossman, G. M. H. E. N. B. o. E. R. (1994). Foreign investment with endogenous protection. Cambridge, MA, National Bureau of Economic Research.
Habib, M. and A. Ljungqvist (2001). "Underpricing and entrepreneurial wealth losses in IPOs; theory and evidence." Review of Financial Studies 14: 433-458.
Hanley, K. (1993). "The underpricing of initial public offerings and the partial adjustment phenomenon." Journal of Financial Economics 34(2): 231-250.
Hausman, J. A. (1978). "Specification Tests in Econometrics." Econometrica 46(6): 1251-1271. Hsu, D. H. (2004). "What Do Entrepreneurs Pay for Venture Capital Affiliation?" The Journal of Finance 59(4):
1805-1844. Hughes, P. and A. Thakor (1992). Litigation risk, intermediation, and the underpricing of initial public
offerings. Review of Financial Studies. 5: 709-742. Ibbotson, R. (1975). "Price performance of common stock new issues." Journal of Financial Economics 2(3):
235-272. Jenkinson, T. and C. Mayer (1988). "The privatisation process in France and the UK." Economic Review: 482–
490. Jensen, M. (1986). "Agency costs of free cash flow, corporate finance and takeovers." The American Economic
Review 76: 323-329. Kroszner, R. S. and T. Stratmann (1998). "Interest-Group Competition and the Organization of Congress:
Theory and Evidence from Financial Services' Political Action Committees." The American Economic Review 88(5): 1163-1187.
Lee, P. M. and S. Wahal (2004). "Grandstanding, certification and the underpricing of venture capital backed IPOs." Journal of Financial Economics 73(2): 375-407.
Leone, A., S. Rock, et al. (2007). "Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings." Journal of Accounting Research 45(5): 1081-1114.
Ljungqvist, A. and J. Wilhelm (2003). "IPO pricing in the dot-com bubbles: Complacency or incentives." Journal of Finance 58: 723-752.
Logue, D. (1973). "On the pricing of the unseasoned equity issues: 1965-1969." Journal of Financial and Quantitative Analysis 8: 91-103.
Loughran, T. and J. Ritter (2002). "Why don't issuers get upset about leaving money on the table of IPOs?" Review of Financial Studies 15: 413-443.
Loughran, T. and J. Ritter (2004). "Why has IPO underpricing changed over time?" Financial Management 33(3): 5-37.
Lowery David, and Holly Brasher. 2004. Organized Interests and American Government. New York: McGraw Hill.
Lowry, M. and K. Murphy (2007). "Executive stock options and IPO underpricing." Journal of Financial Economics 85: 39–65.
Lowry, M. and S. Shu (2002). Litigation risk and IPO underpricing. Journal of Financial Economics. 65: 309-335.
Lowry, M. and G. W. Schwert (2004). "Is the IPO pricing process efficient?" Journal of Financial Economics 71(1): 3-26.
Megginson, W. and K. Weiss-Hanley (1991). "Venture capitalist in Initial public offerings." Journal of Finance 46: 879--903.
Milyo, J., D. Primo, et al. (2000). "Corporate PAC Campaign Contributions in Perspective." Business and Politics 2(1): 75-88.
Niederhoffer, V., S. Gibbs, et al. (1970). "Presidential Elections and the Stock Market." Financial Analysts Journal 26(2): 111-113.
Perotti, E. and S. Guney (1993). "Successful privatization plans: enhanced credibility through timing and pricing of sales." Financial Management 22: 84–98.
Ramanna, K. and S. Roychowdhury (2010). "Elections and Discretionary Accruals: Evidence from 2004." Journal of Accounting Research 48(2): 445-475.
Riley, W. B., Jr. and W. A. Luksetich (1980). "The Market Prefers Republicans: Myth or Reality." The Journal of Financial and Quantitative Analysis 15(3): 541-560.
Ritter, J. (1984). "Signaling and the valuation of unseasoned new issues: A comment." Journal of Finance 39(4): 1231-1237.
28
Ritter, J. (1991). "The long performance of Initial Public Offerings." Journal of Finance 46(1): 3-28. Ritter, J. and I. Welch (2002). "A review of IPO activities, pricing and allocation." Journal of Finance 57(4):
1795-1828. Roberts, B. E. (1990). "A Dead Senator Tells No Lies: Seniority and the Distribution of Federal Benefits."
American Journal of Political Science 34(1): 31-58. Rocholl, J., E. Goldman, et al. (2009). "The Benefits of being Politically Connected: Evidence from
Procurement Contracts." Review of Economic Studies. Rock, K. (1986). "Why new issues are underpriced." Journal of Financial Economics 15(1-2): 187-212. Ross, S. (1977). "The determination of financial structure: The incentive signalling approach." Bell Journal of
Economics 8: 23-40. Schultz, P. (1993). "Unit initial public offerings : A form of staged financing." Journal of Financial Economics
34(2): 199-229. Shon, J. J. (2010). "Do stock returns vary with campaign contributions? Bush vs. Gore: The Florida recount."
Economics & Politics 22(3): 257-281. Spatt, C. and A. Siristrava (1991). "Pre-play communication, participation restrictions, and efficiency in initial
public offerings." Review of Financial Studies 4(4): 709-726. Spence, A. M. (1973). "Job market signaling." Quarterly Journal of Economics: 355-374. Stigler, G. J. (1971). "The theory of economic regulation." The Bell journal of economics and management
science, 3-21. Stratmann, T. (1991). "What Do Campaign Contributions Buy? Deciphering Causal Effects of Money and
Votes." Southern Economic Journal 57(3): 606-620. Stratmann, T. (1995). "Campaign Contributions and Congressional Voting: Does the Timing of Contributions
Matter?" The Review of Economics and Statistics 77(1): 127-136. Stratmann, T. (1998). "The Market for Congressional Votes: Is Timing of Contributions Everything?" Journal
of Law and Economics 41(1): 85-114. Stoll, H. and C. A. (1970). "Small Business and the new issues market for equities." Journal of Financial and
Quantitative analysis 1: 309-322. Trueman, B., M.H.F. Wong, and X. Zhang, 2000, “The Eyeballs Have It: Searching for the Value in Internet
Stocks,” Journal of Accounting Research, 38, Supplement, pp. 137-162. Yu, F. and X. Yu (2011). "Corporate lobbying and fraud detection." Journal of Financial and Quantitative
Analysis 46(6): 1865. Welch, I. (1992). "Sequential sales, learning and cascades." Journal of Finance 47: 695-732.
29
Appendix A: Variables Definition
Variable Definition
Panel A: IPO Pricing
Ln (1+underpricing) Revisions Revdummy
The natural logarithm (plus one) of the percentage difference of the closing price from offering price on the IPO date.
The percentage difference of the offering price from the midpoint of the initial filing range.
Dummy variable: one for an upwards revision, zero otherwise.
Panel B: Political Connections
Political Money
The natural logarithm of total political money contributions (either lobbying or PAC) in the election cycle most closely preceding the IPO date.
PMbyP Political money (either lobbying or PAC) divided by proceeds raised on IPO day. Lobbying Money The natural logarithm of lobbying money in the election cycle most closely preceding the IPO date. LbyP Lobbying money divided by proceeds raised on IPO day. MultiPC Dummy variable: one for multiple political money activity preceding the IPO date, zero otherwise. PAC Money The natural logarithm of PAC money in the election cycle most closely preceding the IPO date. PbyP PAC money divided by proceeds raised on IPO day. MultiPAC Dummy variable: one for multiple PAC activity preceding the IPO date, zero otherwise. House Money The natural logarithm of Congress money in the election cycle most closely preceding the IPO date. House Recipients Total number of PAC money recipients running for seats in the House of Congress. Senate Money The natural logarithm of Senate money in the election cycle most closely preceding the IPO date. Senate Recipients Total number of PAC money recipients running for seats in the House of Senate. Democrat Money The natural logarithm of PAC contributions to Democrat candidates in US$. Democrat Recipients Total number of PAC money recipients belonging to the Democratic party. Republican Money The natural logarithm of PAC contributions to Republican candidates in US$. Republican Recipients Total number of PAC money recipients belonging to the Republican party. Total State Recipients Total number of US States that the PAC recipients represent. Total Candidate Recipients Total number of PAC recipients. JustLobby Dummy variable: one for lobbying activity only (preceding the IPO date), zero otherwise. PAC Only Dummy variable: one for PAC activity only (preceding the IPO date), zero otherwise. Bothlobbypac Dummy variable: one for both lobbying and PAC activity (preceding the IPO date), zero otherwise. Local Candidates Total number of PAC money recipients representing the IPO company state (in Senate or Congress). Samestate*Total Political Money
Political money contributions to candidates representing the State of the IPO firm.
Panel C: IPO Characteristics
Age The natural logarithm plus 1of the years elapsed from firm’s incorporation to the IPO year.
Venture Capital Dummy variable: one for venture backed firms, zero otherwise.
‘Dot.com’ Period Dummy variable: one for IPO within the 1998-2000 period, zero otherwise.
Internet Firm Dummy variable: one for internet firm IPO, zero otherwise. Internet IPOs are classified those IPOs with business description section in the Thomson Financial SDC characterized by the words “Internet”, “Online”, “eBusiness”, “eCommerce”, and/or “Website”.
Tech. Firm
Dummy variable: one for IPO firms with SIC codes 3571, 3572, 3575, 3577, 3578 (computer hardware), 3661, 3663, 3669 (communications equipment), 3671, 3672, 3674, 3675, 3677, 3678, 3679 (electronics), 3812 (navigation equipment), 3823, 3825, 3826, 3827, 3829 (measuring and controlling devices), 3841, 3845 (medical instruments), 4812, 4813 (telephone equipment), 4899 (communications services), and 7371, 7372, 7373, 7374, 7375, 7378, and 7379 (software).
Regulated IPO firms with SIC codes of 4900–4939 (electric and gas), 1300 (oil and gas extraction), 4000– 4700 (transportation), 4800 (telecommunications), 4950–4959 (sanitary services) and all 6000s (financial companies).
Underwriter Ranking Dummy variable: one for most prestigious underwriters, zero otherwise. Prestige rankings are from Jay
30
Ritter's underwriter database.
Overhang Proportion of given ownership (OWN) during the going public process.
Industry classification Dummy variable: one for industrial classified companies, zero otherwise.
Credit Crunch Crises Dummy variable: one for IPO within the financial crisis of 2007–2008, zero otherwise.
NASDAQ Dummy variable: one for NASDAQ floated IPO, zero otherwise.
Market Return Market return is the compounded daily return realized by the CRSP value weighted index within the 20 trading days preceding the IPO day.
Panel D: Firm Characteristics
Assets The natural logarithm the book value of assets in the last fiscal year prior to IPO. Revenues The natural logarithm the book value of revenues in the last fiscal year prior to IPO. Earnings Per Share (EPS) Dummy variable: one for positive EPS in the last fiscal year prior to IPO, zero otherwise. Returns on Assets (ROA) The return on assets in the last fiscal year prior to IPO. Leverage Total liabilities over total assets in the last fiscal year prior to IPO.
31
Table 1: Summary Statistics The Table presents statistics for a sample of US IPO deals announced within the period 1 January, 1998 to 30 June, 2013 drawn from the Securities Data Company (SDC) Database, side by side, with the subsample of IPO deals with a record of political money contributions (PMC). The IPOs are identified by: (1) the election cycle in which they occurred, (2) the Standard Industrial Classification (SIC) division in which they belong, (3) special industry environment, and (4) market value measures.
IPOs with PMC ( N = 273 )
Full sample ( N= 1578 )
Election Cycle No. % No %
98-99 30 10.99 465 29.47 00-01 24 8.79 160 10.14
02-03 15 5.49 94 5.96 04-05 60 21.98 271 17.17 06-07 52 19.05 247 15.65
08-09 20 7.33 56 3.55
10-11 42 15.38 151 9.57
12-13 30 10.99 134 8.49
SIC division No. % No %
Agriculture, Forestry and fishing 1 0.37 4 0.25 Mining and construction industries 13 4.76 49 3.11
Manufacturing 95 34.8 535 33.90 Transp., commun., and utilities 35 12.82 122 7.73 Wholesale and retail trade 15 5.49 122 7.73 Finance, insurance and real estate 41 15.02 185 11.72 Service industries 73 26.74 559 35.42 Public administration 0 0.00 2 0.13
Company specifics
Internet IPOs 26 9.52 198 12.55
Technology IPOs 76 27.84 599 37.96
VC Backed IPOs 97 35.53 745 47.21
Regulated Industry IPOs 80 29.30 337 21.36
NASDAQ IPOs 136 49.82 1095 69.39
Market Value Mean Median Mean Median
s.d s.d.
Market cap. (in mil $) 2441.55 708.08 834.51 322.91
9250.37 3980.58
Tobin's q 2.33 1.63 2.87 2.33
2.65 3.06
32
Table 2: Sample Descriptives The Table presents statistics for a sample of US IPO deals announced within the period 1 January, 1998 to 30 June, 2013 drawn from the Securities Data Company (SDC) Database. The full sample splits further into (1) a subsample of IPO deals with a record of political money contributions (PMC) and (2) a subsample of the rest of IPO deals. The statistics provided describe the mean, median, minimum, maximum and standard deviation for the variables in each Panel. Panel A describes our main measure of IPO pricing, i.e. the first-day return, or underpricing. Panel B lists all the PMC-related variables employed by this study. Panel C describes the typical IPO characteristics suggested by the relevant literature and used in our analysis. Stock price data are from CRSP; accounting data are from Compustat. All variables are defined in Appendix A. Statistical tests for differences in means are also presented.
Full Sample (N= 1578) IPOs with PMC (N = 273) IPOs without PMC (N=1305) P-value of T -Diff Mean Median Min Max Mean Median Min Max Mean Median Min Max
s.d. s.d. s.d. Panel A – IPO pricing Underpricing 0.27 0.12 -0.71 6.84 0.19 0.09 -0.70 4.83 0.29 0.12 -0.37 6.84 0.01
0.58 0.43 0.60 Panel B – PMC characteristics PMC 0.05 0.00 0.00 9.86 0.30 0.09 0.00 9.86 0.00 0.00 0.00 0.00 0.00
0.39 0.89 0.00 Lobby money 0.05 0.00 0.00 9.57 0.27 0.06 0.00 9.57 0.00 0.00 0.00 0.00 0.00
0.36 0.83 0.00 Multiple lobbying 0.14 0.00 0.00 1.00 0.79 1.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00
0.34 0.41 0.00 PAC money 0.01 0.00 0.00 1.53 0.03 0.00 0.00 1.53 0.00 0.00 0.00 0.00 0.00
0.05 0.12 0.00 Multiple PAC 0.06 0.00 0.00 1.00 0.34 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00
0.24 0.48 0.00 House money 0.00 0.00 0.00 1.30 0.02 0.00 0.00 1.30 0.00 0.00 0.00 0.00 0.00
0.04 0.10 0.00 House recipients 1.65 0.00 0.00 348.00 9.51 0.00 0.00 348.00 0.00 0.00 0.00 0.00 0.00
15.29 35.78 0.00 Senate money 0.00 0.00 0.00 0.23 0.01 0.00 0.00 0.23 0.00 0.00 0.00 0.00 0.00
0.01 0.03 0.00 Senate recipients 0.52 0.00 0.00 60.00 3.03 0.00 0.00 60.00 0.00 0.00 0.00 0.00 0.00
3.74 8.58 0.00 Democrat money 0.00 0.00 0.00 0.41 0.01 0.00 0.00 0.41 0.00 0.00 0.00 0.00 0.00
0.02 0.04 0.00 Democrat recipients 0.86 0.00 0.00 185.00 4.95 0.00 0.00 185.00 0.00 0.00 0.00 0.00 0.00
7.84 18.33 0.00 Republican money 0.00 0.00 0.00 1.21 0.02 0.00 0.00 1.21 0.00 0.00 0.00 0.00 0.00
0.04 0.09 0.00 Republican recipients 1.31 0.00 0.00 249.00 7.54 0.00 0.00 249.00 0.00 0.00 0.00 0.00 0.00
11.11 25.86 0.00 Total candidate recipients 2.15 0.00 0.00 396.00 12.42 0.00 0.00 396.00 0.00 0.00 0.00 0.00 0.00
33
18.63 43.40 0.00 Total state recipients 0.76 0.00 0.00 49.00 4.39 0.00 0.00 49.00 0.00 0.00 0.00 0.00 0.00
4.42 9.87 0.00 Lobby only 0.12 0.00 0.00 1.00 0.67 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00
0.32 0.47 0.00 PAC only 0.18 0.00 0.00 1.00 0.11 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00
0.13 0.31 0.00 Both lobby and PAC 0.04 0.00 0.00 1.00 0.22 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00
0.19 0.42 0.00 Panel C – IPO characteristics Gross proceeds 137.66 66.04 0.86 11,805 354.11 121.36 9.35 11,805.70 92.39 60.81 0.86 14,266.00 0.00
465.40 1,065.90 114.44 Venture Capital 0.47 0.00 0.00 1.00 0.36 0.00 0.00 1.00 0.50 0.00 0.00 1.00 0.00
0.50 0.48 0.50 Internet IPOs 0.13 0.00 0.00 1.00 0.10 0.00 0.00 1.00 0.13 0.00 0.00 1.00 0.10
0.33 0.29 0.34 Technology IPOs 0.38 0.00 0.00 1.00 0.28 0.00 0.00 1.00 0.40 0.00 0.00 1.00 0.00
0.49 0.45 0.49 Regulated industry 0.21 0.00 0.00 1.00 0.29 0.00 0.00 1.00 0.20 0.00 0.00 1.00 0.00
0.41 0.46 0.40 Underwriter Ranking 0.62 1.00 0.00 1.00 0.82 1.00 0.00 1.00 0.58 1.00 0.00 1.00 0.00
0.49 0.38 0.49 Share Overhang 3.53 2.88 0.00 80.75 3.70 2.97 0.00 50.34 3.49 2.87 0.00 80.75 0.35
3.41 3.67 3.35 NASDAQ 0.69 1.00 0.00 1.00 0.50 0.00 0.00 1.00 0.74 1.00 0.00 1.00 0.00
0.46 0.50 0.44 Assets 1,024 55.20 0.00 251,075 4,483 239.40 0.45 251,075 301 43.07 0.00 40,671 0.00
10,533 24,857 1,503 Revenues 391 46.21 0.00 78,277 1,514 175.45 0.00 78,277 156 38.62 0.00 6,036 0.00
2,504 5,837.59 394 Earnings per share 0.47 0.00 0.00 1.00 0.56 1.00 0.00 1.00 0.45 0.00 0.00 1.00 0.00
0.50 0.50 0.50 Returns on assets -0.36 -0.01 -40.8 1.14 -0.11 0.01 -4.28 0.86 -0.36 -0.01 -40.8 1.14 0.01
1.75 0.48 1.75 Leverage 1.50 0.94 0.00 81.50 1.17 0.91 0.00 6.78 1.56 0.95 0.00 81.50 0.05
3.11 0.96 3.39 Firm age 16.37 8.00 0.00 165.00 24.89 11.00 0.00 165.00 14.58 8.00 0.00 45.00 0.00
23.15 32.05 20.39 Dot.com period 0.37 0.00 0.00 1.00 0.15 0.00 0.00 1.00 0.42 0.00 0.00 1.00 0.00
0.48 0.36 0.49 Credit Crunch Crises 0.11 0.00 0.00 1.00 0.20 0.00 0.00 1.00 0.09 0.00 0.00 1.00 0.00
0.31 0.40 0.29
34
Table 3: Firm Contribution Characteristics This table presents data from the Federal Election Commission (FEC) detailed files on PAC money contributions to House and Senate elections for the period from 1998 to June-30 2013. The sample includes $7.84 million in contributions made by 89 unique firms. The table reports firm contribution characteristics per firm, per election cycle.
Variable Mean Min 25thPer Median 75thPer Max Panel A: Dollar Amount of Firm Contributions per El ection Cycle closest to IPO
Total Contributions $88,108 1,000 9,500 21,000 68,050 1,527,649 Candidates
Democrats 33,380 0 1,500 6,500 22,780 411,983 Republicans 54,385 0 5,000 15,000 41,000 1,207,475
Races House 63,538 0 6,000 13,550 41,500 1,302,099 Senate 24,570 0 3,000 8,000 20,500 225,550
Panel B: Number of Firm Contributions per Election Cycle closest to IPO
No. of Candidates 38 0 5 12 37 396 No. of States 13 0 4 8 20 49
Candidates Democrats 15 0 1 4 11 185
Republicans 23 0 3 8 23 249 Races
House 29 0 3 9 22 348 Senate 9 0 1 4 10 60
35
Table 4: Distribution of PAC Contributions by US State The table breaks down by election cycle the contributions made by US IPO firms, over the period 1 January, 1998 to 30 June 2013, to lobbying and PAC campaigns. For each election cycle, the top row gives the aggregate contribution value in million of US dollar and the bottom line the number of IPO firms that actually contributed. In the ‘PAC by US State’ panel we break down further by US State. The lobbying data comes from the files of the Center for Responsive Politics (CRP) and PAC contributions from the files of the Federal Election Commission (FEC).
Election Cycle
98-99 00-01 02-03 04-05 06-07 08-09 10-11 12-13 TOTAL
Lobby Activity (in mil US $) 14.6 12.5 1.55 7.2 12.7 5.7 14.5 4.6 73.5 # of contributors 26 23 15 44 48 19 39 30 244
PAC Activity (in mil US $) 3.63 1.32 0.27 0.63 0.82 0.05 0.67 0.45 7.84 # of contributors 14 9 6 2 16 4 10 5 89
PAC by US State
Alabama (in 000's US $) 81.5 13.5 7.4 4.0 24.5 0.0 4.5 0.0 135.4 # of contributors 8 3 3 1 4 0 2 0 21
Alaska (in 000's US $) 28.6 5.0 7.5 14.5 3.0 0.0 2.0 2.5 63.1 # of contributors 5 3 3 5 1 0 2 1 19
Arizona (in 000's US $) 55.8 37.3 6.0 7.5 7.0 0.0 7.5 32.0 153.1 # of contributors 5 6 1 5 2 0 3 1 22
Arkansas (in 000's US $) 37.0 6.0 0.0 4.0 1.0 0.0 6.5 5.0 59.5 # of contributors 5 2 0 3 1 0 3 1 14
California (in 000's US $) 326.2 101.8 11.5 42.0 83.5 5.8 46.5 73.0 690.3 # of contributors 10 7 4 11 5 3 5 4 45
Colorado (in 000's US $) 55.3 8.0 7.0 12.3 2.0 17.0 5.0 5.5 112.1 # of IPO contributors 5 4 3 3 2 1 3 2 21
Connecticut (in 000's US $) 49.1 44.0 3.0 5.0 14.0 0.0 2.0 5.0 122.1 # of contributors 6 3 2 2 3 0 1 2 17
Delaware (in 000's US $) 7.1 19.0 0.0 2.0 12.0 0.0 3.6 5.0 48.6 # of contributors 3 3 0 1 2 0 3 1 12
Florida (in 000's US $) 120.5 57.0 7.0 59.0 42.5 2.0 16.0 22.3 326.3 # of contributors 7 4 3 7 5 2 5 3 33
Georgia (in 000's US $) 154.8 23.5 4.0 22.0 8.5 0.0 12.5 10.0 235.3 # of contributors 8 6 2 5 4 0 2 3 27
Hawaii (in 000's US $) 15.2 1.5 0.0 5.0 2.0 2.0 3.5 0.0 29.2 # of contributors 3 2 0 1 1 1 2 0 10
Idaho (in 000's US $) 38.0 1.5 1.0 7.0 11.5 0.0 7.0 1.0 67.0 # of contributors 6 2 1 3 2 0 3 1 17
Illinois (in 000's US $) 172.9 47.5 1.0 39.7 16.3 2.0 21.0 13.5 313.9 # of contributors 11 5 2 7 3 2 5 2 35
Indiana (in 000's US $) 128.0 16.5 4.5 9.0 23.0 0.0 19.5 1.5 202.0 # of contributors 9 5 1 6 2 0 4 1 27
Iowa (in 000's US $) 51.7 13.0 2.5 9.8 4.0 1.0 7.0 7.5 96.5 # of contributors 9 4 2 3 2 1 4 3 25
Kansas (in 000's US $) 46.6 7.5 1.0 2.5 15.5 0.0 9.0 2.0 84.1 # of contributors 6 3 1 2 4 0 2 1.0 18.0
Kentucky (in 000's US $) 84.4 22.0 6.5 16.7 10.0 4.8 11.0 12.0 167.4 # of contributors 9 4 2 5 4 1 4 2 29
Louisiana (in 000's US $) 79.5 15.0 3.0 17.5 7.0 0.0 11.0 2.0 135.0 # of contributors 6 5 2 8 3 0 3 1 27
Maine (in 000's US $) 6.8 9.5 3.0 0.0 1.0 0.0 0.0 2.0 22.3 # of contributors 3 4 2 0 1 0 0 2 10
Maryland (in 000's US $) 69.7 23.2 17.0 3.5 25.0 2.0 15.0 8.5 163.9 # of contributors 6 5 3 2 4 1 3 2 24
Massachusetts (in 000's US $) 39.2 42.5 0.0 1.0 3.5 0.0 23.0 12.0 121.2 # of contributors 6 3 0 1 2 0 3 2 15
Michigan (in 000's US $) 159.6 53.8 5.5 22.5 13.3 4.0 98.5 11.0 368.2 # of contributors 9 5 2 7 4 2.0 7 3 36
36
Minnesota (in 000's US $) 26.9 27.5 2.9 2.0 7.0 0.0 6.2 15.0 87.4 # of contributors 6 4 3 2 3 0 3 2 21
Mississippi (in 000's US $) 32.5 8.5 0.0 2.0 8.5 1.0 3.5 6.0 62.0 # of contributors 4 4 0 2 2 1 3 1 16
Missouri (in 000's US $) 115.6 53.4 4.5 40.4 19.0 0.0 20.5 9.5 262.9 # of contributors 8 4 2 8 5 0 3 1 30
Montana (in 000's US $) 5.5 12.0 1.0 6.0 5.0 0.0 4.5 10.5 44.5 # of contributors 4 5 1 4 2 0 3 3 19
Nebraska (in 000's US $) 29.5 38.0 4.0 2.5 13.5 0.0 7.0 2.5 97.0 # of contributors 6 5 1 3 2 0 3 1 20
Nevada (in 000's US $) 32.5 14.0 1.0 15.0 8.8 0.0 8.5 5.0 84.8 # of contributors 6 4 1 3 4 0 5 1 23
New Hampshire (in 000's US $) 26.5 0.0 1.0 6.0 4.0 0.0 2.0 4.5 44.0 # of contributors 6 0 1 3 3 0 2 1 15
New Jersey (in 000's US $) 95.7 59.5 3.1 10.0 27.0 2.0 2.0 10.1 209.4 # of contributors 7
2 3 6 1 2 3 27
New Mexico (in 000's US $) 44.5 11.5 5.5 1.8 19.0 0.0 10.5 6.0 98.8 # of contributors 6 4 3 2 4 0 2 2 21
New York (in 000's US $) 244.3 116.8 21.3 17.4 28.0 0.5 36.5 13.5 478.3 # of contributors 9 4 4 9 3 1 5 2 35
North Carolina (in 000's US $) 96.9 11.0 2.3 22.7 11.0 0.0 16.5 16.5 176.8 # of contributors 7. 3 2 6 2 0 4 3 24
North Dakota (in 000's US $) 25.2 32.5 2.0 9.5 2.1 0.0 6.4 0.0 77.7 # of contributors 7 4 1 3 1 0 3 0 19
Ohio (in 000's US $) 160.6 34.8 7.3 18.5 20.5 0.0 52.5 18.5 312.6 # of contributors 10. 5 3 6 5 0 5 3 34
Oklahoma (in 000's US $) 53.7 20.0 0.5 5.5 7.1 0.0 1.0 1.0 88.8 # of contributors 8 6 1 6 2 0 1 1 24
Oregon (in 000's US $) 27.5 5.5 1.3 0.0 0.0 0.0 8.0 7.5 49.8 ## of contributors 8 3 1 0 0 0 2 1 14
Pennsylvania (in 000's US $) 157.2 62.5 36.8 31.4 49.0 0.0 28.3 9.0 374.2 # of contributors 9 4 4 6. 6 0 5 3 34
Rhode Island (in 000's US $) 7.9 12.4 4.0 0.0 3.5 1.0 0.0 5.0 33.7 # of contributors 4 2 1 0 1 1 0 2 9
South Carolina (in 000's US $) 37.2 32.0 2.5 8.5 30.0 0.0 8.0 5.0 123.2 # of contributors 6 3 1 3 4 0 4 1 21
South Dakota (in 000's US $) 47.0 6.0 11.5 2.0 9.0 0.0 14.5 4.5 94.5 # of contributors 8 3 2 2 2 0 4 2 21
Tennessee (in 000's US $) 34.4 17.5 1.5 0.5 19.5 0.0 16.5 9.5 99.4 # of contributors 6 4 2 2 4 0 5 2 23
Texas (in 000's US $) 238.4 58.1 1.0 59.8 37.0 1.0 32.5 13.0 440.8 # of contributors 9 6 1 14 5 1 4 2 40
Utah (in 000's US $) 35.0 14.5 0.0 14.5 42.0 2.4 9.5 18.0 135.9 # of contributors 9 6 0 5 5 1 5 3 31
Vermont (in 000's US $) 0.0 17.0 0.0 0.0 0.0 0.0 0.0 0.0 17.0 # of contributors 0 4 0 0 0 0 0 0 4
Virginia (in 000's US $) 49.0 26.0 36.0 15.3 78.2 0.0 28.0 15.0 247.4 # of contributors 8 6 3 10 6 0 4 2 37
Washington (in 000's US $) 81.6 26.0 2.2 0.0 20.0 0.5 3.5 6.9 140.6 # of contributors 6 5 1 0 3 1 2 2 18
West Virginia (in 000's US $) 16.5 7.0 12.0 11.5 7.0 1.0 7.5 0.0 62.5 # of contributors 3 1 3 4 1 1 3 0 16
Wisconsin (in 000's US $) 89.4 12.0 0.5 1.0 1.0 0.0 6.3 1.5 111.7 # of contributors 7 2 1 1 1 0 2 1 14
Wyoming (in 000's US $) 10.0 12.0 0.0 21.0 3.0 0.0 1.5 2.5 50.0 # of contributors 3 3 0 4 3 0 1 1 14
37
Table 5: Political Money Contributions of IPO firms (Full Sample) The table reports results of the cross-sectional OLS regression analysis of IPO underpricing (dependent variable) on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size. Variables Political Money
All Type (1) Political Money
Lobby Money (2) Political Money PAC Money (3)
Constant -0.232*** -0.232*** -0.235***
(0.000) (0.000) (0.000)
lnproceeds 0.0446*** 0.0444*** 0.0442***
(0.000) (0.000) (0.000)
leverage 0.00177 0.00177 0.00178
(0.495) (0.493) (0.491)
ROA 0.00458 0.00458 0.00451 (0.288) (0.289) (0.298)
age -0.0145*** -0.0148*** -0.0135**
(0.00907) (0.00755) (0.0152)
venture capital 0.0487*** 0.0491*** 0.0475***
(0.00151) (0.00140) (0.00192)
‘dotcom’ period 0.167*** 0.167*** 0.171***
(0.000) (0.000) (0.000)
internet firm 0.0935*** 0.0935*** 0.0933***
(0.001) (0.001) (0.001)
tech. firm 0.0750*** 0.0753*** 0.0747***
(0.000) (0.000) (0.000)
regulated -0.0173 -0.0175 -0.0167
(0.222) (0.218) (0.239)
underwriter 0.0595*** 0.0591*** 0.0589*** (0.0002) (0.0002) (0.0002)
overhang 0.0128*** 0.0128*** 0.0127***
(0.00304) (0.003) (0.00275)
Nasdaq 0.0721*** 0.0727*** 0.0717***
(0.000) (0.000 (0.000)
market return 22.98*** 22.91*** 22.82***
(0.000) (0.000) (0.000)
political money -0.00289**
(0.0371)
lobbying money -0.00288**
(0.0427)
PAC money -0.00549***
(0.00639)
Obs. 1,578 1,578 1,578
Adj. R-squared 0.265 0.265 0.266
38
Table 6: Political Money Contributions (PMC Sample) The table reports results of the cross-sectional OLS regression analysis of IPO underpricing (dependent variable) on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013, with a record of PMC activity. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size.
Political Money (All Type) (1)
Lobby Money (2)
PAC Money (3)
Total Recipient States (4)
Constant -0.0511 -0.0524 -0.0502 -0.112
(0.533) (0.524) (0.541) (0.158) lnproceeds 0.005 0.003 0.003 0.015 (0.826) (0.819) (0.818) (0.279)
leverage -0.0197 -0.0197 -0.0199 -0.0200 (0.205) (0.205) (0.202) (0.192) ROA 0.130** 0.130** 0.132** 0.127** (0.0178) (0.0182) (0.0161) (0.0170) age -0.006 -0.006 -0.006 -0.0007
(0.473) (0.476) (0.491) (0.932) venture capital 0.0909** 0.0907** 0.0945** 0.0944**
(0.0208) (0.0213) (0.0154) (0.0143) ‘dotcom’ period 0.223*** 0.222*** 0.226*** 0.230*** (0.0002) (0.0002) (0.0002) (0.0002) internet firm 0.0391 0.0395 0.0376 0.0434 (0.561) (0.557) (0.576) (0.514) tech. firm 0.0527* 0.0527* 0.0501 0.0442
(0.0993) (0.0994) (0.112) (0.158) regulated -0.0190 -0.0191 -0.0199 -0.0197
(0.441) (0.438) (0.417) (0.423) financial crisis -0.0373 -0.0372 -0.0376 -0.0454*
(0.133) (0.134) (0.130) (0.0693) underwriter 0.0804* 0.0808* 0.0781* 0.0744* (0.0603) (0.0591) (0.0670) (0.0750) overhang 0.00635 0.00637 0.00617 0.00684 (0.245) (0.244) (0.254) (0.188) Nasdaq 0.111*** 0.111*** 0.111*** 0.111***
(0.0001) (0.0001) (0.0001) (0.0001) market return 22.95*** 22.95*** 23.16*** 23.00***
(0.0008) (0.0008) (0.0008) (0.0008) PMbyP -0.708***
(0.001) LbyP -0.749*** (0.0009)
PbyP -7.396*** (0.0008)
total States -0.00317** (0.0118)
Obs. 273 273 273 273
Adj. R-squared 0.351 0.351 0.352 0.357
39
Table 7: Probit regressions explaining the occurrence of political donations by type The table reports results of the probit regression analysis of alternate donation manners on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013 with a record of PMC activity. Column 1 pertains to the full sample and uses as dependent variable the probability that a firm has contributed via both lobbying and PAC. Column 2 pertains to the PMC sample and uses as dependent variable the probability that a firm has contributed via both lobbying and PAC. Column 3 pertains to the PMC sample and uses as dependent variable the probability that a firm has contributed to lobbying, only. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size
Bothlobbypac (1) Bothlobbypac (2) Justlobby (3)
Constant -3.645*** -1.854*** 1.014* (0.000) (0.0009) (0.0630) ln(1+underpricing) -0.615** -0.935** 1.053**
(0.0307) (0.0394) (0.0238) lnproceeds 0.372*** 0.202** -0.0657 (0.000) (0.0456) (0.492)
leverage -0.146** -0.202* 0.220* (0.0490) (0.0996) (0.0915)
ROA 0.128 0.212 -0.436*
(0.572) (0.348) (0.0831)
age 0.110* 0.121 -0.202** (0.0829) (0.158) (0.0130) venture capital -0.363* -0.418* 0.551**
(0.0680) (0.0991) (0.0172) ‘dotcom’ period -0.0519 0.516* -0.758**
(0.762) (0.0805) (0.0103)
internet firm 0.311 0.324 -0.181
(0.173) (0.328) (0.599) tech. firm -0.0624 -0.0451 0.174 (0.727) (0.843) (0.420)
regulated 0.132 0.134 -0.154 (0.388) (0.505) (0.427)
underwriter 0.162 0.00344 -0.245
(0.402) (0.991) (0.364)
overhang 0.0169 0.0121 0.00301 (0.164) (0.558) (0.888)
Nasdaq -0.0545 -0.0102 0.239
(0.724) (0.964) (0.256)
market return 12.47 -37.93 5.404
(0.728) (0.472) (0.914)
Obs. 1,578 273 273
Pseudo R^2 0.224 0.147 0.207
40
Table 8: Returns and PAC spending characteristics The table reports results of the cross-sectional OLS regression analysis of IPO underpricing on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013 with a record of PMC activity. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size.
lninitialreturnplus1 (1)
lninitialreturnplus1 (2)
lninitialreturnplus1 (3) VARIABLES
Constant -0.0894 -0.108 -0.0710 (0.271) (0.191) (0.382) lnproceeds 0.0120 0.0148 0.00752 (0.409) (0.329) (0.605) leverage -0.0199 -0.0189 -0.0199 (0.201) (0.222) (0.201) ROA 0.131** 0.129** 0.130** (0.0148) (0.0168) (0.0166) age -0.000658 -0.00450 -0.00168 (0.941) (0.624) (0.849) venture capital 0.0890** 0.0937** 0.0879** (0.0226) (0.0163) (0.0230) ‘dotcom’ period 0.224*** 0.220*** 0.223*** (0.0001) (0.0002) (0.0002) internet firm 0.0440 0.0404 0.0421 (0.515) (0.551) (0.531) tech. firm 0.0445 0.0488 0.0435 (0.161) (0.120) (0.175) financial crisis -0.0441* -0.0383 -0.0416* (0.0824) (0.119) (0.0973) underwriter 0.0826* 0.0763* 0.0848** (0.0550) (0.0726) (0.0477) overhang 0.00584 0.00650 0.00636 (0.285) (0.240) (0.222) Nasdaq 0.108*** 0.115*** 0.106*** (0.00165) (0.000) (0.0002) market return 22.95*** 23.35*** 23.45*** (0.000783) (0.000709) (0.000710) RepublicanIPO -0.0510** (0.0253) SenateIPO -0.0146 (0.631) samestate*total political money
-1.83e-08**
(0.0481) multiPC -2.82e-08***
(0.005) multiPAC -0.00442* (0.059) Obs. 273 273 273 Adj. R^2 0.354 0.353 0.349
41
Table 9: Returns and PAC Money Recipients Identity .The table reports results of the cross-sectional OLS regression analysis of IPO underpricing on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013 with a record of PMC activity. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size.
(1) (2) (3) (4) (5) (6) IRplus1 IRplus1 IRplus1 lRplus1 lRplus1 lRplus1 Constant -0.112 -0.112 -0.108 -0.115 -0.107 -0.130 (0.165) (0.158) (0.180) (0.156) (0.188) (0.100) lnproceeds 0.0145 0.0154 0.0140 0.0146 0.0134 0.0186 (0.311) (0.279) (0.328) (0.311) (0.356) (0.186) leverage -0.0195 -0.0200 -0.0195 -0.0194 -0.0194 -0.0199 (0.200) (0.192) (0.201) (0.203) (0.203) (0.191) ROA 0.128** 0.127** 0.127** 0.130** 0.129** 0.127** (0.0168) (0.0170) (0.0177) (0.0156) (0.0169) (0.0165) age -0.00219 -0.000750 -0.00255 -0.00171 -0.00244 -0.00112 (0.806) (0.932) (0.775) (0.848) (0.784) (0.899) venture capital 0.0993** 0.0944** 0.0980** 0.101** 0.0992** 0.0989** (0.0111) (0.0143) (0.0118) (0.0106) (0.0113) (0.0108) ‘dotcom’ period 0.241*** 0.230*** 0.240*** 0.242*** 0.240*** 0.243*** (0.0002) (0.0002) (0.0002) (0.0002) (0.0002) (0.0001) internet Firm 0.0363 0.0434 0.0375 0.0349 0.0361 0.0382 (0.589) (0.514) (0.576) (0.604) (0.591) (0.566) tech Firm 0.0445 0.0442 0.0445 0.0447 0.0445 0.0452 (0.155) (0.158) (0.155) (0.154) (0.157) (0.147) financial crisis -0.0405* -0.0454* -0.0408* -0.0397 -0.0398 -0.0433* (0.0997) (0.0693) (0.0985) (0.105) (0.106) (0.0797) underwriter 0.0730* 0.0744* 0.0745* 0.0720* 0.0738* 0.0724* (0.0796) (0.0750) (0.0746) (0.0831) (0.0773) (0.0812) overhang 0.00682 0.00684 0.00668 0.00701 0.00677 0.00698 (0.219) (0.188) (0.236) (0.197) (0.226) (0.191) Nasdaq 0.112*** 0.111*** 0.111*** 0.113*** 0.112*** 0.112*** (0.0001) (0.0001) (0.0001) (0.0001) (0.0001) (0.0001) market return 23.58*** 23.00*** 23.63*** 23.41*** 23.69*** 22.79*** (0.00071) (0.00084) (0.000717) (0.0007) (0.0007) (0.0009) regulated -0.0187 -0.0197 -0.0197 -0.0171 -0.0189 -0.0178 (0.442) (0.423) (0.419) (0.483) (0.439) (0.465) total recipients -0.000767*** (0.00474) total states -0.00317** (0.0118) Republican Recip. -0.00125*** (0.00894) Democrat Recip -0.00185*** (0.00406) House Recip -0.000889*** (0.00655) Senate Recip -0.00446*** (0.00139) Obs. 273 273 273 273 273 273 Adj. R-squared 0.359 0.357 0.358 0.360 0.358 0.363
42
Table 10: Filing Price Revisions and Political Money The table reports results of the cross-sectional OLS and probit regression analysis of filing price revisions on political money contributions variables and other issuer- and deal-specific characteristics for a sample of U.S. IPOs announced over the period 1 January, 1998 to 30 June, 2013. Column 1 pertains to the full sample and uses as dependent variable the percentage difference of the offering price from the midpoint of the initial filing range. Column 2 pertains to the PMC sample and is otherwise identical test with Column 1. Column 3 pertains to the full sample and uses as dependent variable the probability of an upward price revision. Column 4 pertains to the PMC sample and is otherwise identical test with Column 3. Variables are defined in Appendix A. All regressions control for year fixed effects whose coefficients are suppressed. We use the symbols *, ** and *** to denote statistical significance at the 1%, 5%, and 10% levels, respectively. The t-statistics reported in parentheses are based on standard errors adjusted for heteroskedasticity. N refers to sample size
OLS Probit (1) (2) (3) (4) Constant -9.434*** -18.36*** -0.932*** -0.770*
(0.000) (0.005) (0.000) (0.0975)
leverage 0.233 -0.486 -0.00365 -0.0648
(0.230) (0.678) (0.897) (0.599)
ROA 0.913** 6.660* 0.142* 0.709**
(0.0272) (0.0699) (0.0972) (0.0464)
age 0.111 2.182 0.0182 0.0136
(0.784) (0.156) (0.673) (0.885)
venture capital 1.244 5.662** 0.195** 0.667***
(0.203) (0.0395) (0.0332) (0.00725)
‘dotcom’ period 5.182*** 9.566*** 0.399*** 1.138***
(0.000) (0.000) (0.000) (0.001)
internet firm 4.488*** 1.915 0.575*** 0.179
(0.0009) (0.675) (0.000) (0.597)
tech. firm 5.059*** 7.627*** 0.347*** 0.330
(0.000) (0.00285) (0.000) (0.146)
regulated 2.765*** 6.365** 0.177* 0.142
(0.00814) (0.0172) (0.0948) (0.538)
underwriter 3.668*** 4.362 0.483*** 0.615*
(0.000) (0.114) (0.000) (0.0568)
overhang 0.428** 0.419 0.0209 -0.0225
(0.0249) (0.416) (0.154) (0.640)
Nasdaq -0.766 2.416 -0.0966 0.0136
(0.417) (0.329) (0.308) (0.951)
market return 1,145*** -17.44 89.90*** 16.92
(0.000) (0.979) (0.000) (0.768)
PM by proceeds -14.52** -26.82** -215.2*** -318.9***
(0.0255) (0.0101) (0.0009) (0.0001)
Obs. 1,164 205 1164 204
Adjusted R2 0.136 0.139
Pseudo R2 0.1057 0.1763