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Ownershio Structure Pre and Post IPO and Operating Performance of Jasdaq Comp
Ownershio Structure Pre and Post IPO and Operating Performance of Jasdaq Comp
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and industry-median-adjusted operating performance, based on Nikkei Needs Annual
Corporate Financial Data (see Table 2).
Table 4 presents the operating performance of IPO firms for 9 years before and after
flotation (Year 1 indicates the fiscal year just prior to the offering). As shown in Table
4, operating performance tends to decrease after flotation. For example, the median net
profits increased from w205 million for Year 5 to w384 for Year 0, and decreased to
w316 for Year + 3. These results are consistent with Jinza (1995), who analyzed the
operating performance of JASDAQ companies registered between 1990 and 1994
3
.
Moreover, we observed that the number of JASDAQ companies with negative ordinary
profits and net profits decreased from Year 5 to Year 1, and then sharply increased
after IPO. Minimum ordinary profits and net profits for Year 1 are w171 million and
w41 million, respectively, while most figures besides Year 1 are negative. For
example, in terms of net profits, the percentage of companies with negative net profits
for Year + 3 was more than 10%. This result hints at the possibility of owner managers,
venture capitalists, underwriters, banks and auditors attempting to Window-dress prior
3
Regarding the profitability of JASDAQ companies, Jinza (1995), analyzing newly registered JASDAQ
companies between 1990 and 1994, found that net profits peaked 1 year prior to flotation and subsequently
decreased. Furthermore, average 5-year growth rates of profits post-flotation for 132 newly registered JASDAQ
companies in 1988/1989 are comparatively lower than for companies listed on the first division of the Tokyo
Stock Exchange. The average growth rates were 9.5% and 8.3%, respectively.
Fig. 1. Ratio of ordinary profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes
vary due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both
raw and industry-median-adjusted operating performance. The industry-median-adjusted operating performance
is calculated as the difference between its raw ratio of ordinary profits to net sales and the median ratio of all
JASDAQ-registered firms in its industry.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 171
to going public (DeGeorge and Zeckhauser, 1993; Jain and Kini, 1994; Teoh et al.,
1998a,b).
Figs. 1 and 2 present the ratio of ordinary profits and net profits to net sales for 9
years. The median raw ratio of ordinary profits to net sales increased from 4.65% for
Year 5 to 6.25% for Year 1, and decreased to 4.50% for Year + 3. The median
industry-median-adjusted ratio of ordinary profits to net sales also increased from
0.06% for Year 5 to 1.21% for Year 1, and decreased to 0.53% for Year + 3. The
industry-median-adjusted operating performance is calculated as the difference between
its raw ratio of ordinary profits to net sales and the median ratio of all JASDAQ-
registered firms in its industry. In addition, the median raw ratio of net profits to net
sales increased from 2.00% for Year 5 to 2.99% for Year 0, and decreased to 1.90%
for Year + 3. The median industry-median-adjusted ratio of net profits to net sales also
increased from 0.16% for Year 5 to 0.72% for Year 1, and decreased to 0.21%
for Year + 3.
Fig. 3 and Table 5 show the raw and industry-median-adjusted changes in the growth
rates of net sales, ordinary profits and net profits for 9 years before and after flotation
4
. The
industry-median-adjusted operating performance is calculated as the difference between its
Fig. 2. Ratio of net profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes vary
due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and
industry-median-adjusted operating performance. The industry-median-adjusted operating performance is
calculated as the difference between its raw ratio of net profits to net sales and the median ratio of all
JASDAQ-registered firms in its industry.
4
As shown in Table 4, there are no companies with negative ordinary profits and net profits in Year 1.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 172
change in operating performance and the median change in operating performance of all
JASDAQ-registered firms in its industry. In Fig. 3, the change in growth rate is calculated
to the prior year. The average growth rates for four periods before and after IPO are
compared in Panel A of Table 5. The pre-IPO growth rate indicates the average of four
periods; Year 5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1. The
post-IPO growth rate means the average rate of Year 1 to 0, Year 0 to + 1, Year + 1 to
+ 2, and Year + 2 to + 3.
Again, we find a significant decline in the post-issue operating performance. As shown
in Fig. 3, industry-median-adjusted growth rate of net sales increases from 5.29% in the
Year 5 to 4, to 6.84% in the Year 2 to 1, and declines to 0.24% in the Year
+ 2 to + 3. Furthermore, Panel A of Table 5 confirms that industry-median-adjusted
growth rate of net sales for four periods after IPO is 0.96%, compared to 7.39% for four
periods before IPO. The trend is confirmed by the Wilcoxon Matched-Pairs Signed-Ranks
Test as described in the last column of Table 5. The Z-statistics are calculated to be
7.580, implying significant differences at the 1% level before and after flotation.
In addition, growth rates of ordinary profits and net profits tend to decrease after
flotation. According to Panel B of Table 5, industry-median-adjusted growth rates of
ordinary profits and net profits in Year 1 to + 1 are 4.17% and 3.58%, respectively.
However, industry-median-adjusted growth rates of ordinary profits and net profits sharply
declined to 0.18% and 9.16%, respectively, in Year 1 to + 3.
Fig. 3. Growth rates of net sales before and after IPO. Sample sizes are in parentheses. Sample sizes vary due to
missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and
industry-median-adjusted operating performance. The industry-median-adjusted operating performance is
calculated as the difference between its raw change in growth rate of net sales and the median change in
operating performance of all JASDAQ-registered firms in its industry.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 173
Table 5
A comparison of the operating performance before and after IPO
Panel A: The ratio of ordinary profits to net sales,
and growth rates of net sales before and after IPO
Sample
size
Mean
(%)
Median
(%)
Wilcoxon
Z-statistic
Ordinary profits/net sales
(average for 5 years before IPO): raw
247 6.78 5.38 0.929
Ordinary profits/net sales
(average for 4 years after IPO): raw
247 6.49 5.14
Ordinary profits/net sales
(average for 5 years before IPO):
industry-median-adjusted
247 1.83 0.62 0.930
Ordinary profits/net sales
(average for 4 years after IPO):
industry-median-adjusted
247 1.75 0.42
Sales growth
(average for four periods before IPO): raw
246 8.87 5.65 3.739***
Sales growth
(average for four periods after IPO): raw
247 5.23 3.10
Sales growth
(average for four periods before IPO):
industry-median-adjusted
246 9.69 7.39 7.580***
Sales growth
(average for four periods after IPO):
industry-median-adjusted
247 2.44 0.96
Panel B: Growth rates of net sales,
ordinary profits, and net profits after IPO
Sample
size
Mean
(%)
Median
(%)
S.D.
(%)
Sales growth
(average from Year 1 to Year +1): raw
241 18.08 12.85 34.32
Sales growth
(average from Year 1 to Year +3): raw
230 26.81 8.88 82.40
Sales growth
(average from Year 1 to Year +1):
industry-median-adjusted
241 11.43 5.05 36.09
Sales growth
(average from Year 1 to Year +3):
industry-median-adjusted
230 16.42 2.04 84.08
Ordinary profits growth
(average from Year 1 to Year +1): raw
241 8.33 12.12 77.18
Ordinary profits growth
(average from Year 1 to Year +3): raw
230 21.37 5.90 144.88
Ordinary profits growth
(average from Year 1 to Year +1):
industry-median-adjusted
241 0.52 4.17 77.87
Ordinary profits growth
(average from Year 1 to Year +3):
industry-median-adjusted
230 15.53 0.18 146.19
Net profits growth
(average from Year 1 to Year +1): raw
241 2.56 15.48 122.56
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 174
Thus, we found evidence that JASDAQ companies showed sharply decreasing
operating performance after flotation.
5. Cross-sectional OLS regressions: On the relationship between ownership structure
and operating performance
In this section, we analyze the relationship between the ownership structure and
operating performance before and after IPO by estimating cross-sectional OLS regres-
sions. Operating performance before IPO is measured first in terms of the average
industry-median-adjusted growth rates of net sales for four periods before IPO (Year
5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1). In addition, average
industry-median-adjusted ratios of ordinary profits to net sales for five years before IPO
(Year 5, Year 4, Year 3, Year 2 and Year 1) are also used. Operating
performance after IPO is measured in terms of the average industry-median-adjusted
growth rates of net sales for four periods (Year 1 to 0, Year 0 to + 1, Year + 1 to + 2,
and Year + 2 to +3). Average industry-median-adjusted ratios of ordinary profits to net
sales for 4 years after IPO (Year 0, Year + 1, Year + 2, and Year + 3) are also explored. In
addition, industry-median-adjusted growth rates of net sales and ordinary profits from
Year 1 to Year + 3 are examined.
Firstly, we analyze the relationship between operating performance before IPO and
ownership structure just prior to IPO by using the following eight independent variables.
T1BF and T10BF indicate the ownership stake before IPO by top shareholder and top 10
shareholders, respectively. VCBF
_
D and BKBF
_
D are dummy variables taking on the
value 1 if venture capital firm and bank invested before IPO and 0 otherwise. MANU
_
D is
a dummy variable taking on the value 1 if the company is manufacturing and 0 otherwise.
Panel B: Growth rates of net sales,
ordinary profits, and net profits after IPO
Sample
size
Mean
(%)
Median
(%)
S.D.
(%)
Net profits growth
(average from Year 1 to Year + 3): raw
230 3.94 9.14 189.27
Net profits growth
(average from Year 1 to Year + 1):
industry-median-adjusted
241 10.49 3.58 123.60
Net profits growth
(average from Year 1 to Year + 3):
industry-median-adjusted
230 5.93 9.16 190.20
This table summarizes the raw and industry-median-adjusted operating performance before and after IPO.
Operating performance includes the ratio of ordinary profits to net sales, and growth rates of net sales, ordinary
profits, and net profits. First, operating performance before and after IPO is compared in Panel A. Five years
before IPO mean from Year 5 to Year 1. Four years after IPO mean from Year 0 to Year + 3. The pre-IPO
growth rate indicates the average of four periods for Year 5 to 4, Year 4 to 3, Year 3 to 2, and
Year 2 to 1. The post-IPO growth rate means the average of four periods for Year 1 to 0, Year 0 to + 1,
Year + 1 to + 2, and Year + 2 to + 3. The Z-statistics is based on the Wilcoxon signed rank test. Second, growth
rates of net sales, ordinary profits, and net profits after IPO are examined in Panel B.
*** 1% significance level.
Table 5 (continued)
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 175
Table 6
Cross-sectional OLS regressions of operating performance before and after IPO on ownership structure and firm characteristics
Dependent variables Independent variables
Panel A: Before IPO Intercept T1BF T10BF VCBF
_
D BKBF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 11.31 0.07 2.69 1.28 1.33 1.92 11.99 0.42 14.17*** 0.27 246
(average for four periods 0.59 1.63 1.63 0.67 0.79 1.74 * 6.76*** 0.38
before IPO): 8.10 0.05 2.71 1.45 1.41 2.02 12.23 0.57 13.77*** 0.27 246
industry-median-adjusted 0.39 0.83 1.64 0.76 0.84 1.83 * 6.76*** 0.52
Ordinary profits/net sales 38.57 0.02 0.35 0.85 0.65 3.11 0.55 1.91 12.44*** 0.25 247
(average for 5 years before IPO): 5.97*** 1.57 0.63 1.32 1.16 8.40*** 0.93 5.21***
industry-median-adjusted 40.12 0.01 0.36 0.91 0.61 3.10 0.82 1.96 11.98*** 0.24 247
5.82*** 0.30 0.66 1.41 1.08 8.31*** 1.35 5.34***
Panel B: After IPO (1) Intercept T1AF T10AF VCAF
_
D BKAF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 8.72 0.03 1.03 2.08 1.65 2.30 8.85 0.15 10.66*** 0.22 247
(average for four periods 0.53 0.74 0.66 0.87 1.17 2.48** 5.96*** 0.16
after IPO): 6.03 0.02 1.11 2.14 1.70 2.30 9.23 0.25 10.58*** 0.21 247
industry-median-adjusted 0.35 0.36 0.71 0.90 1.21 2.48** 6.15*** 0.27
Ordinary profits/net sales 60.74 0.00 2.33 0.96 0.09 4.23 1.10 1.81 9.24*** 0.19 247
(average for 4 years after IPO): 6.00*** 0.11 2.40** 0.66 0.10 7.38*** 1.20 3.19***
industry-median-adjusted 67.15 0.07 2.47 0.88 0.16 4.31 1.56 1.92 9.99*** 0.20 247
6.40*** 2.04** 2.56** 0.60 0.19 7.57*** 1.70 * 3.42***
Sales growth 128.08 0.72 10.56 17.04 8.68 18.12 50.01 2.86 8.03*** 0.18 230
(average from Year 1 to 1.00 2.10** 0.86 0.93 0.79 2.52** 4.35*** 0.40
Year +3): 134.33 0.28 10.97 18.92 9.68 18.80 53.20 1.82 7.34*** 0.16 230
industry-median-adjusted 0.99 0.67 0.89 1.02 0.87 2.58*** 4.54*** 0.25
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Ordinary profits growth 439.26 1.58 9.30 42.67 0.37 34.96 54.11 3.32 5.23*** 0.11 230
(average from Year 1 to 1.90 * 2.55** 0.42 1.29 0.02 2.69*** 2.61*** 0.26
Year +3): 521.07 1.31 9.31 48.00 1.11 37.24 56.29 2.15 4.67*** 0.10 230
industry-median-adjusted 2.14** 1.73 * 0.42 1.44 0.06 2.84*** 2.67*** 0.17
Panel C: After IPO (2) Intercept T1CHG T10CHG VCAF
_
D BKAF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 8.92 0.13 1.18 1.98 1.65 2.29 8.81 0.19 10.78*** 0.22 247
(average for four periods
after IPO): 0.55 1.08 0.75 0.83 1.18 2.48** 6.00*** 0.20
industry-median-adjusted 7.47 0.02 1.03 2.15 1.67 2.32 9.11 0.19 10.57*** 0.21 247
0.45 0.16 0.64 0.91 1.19 2.51** 6.24*** 0.20
Ordinary profits/net sales 59.26 0.18 2.48 0.70 0.04 4.27 0.70 1.76 10.30*** 0.21 247
(average for 4 years after IPO): 5.93*** 2.42** 2.58** 0.48 0.04 7.55*** 0.78 3.16***
industry-median-adjusted 59.04 0.06 2.49 1.00 0.11 4.24 0.98 1.90 9.41*** 0.19 247
5.78*** 0.98 2.53** 0.68 0.12 7.42*** 1.09 3.32***
This table shows cross-sectional OLS regressions of industry-median-adjusted operating performance on ownership structure and firm characteristics. In Panel A,
operating performance before IPO is measured first in terms of the average industry-median-adjusted growth rates of net sales for four periods before IPO (Year 5 to
4, Year 4 to 3, Year 3 to 2 and Year 2 to 1). In addition, average industry-median-adjusted ratios of ordinary profits to net sales for 5 years before IPO
(Year 5, Year 4, Year 3, Year 2 and Year 1) are also used. In Panels B and C, operating performance after IPO is measured in terms of the average industry-
median-adjusted growth rates of net sales for four periods (Year 1 to 0, Year 0 to + 1, Year + 1 to +2, and Year +2 to + 3). Average industry-median-adjusted ratios of
ordinary profits to net sales for 4 years after IPO (Year 0, Year + 1, Year + 2, and Year + 3) are also explored. In addition, industry-median-adjusted growth rates of net
sales and ordinary profits from Year 1 to Year + 3 are examined. T1BF and T10BF indicate the ownership stake before IPO by top shareholder and top 10 shareholders,
respectively. VCBF
_
D and BKBF
_
D are dummy variables taking on the value 1 if venture capital firm and bank invested before IPO and 0 otherwise. T1AF and T10AF
indicate the ownership stake after IPO by top shareholder and top 10 shareholders, respectively. T1CHG and T10CHG indicate the change in shareholdings before and
after IPO (i.e. percentage of shareholdings after IPO minus before IPO). VCAF
_
D and BKAF
_
D are dummy variables taking on the value 1 if venture capital firm and
bank have invested 1 year after IPO and 0 otherwise. MANU
_
D is a dummy variable taking on the value 1 if the company is manufacturing and 0 otherwise. Ln(MCAP),
Ln(AGE), and Ln(EMP) indicate the natural logarithms of market capitalization at the date of IPO, years of operating history, and number of employees before IPO. In
each regression, statistics are indicated below the estimates.
* 10% significance level.
** 5% significance level.
*** 1% significance level.
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Ln(MCAP), Ln(AGE), and Ln(EMP) indicate the natural logarithms of market capital-
ization at the date of IPO, years of operating history, and number of employees before IPO.
Secondly, the following 10 variables are used to explore the relationship between post-
IPO operating performance and the change in ownership structure. T1AF and T10AF
indicate the ownership stake after IPO by top shareholder and top 10 shareholders,
respectively. T1CHG and T10CHG indicate the change in shareholdings before and after
IPO (i.e. percentage of shareholdings after IPO minus before IPO). VCAF
_
D and
BKAF
_
D are dummy variables taking on the value 1 if venture capital firm and bank
have invested 1 year after IPO and 0 otherwise. The definition of MANU
_
D, Ln(MCAP),
Ln(AGE), and Ln(EMP) is the same as before.
The results in Panel A of Table 6 suggest that sales growth before IPO is significantly
and positively related to market capitalization (Ln(MCAP)) and negatively related to years
of operating history (Ln(AGE)). The ratios of ordinary profits to net sales before IPO are
significantly and positively related to market capitalization (Ln(MCAP)) and negatively
related to number of employees (Ln(EMP)). We do not observe a statistically significant
relationship between ownership structure and operating performance before IPO.
The results in Panels B and C of Table 6 suggest that operating performance after IPO
is significantly and positively related to Ln(MCAP), and negatively related to Ln(AGE)
and Ln(EMP). In addition, operating performance after IPO is significantly positive
related to top shareholders stake after IPO(T1AF). The change in top shareholders stake
(T1CHG) is positively related to the ratio of ordinary profits to net sales. Also, venture
capital investments (VCAF
_
D) are positively related to the ratio of ordinary profits to net
sales.
6. Conclusion and further research
In this paper, we considered how the operating performance of JASDAQ companies is
affected by the ownership structure in the pre- and post-flotation period.
Our evidence shows that the top 10 shareholders decrease their stakes after IPO, but
retain more than 60%, so that ownership is still concentrated. Banks increase their stakes
after the offering, in contrast to venture capital firms.
Regarding operating performance measured pre-flotation and post-flotation, we find a
number of interesting results. We found evidence that JASDAQ companies showed
sharply decreasing sales, ordinary profits and net profits growth after flotation. Our results
are consistent with Matsuda et al. (1994), Jinza (1995) and Kutsuna et al. (2000).
On the relationship between ownership structure and operating performance, a further
set of interesting results occurs. Firstly, the percentage held by the top shareholder is
closely related to post-IPO operating performance. Top shareholders stake positively
influences the growth rates of net sales and ordinary profits. Also, on changes in
ownership structure after IPO, the coefficient on T1CHG is significantly and positively
related to post-IPO operating performance (ordinary profits/net sales). Firms in which the
top shareholder decreased ownership stakes after IPO show poorer performance. Fur-
thermore, top 10 shareholders stakes after IPO are positively related to the ratio of
ordinary profits to net sales, and ordinary profits growth rates. Our evidence supports the
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 178
view that the post-IPO deterioration in operating performance is partly attributable to the
reduced managerial ownership. Although we are not using identical performance measures
as Cai and Wei (1997)
5
, our results on JASDAQ broadly contrast with theirs, which
analyze the operating performance of companies newly listed on the Tokyo Stock
Exchange. They indicated that the deterioration of post-IPO profitability cannot be
associated with the reduced managerial shareholdings.
Secondly, on the role of banks shareholdings, all coefficients (BKBF
_
D and
BKAF
_
D) are statistically insignificant. On the role of VC investment, the coefficient
on VCAF
_
D is statistically significant. Our evidence is partially in accord with Jain and
Kini (1995), who found that VC backing resulted in relatively superior operating perfor-
mance through a monitoring process. However, the coefficient on VCBF
_
D is not sta-
tistically significant. In this respect, further research concerning the Japanese VC invest-
ment would seem to be appropriate.
Thirdly, market capitalization is positively related to pre-IPO operating performance
while the size (number of employees) and the firms age (years of operating history) is
negatively related. Furthermore, age of firm and number of employees negatively
influence the aftermarket operating performance, while market capitalization exerts a
positive influence. Our regression analysis shows that poor operating performance before
and after IPO is associated with large and established companies.
Finally, in as much as we have established a series of important and interesting findings
concerning the operating performance of Japanese IPO companies and ownership
structure, there are many unanswered questions. Another potentially interesting avenue
of research is the comparison of operating performance of new or existing listed
companies on stock exchanges to distinguish whether these trends are peculiar to newly
registered OTC companies (Hebner and Hiraki, 1993; Cai and Wei, 1997). Also, we may
need further analysis using another performance measure, for example, operating perform-
ance per capita or per assets, or stock price performance.
Acknowledgements
We are grateful to Professor S. Ghon Rhee and anonymous referees for valuable
comments and suggestions. This paper was presented for the International Conference held
in Osaka City University at 79 August 1999. We thank Richard Smith (Claremont
Graduate School) and Leslie Marx (University of Rochester) for helpful comments. We are
grateful to the Zengin Foundation for Studies on Economics and Finance, and the Ministry
of Education for providing financial support. A part of this research is financially
supported by Japan Society for the Promotion of Science Grant-in-Aid for Encouragement
of Young Scientists.
5
Cai and Wei (1997) use six operating performance measures of (1) ordinary income/total assets, (2)
operating income/total assets, (3) operating cash flow/total assets, (4) growth rate of capital expenditure, (5)
growth rate of net sales, and (6) growth rate of operating income. Also, in their regression analysis, the changes in
ordinary income relative to total assets from Year 1 to +1, + 3, and +5 are used as the independent variables.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 179
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