Accepted Manuscript

Zero-revenue IPOs

Andrea Signori

PII: S1057-5219(18)30172-8
DOI: doi:10.1016/j.irfa.2018.03.003
Reference: FINANA 1200
To appear in: International Review of Financial Analysis
Received date: 25 November 2017
Revised date: 27 February 2018
Accepted date: 14 March 2018

Please cite this article as: Andrea Signori , Zero-revenue IPOs. The address for the
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appropriate. Finana(2017), doi:10.1016/j.irfa.2018.03.003

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 ACCEPTED MANUSCRIPT

Zero-revenue IPOs

Andrea Signori

Catholic University of Milan

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Abstract

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Information-based models of the IPO decision suggest that going public before having generated
revenues is inefficient. Still, 15% of firms going public in Europe have not reported revenues prior
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to the IPO. This paper investigates why these firms decide to conduct an IPO and examines whether
the absence of revenues affects the outcomes of this decision. The evidence shows that zero-
revenue firms go public to fund investments, mainly in the form of R&D. However, their shares are
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more underpriced at the IPO and develop less liquid and more volatile aftermarket trading than
those of revenue-generating issuers. These effects are driven by firms whose revenue-less status is
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more persistent, as 18.6% still report no revenues at their three-year IPO anniversary. Also, zero-
revenue issuers face a higher risk of being delisted shortly after the IPO. Overall, the evidence
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indicates that zero-revenue firms go public in an attempt to fund superior growth opportunities, but
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the high levels of information asymmetry and uncertainty increase the cost of raising capital and the
risk of an early delisting.
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JEL classification: G32, G33, G34

Keywords: IPOs, zero revenues, growth opportunities, information asymmetry.


Address: Largo Gemelli 1, 20123 Milan, Italy. Phone: (+39) 02 7234 4101. E-mail: andrea.signori@unicatt.it.
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Zero-revenue IPOs

PT
Abstract

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Information-based models of the IPO decision suggest that going public before having generated
revenues is inefficient. Still, 15% of firms going public in Europe have not reported revenues prior

SC
to the IPO. This paper investigates why these firms decide to conduct an IPO and examines whether
the absence of revenues affects the outcomes of this decision. The evidence shows that zero-
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revenue firms go public to fund investments, mainly in the form of R&D. However, their shares are
more underpriced at the IPO and develop less liquid and more volatile aftermarket trading than
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those of revenue-generating issuers. These effects are driven by firms whose revenue-less status is
more persistent, as 18.6% still report no revenues at their three-year IPO anniversary. Also, zero-
revenue issuers face a higher risk of being delisted shortly after the IPO. Overall, the evidence
D

indicates that zero-revenue firms go public in an attempt to fund superior growth opportunities, but
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the high levels of information asymmetry and uncertainty increase the cost of raising capital and the
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risk of an early delisting.

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JEL classification: G32, G33, G34

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Keywords: IPOs, zero revenues, growth opportunities, information asymmetry.

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1. Introduction

Over the last decade, 15% of the companies going public in Europe had no revenues at the time

of the IPO. A firm’s decision to issue public equity even before bringing its products to the market

is somehow puzzling. Information-based models of the IPO decision predict that firms should go

public only after a sufficient amount of information about them has accumulated among potential

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investors (Chemmanur and Fulghieri, 1999). Similarly, product market-based models indicate that

firms should first finance projects with the greatest revenue-generating ability privately, and then

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rely on public markets to fund the remaining investment opportunities that contribute to incremental

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growth (Spiegel and Tookes, 2008). Most of the empirical evidence is consistent with the above

theoretical predictions, as a private firm’s likelihood of going public becomes significant only after
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reaching certain critical size and productivity levels (Pagano et al., 1998; Chemmanur et al., 2010).
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This implies that going public in the absence of revenues may be an inefficient decision. Still, zero-

revenue firms across Europe have succeeded in raising around nine billion euros over the last

decade. This paper sheds light on the reasons pushing these firms to conduct an IPO, and
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investigates whether the absence of revenues affects the outcomes of this decision.
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The trade-off faced by a zero-revenue firm evaluating the option to go public can be modeled
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as follows. On the one hand, the absence of revenues implies larger costs of information acquisition

for outsiders, with investors possibly requiring extra compensation to participate in the offering, e.g.
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in the form of underpricing. Therefore, a premature IPO timing may result in increased costs of

raising capital for the firm. On the other hand, the IPO provides the company with greater flexibility

in accessing financial resources and unlocks value-enhancing projects thanks to the fresh infusion

of cash. The young age and the absence of revenues imply that the value of these firms is almost

exclusively ascribed to growth opportunities. These opportunities are likely to be missed if the firm

remains private longer, because the lack of an established stream of revenues that can serve as

collateral to new debt issuance further exacerbates financial constraints, typically more severe for

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private rather than public firms in the first place. Thus, if the expected benefits from pursuing such

growth opportunities offset the expected costs of raising capital in the presence of increased

information asymmetry, then zero-revenue firms may find it optimal to go public.

The first objective of this paper is to identify the reasons why a firm decides to go public

despite its inability to generate revenues until then. Since cashing out by existing shareholders and

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capital structure rebalancing are secondary motives due to the young age and low leverage of these

firms, the analysis focuses on two factors, namely investments and M&A activity. The growth

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opportunities explanation predicts that, in equilibrium, zero-revenue firms that decide to go public

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invest more than their revenue-generating peers after the IPO as they face superior growth

opportunities that are expected to offset the larger information production costs. These opportunities
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may consist of internal and external growth, as IPO proceeds can be allocated to investments and
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publicly traded stocks can be used as acquisition currency. Furthermore, as being acquired by an

established incumbent is increasingly modeled as a successful outcome for new entrants (Gao et al.,

2013), it is possible that zero-revenue firms go public in an attempt to gain visibility and draw the
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attention of potential acquirers.

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The second objective of this paper is to assess whether the absence of revenues affects the
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outcomes of the decision to go public in a way that may increase the cost of raising capital for the

firm. The link between the product and financial market characteristics generates important
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implications for investors who consider participating in IPOs by zero-revenue firms. First, the

inability to bring products to the market makes it unlikely that investors are acquainted with the

firm at the time it goes public, thereby increasing the level of information asymmetry. Second,

uncertainty about whether and when the firm will manage to start generating revenues increases the

risk associated with the investment. This predicts that zero-revenue firms are more underpriced than

revenue-generating issuers at the IPO, as investors would require a compensation for their superior

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risk exposure, and develop less liquid and more volatile trading in the aftermarket. Also, this may

expose zero-revenue IPOs to a higher risk of delisting.

The above predictions are tested on the population of 2,432 non-financial European IPOs

during the period 2002-2014. Although it is unlikely that firms self-select into the zero-revenue

status, their behavior is benchmarked against both the rest of the population of IPOs and a matched

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sample of revenue-generating issuers to alleviate possible endogeneity concerns. The reason for

choosing the European context is because of the presence of second-tier, loosely regulated markets,

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such as London’s Alternative Investment Market (AIM), designed to facilitate small firms’ access

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to public equity capital (Vismara et al., 2012). The minimal admission criteria set by these markets

make it easier for firms with no revenues to go public, thereby increasing the relevance of the zero-
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revenue IPOs phenomenon. In terms of industry distribution, more than half of these issuers belong
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to the natural resources and pharmaceutical industries. This is consistent with prior literature

documenting that firms operating in industries characterized by greater capital intensity tend to go

public at an earlier stage of their life cycle (Chemmanur et al., 2010).

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The empirical evidence can be summarized as follows. The analysis of IPO motivations
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documents that zero-revenue firms invest more in research and development (R&D) than both the
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rest of the population and the matched sample of revenue-generating issuers after going public. This

is consistent with the growth opportunities explanation. On average, the R&D expenses to total
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assets ratio of zero-revenue firms computed across the three years post-IPO is 2.4 percentage points

higher than that of other firms. At the same time, capital expenditure is 2.4 percentage points lower,

and the likelihood of making an acquisition decreases by 11%. In line with the young age and

industry distribution of these firms, the evidence suggests that their growth opportunities consist of

early stage, innovation-oriented investments rather than increases in tangible fixed assets or

acquisitions of other firms. Inspection of official IPO prospectuses supports this view. For instance,

the intended use of proceeds stated by Circassia Pharmaceuticals, a UK-based biotech company

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gone public in 2014 and focused on the development of immunotherapy products for allergies, was

to bring its lead product candidate to the market and advance the development of its other clinical-

stage product candidates. Still, there is a small fraction of firms that mention cashing out by existing

shareholders and debt retirement as important IPO motivations. Zero-revenue firms that go public to

retire debt invest less in R&D and face a higher risk of being delisted. As for the likelihood of being

targeted in an M&A shortly after going public, the results show that it does not differ between zero-

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revenue and other issuers.

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The evidence on IPO outcomes documents that the absence of revenues plays a negative role.

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First, zero-revenue IPOs are more underpriced than ordinary IPOs, with an average difference of

2.3 percentage points. This is consistent with the presence of increased information asymmetry that
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leads to a larger amount of money left on the table. Second, aftermarket trading is characterized by
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a significantly lower level of stock liquidity, with the evidence being robust across three different

proxies, namely bid-ask spread, Amihud’s (2002) illiquidity ratio, and the fraction of zero-return

days. Also, zero-revenue stocks are more volatile, as the standard deviation of returns is 19% higher
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than that of the matched sample. Consistent with the view that a firm’s inability to generate
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revenues increases information asymmetry and uncertainty among investors, the two above effects

are primarily due to issuers whose revenue-less status lasts longer after the IPO. Indeed, a
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significant fraction of firms, namely 18.6%, still report no revenues at the three-year IPO
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anniversary. Third, zero-revenue firms face a higher risk of delisting. The likelihood of being

delisted within three years of going public is 3.8% higher than that of the matched sample.

The contribution of this paper is two-fold. First, it adds to the recent literature relating product

market characteristics and IPO outcomes (see, e.g., Chemmanur and He, 2011). In particular, IPOs

by loss-making firms have received a great deal of attention (e.g., Yi, 2001). The fraction of firms

going public with negative earnings has indeed increased over time, with a peak during the dot-com

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bubble.1 Aggarwal et al. (2009) document that firms with more negative earnings are perceived as

facing greater growth opportunities and obtain higher valuations at the IPO. This paper takes

another perspective as the absence of revenues conveys information about the issuers that are

substantially different from those suggested by negative earnings. While losses for the period may

be due to the firm’s temporary failure to cover its costs, the absence of revenues indicates its

inability to bring products to the market to date. In the latter case, the implications for investors and

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other market participants are profoundly different from those generated by a loss-making IPO firm

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that has already commercialized its products. Second, the paper adds to the debate on the success

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factors that help early-stage firms to raise capital. The role played by the presence of prior revenues

(or ‘traction’) in attracting early-stage financing seems to depend on the type of capital suppliers,
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with professional investors such as venture capitalists (VCs) and business angels (Bernstein et al.,

2017) responding differently from the crowd (Vismara, 2016). This paper adds to this debate by
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documenting that the absence of revenues leads to larger costs of raising public equity capital and to

a higher risk of an early delisting, consistent with increased information asymmetry and uncertainty
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faced by investors.
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The remainder of the paper is organized as follows. Section 2 reviews the related literature and

formulates the hypotheses. Section 3 presents the sample, data, and methodology used in the paper,
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and shows some descriptive statistics. Section 4 presents the results of the multivariate analyses on
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IPO motivations and outcomes. Section 5 provides evidence of additional tests about the effects of

the natural resources industry, VC backing, geographic region, and legal origin. Section 6

concludes.

2. Related literature and hypotheses

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See Jay Ritter’s website for updated data on IPOs by companies with negative earnings.
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The ability to quickly launch products to the market, and hence generate revenues, is a crucial

factor for start-up firms to enable their development and survival. A large stream of literature across

disciplines has addressed this issue by trying to identify the various sources of competitive

advantage that make some firms better equipped than others to achieve this goal. Consensus has

been reached over the presence of a funding gap that prevents entrepreneurial ventures from

commercializing their products and services quickly (Frank et al., 1996). This gap can be quantified

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as the difference between the amount of capital that would be invested in the absence of

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information-based market frictions and the amount of capital actually invested. While various

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theories of the firm have modeled the role played by human assets in alleviating information

asymmetry (e.g., Wernerfelt, 1984), young firms’ difficulty in raising early-stage capital is also
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ascribed to the lack of nonhuman assets such as no or little credible track records, as in the case of

zero-revenue firms (Busenitz et al., 2005). Documented market acceptance of the firm’s product is
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indeed a major predictor of success (Macmillan et al., 1987). Bernstein et al. (2017) investigate the

effectiveness of firm traction in conveying information about an underlying idea’s success and
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therefore attracting early-stage investors, and finds that investors are more sensitive to the
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characteristics of the founding team rather than traction. Vismara (2016) addresses this issue in an
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equity crowdfunding setting and finds that firms reporting prior revenues are more likely to be
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funded.

2.1 Zero-revenue status and IPO motivations

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While the conventional wisdom associates a firm’s choice to go public with a natural stage in

its growth process, several other factors play a relevant role. A survey by Brau and Fawcett (2006)

reveals that the creation of publicly traded stocks to be used as acquisition currency is the most

relevant motivation to go public, followed by the establishment of a market value for the firm and

reputation enhancement. Consistently, Celikyurt et al. (2010) document the role played by the

acquisition motive, and Zingales (1995) develops a theoretical model according to which the IPO

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may increase the bargaining power of a newly listed firm vis-à-vis potential acquirers by setting its

valuation for a subsequent acquisition. Other relevant IPO motivations are the firm’s need to

rebalance its capital structure and to provide shareholders with an exit mechanism. Pagano et al.

(1998) document that firms go public to reduce leverage following a period of substantial

investments. Lerner (1994) shows that VCs time their exit decision by taking portfolio firms public

when equity valuations are high.

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Also, firms become more likely to go public in the presence of favorable windows of

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opportunity to take advantage of the positive investor sentiment (Ritter, 1984). Starting with

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Ibbotson and Jaffe (1975), the literature on market timing has highlighted that IPOs tend to occur in

waves. A number of papers have focused on information spillovers as the main driver of the so-
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called hot market phenomenon. Alti (2005) develops a model based on the idea that information
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generated in valuing pioneer firms makes the valuation of followers easier and hence triggers a

larger number of IPOs. Lowry and Schwert (2002) and Benveniste et al. (2003) provide empirical

evidence of such an effect by documenting that IPO volume depends on the outcomes of recent
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issues. Benveniste et al. (2002) present a model in which pioneers’ IPOs reveal the presence of
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industry-wide growth opportunities. On the other hand, Yung et al. (2008) argue that variations of

real investment opportunities over time affect the degree of adverse selection in the IPO market, as
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an increase in investment opportunities induces more bad firms to pool. Whether zero-revenue
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firms’ decision to go public is driven by the desire to fund growth opportunities or by the attempt to

issue overvalued equity by pooling with high quality firms remains an open question.

A growing literature has highlighted that the extent of the benefits that a firm can enjoy by

effectively timing its IPO decision, as predicted by market timing theories, is crucially shaped by its

competitive position in the product market. Bhattacharya and Ritter (1983) and Maksimovic and

Pichler (2001) model the trade-off faced by innovative private firms when evaluating the option to

conduct an IPO. While going public allows to raise capital at a lower cost than private equity, it has

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the disadvantage of releasing confidential information that can harm the firm’s competitive

position. Therefore, firms that have a smaller market share, face more competition, and operate in

industries characterized by a greater value of confidentiality are less likely to go public. Spiegel and

Tookes (2008) derive similar implications for the relationship between a firm’s market share and its

probability of going public. Chemmanur and He (2011) develop a theoretical model of IPO timing

starting from the notion that going public enables a firm to grab market share from competitors in

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the product market. Chemmanur et al. (2010) show that firm productivity peaks around the IPO,

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indicating that both financial and product market considerations matter in the timing of the going

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public decision.

In the specific context of zero-revenue firms, the revenue-less status implies that cashing out by
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existing owners and debt retirement should not be relevant reasons to go public. First, the fact that
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the firm is still at such an early stage of its life cycle makes it unlikely to be the appropriate timing

for existing shareholders to monetize their investment. One may argue that, if the absence of

revenues is a consequence of the firm’s weak competitive position in the product market, owners
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might be willing to cash out in an attempt to abandon the sinking ship. Still, the negative signal
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conveyed by the sale of secondary shares in the IPO (Leland and Pyle, 1977), combined with the

issuer’s inability to bring products to the market until then, would probably prevent the firm from
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attracting sufficient demand for its shares, thereby undermining the feasibility of the whole IPO
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process. Second, the lack of an established stream of revenues that can serve as collateral to debt

issuance is likely to make these firms unable to take on debt when private (Stiglitz and Weiss,

1981). Consistent with these arguments, the testable hypotheses of the paper are formulated with

respect to the following IPO motivations: (1) raising funds for investments, and (2) facilitating

M&A activity.

2.1.1 Investments

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Going public in the absence of revenues may be an efficient choice only if the value-enhancing

effect of unlocking superior growth opportunities is expected to offset information production costs,

which are presumably larger for zero-revenue firms relative to revenue-generating issuers. Financial

constraints, that become more severe in absence of an established track record, may make the

issuance of public equity the only option available so as not to forgo such growth opportunities.

Thus, these firms’ likelihood to survive after going public depends exclusively on their ability to

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turn these opportunities into positive NPV investments by efficiently allocating IPO proceeds. If the

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decision to go public serves this purpose, then we should observe larger post-IPO investments by

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zero-revenue firms relative to revenue-generating issuers.

The absence of revenues allows us to draw implications also for the type of investment that
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these firms are likely to undertake. Indeed, investment strategies of small and young firms sensibly
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differ from those of large and established incumbents (Acs and Audretsch, 1988). In particular,

established firms tend to be more concerned about gaining efficiency, minimizing risk, and

safeguarding current assets as their stream of revenues comes primarily from existing products. This
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lowers their incentive to engage in R&D investments that may result in their own products being
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cannibalized (Arrow, 1962). On the other hand, new entrants are motivated by the advantage of

becoming first movers, leading to a division and specialization of the innovation effort, with small
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firms investing mostly in radical innovation, and large firms engaging in incremental innovation.
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This suggests that zero-revenue firms are more likely to allocate IPO proceeds to radical rather than

incremental innovation projects. Radical innovation is typically pursued by means of R&D

investments, which measure a firm’s commitment in terms of innovative input (Signori and

Vismara, 2014). Therefore, the investments undertaken by zero-revenue firms are more likely to

have the form of R&D expenses aimed at generating breakthroughs rather than purchases of

physical assets aimed at increasing productivity. This leads to the prediction that zero-revenue

issuers invest more in R&D than revenue-generating issuers after going public.

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2.1.2 M&A activity

Prior literature has documented that a firm’s acquisition activity soars after going public (e.g.,

Celikyurt et al., 2010). The fresh infusion of cash, the creation of stock as alternative currency, and

the reduction of uncertainty concerning potential takeover gains are all benefits that tend to trigger

acquisitions by newly listed firms (Hsieh et al., 2011). The growth opportunities explanation

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predicts that zero-revenue firms are more likely to conduct acquisitions than revenue-generating

issuers after going public as long as external growth is part of these opportunities. Also, potential

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targets may be more likely to accept an acquisition bid made by a firm facing promising growth

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prospects (for a given bid and a given intrinsic value).
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At the same time, however, an increasing fraction of firms is being acquired shortly after going

public (Gao et al., 2013). Previous literature has highlighted the role of the IPO as an intermediate
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step towards the subsequent sale of the firm, given the benefits obtained in terms of reduced

information asymmetry (Reuer and Shen, 2004), increased bargaining power (Zingales, 1995), and
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the possibility of investing the IPO proceeds in value-enhancing projects that subsequently
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positions the firm to have a better valuation (Poulsen and Stegemoller, 2008). These effects should
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be particularly beneficial for zero-revenue firms, which suffer from more severe information
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asymmetry and financial constraints in light of the above theoretical arguments. Furthermore, in

line with the predictions on R&D investments, the fact that zero-revenue firms are more likely to
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conduct more radical innovation than incumbents implicitly shapes their role in the market for

corporate control (Henkel et al., 2015). Large and established firms, focused on harvesting

innovation outputs, are indeed more likely to become acquirers, while small and young firms, still

putting a great deal of effort in innovation inputs, tend to become targets (Bena and Li, 2014).

Overall, the predictions about the effect of the zero-revenue status on post-IPO M&A activity

can be formulated as follows. First, zero-revenue firms’ likelihood of making an acquisition is not

expected to differ from that of other revenue-generating issuers because, although growth
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opportunities may unfold through acquisitions, the absence of revenues makes these firms less

suitable to become acquirers. Second, zero-revenue firms are more likely to be acquired than other

revenue-generating issuers after going public in light of the positive implications that the IPO

generates for new entrants in the market for corporate control.

2.2 Zero-revenue status and IPO outcomes

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Although motivated by the need to fund superior growth opportunities, the decision to go

public may turn out to be inefficient if the issuer was unable to generate revenues until then and

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negatively affect IPO outcomes. This subsection formulates testable hypotheses about the effect of a

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firm’s absence of revenues on the following outcomes of the going public decision: underpricing,
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stock liquidity, stock return volatility, and survival.

2.2.1 IPO underpricing

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Information-based theories have played a prominent role in explaining the existence of IPO

underpricing and its cross-sectional variation. Starting from the winner’s curse theory proposed by
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Rock (1986), the fact that information about the issuer’s true value are not uniformly distributed
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across various market participants has been the premise of a number of theoretical explanations.

Information revelation (Benveniste and Spindt, 1989) and signaling (Ibbotson, 1975) theories are
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some of the most notable examples. In the presence of a revenue-less issuer, the higher degree of
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information asymmetry faced by investors should result in higher underpricing than that of ordinary

IPOs as remuneration for investors’ superior risk exposure. Furthermore, the absence of revenues

makes IPO pricing particularly problematic as the most common methodology used to value IPOs,

namely comparable firm multiples (Roosenboom, 2012), becomes unfeasible. With future cash

flows being difficult to forecast, fair value estimates are affected by a considerable degree of

uncertainty. A higher level of uncertainty about the issuer’s value also leads to higher expected

underpricing (Beatty and Ritter, 1986). Therefore, these theoretical arguments lead to the

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hypothesis that IPOs by zero-revenue firms are more underpriced compared to those by revenue-

generating firms.

2.2.2 Stock liquidity and volatility

The ability to develop liquid trading in the secondary market is a critical component in the

success of an IPO. Prior literature documents that liquidity has beneficial effects on stock prices and

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stimulates trading by knowledgeable investors that make prices more informative (e.g., Amihud and

Mendelson, 1986). Firms with more liquid shares pay lower investment banking fees when

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conducting seasoned equity issues (Butler et al., 2009). In terms of information asymmetry, Ellul

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and Pagano (2006) propose a model in which an issuer’s aftermarket liquidity is negatively related
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to its level of information asymmetry. Diamond and Verrecchia (1991) show that reducing

information asymmetry through enhanced disclosure lessens the price impact of trades and
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improves stock liquidity. If the absence of revenues increases the level of information asymmetry

faced by firm outsiders, investors would be discouraged to get involved in trading. This leads to the
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hypothesis that zero-revenue IPOs are characterized by a lower level of stock liquidity than ordinary
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IPOs in the aftermarket.

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A similar line of reasoning applies for stock return volatility. Uncertainty about whether and
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when the firm will be able to start generating revenues in the future may increase investors’

perceived risk of trading shares of zero-revenue issuers. Furthermore, increased information

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asymmetry implies that, in the presence of reduced stock liquidity due to lower investor

participation, stock prices become a noisier proxy of firm value. As trading activity becomes more

sporadic, prices have to adjust to a larger amount of information revealed per trade, and are

therefore exposed to higher volatility. Consistently, the effects of periodic surprises about a firm’s

performance, such as earnings announcements, are amplified in the presence of a higher degree of

information asymmetry, resulting in more volatile stock returns (Healy et al., 1999). This leads to

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the hypothesis that zero-revenue IPOs are characterized by a higher level of volatility of stock

returns than ordinary IPOs in the aftermarket.

2.2.3 Survival rate

Another crucial outcome of the IPO process that has received considerable attention from the

literature is the firm’s ability to survive in the financial market. The documented determinants of

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IPO survival are manifold, spanning from the characteristics of the issuing firm (Pour and Lasfer,

2013) to the affiliation with reputable third-party agents like underwriters (Espenlaub et al., 2012)

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and VCs (Jain and Kini, 2000), to the requirements imposed by stock market regulators (Cattaneo et

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al., 2015). The prediction generated by the presence of increased information asymmetry argues that
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zero-revenue IPOs may develop less liquid trading in the aftermarket. A direct implication of this

effect is that these IPOs may be less able to attract the amount of trading volume that is necessary to
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meet ongoing listing requirements, thereby increasing their likelihood of being delisted. Therefore,

these arguments lead to the hypothesis that zero-revenue firms are more likely to be delisted than
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revenue-generating issuers shortly after the IPO.

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3. Data
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3.1 Sample
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The empirical design of the paper is based on the population of 2,432 non-financial firms going

public in Europe during the period 2002–2014. The stock exchanges of the following countries are

covered: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,

Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Malta, the Netherlands, Norway,

Poland, Portugal, Romania, Slovenia, Spain, Sweden, Switzerland, Turkey, and the United

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Kingdom.2 The main data source is the EurIPO database, used in previous IPO studies (e.g.,

Chambers and Dimson, 2009).3 The population includes IPOs by operating companies identified

after applying the usual filters adopted by the IPO literature (e.g., Loughran and Ritter, 2004), that

is, after excluding introductions, readmissions, market transfers, cross-listings, SPACs, and closed-

end funds.4

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Zero-revenue IPOs are defined as initial public offerings by firms that reported zero revenues in

the last fiscal year before the IPO date, as stated in the official listing prospectus. Table 1 reports the

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distribution of zero-revenue IPOs by year, industry, and country. Overall, they account for a

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significant fraction of the population of European IPOs over the sample period, namely 15%. The

year distribution exhibits a certain degree of homogeneity. In terms of industry distribution, the
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phenomenon is predominant in the natural resources industries, namely oil and gas and mining. This
MA

is consistent with previous studies on the influence of product market characteristics on IPO timing

which document that firms operating in industries characterized by higher capital intensity tend to

go public at an earlier stage (Chemmanur et al., 2010).5 In terms of country distribution, the highest
E D

percentage is in the UK, where one fourth of the IPOs are conducted by firms with no revenues.
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This is mainly due to the presence of the AIM market.

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[ TABLE 1 ]
AC

2
For France, the French Paris Bourse is considered until the creation of Euronext through the merger of the stock
exchanges of Belgium, France, the Netherlands and Portugal, where the first listing took place on January 27, 2005.
Afterwards, Euronext is considered in its entirety. The stock exchanges of the four largest European economies (France,
Germany, Italy, and UK) are covered over the whole sample period and represent 76.5% of the observations. Other
exchanges are covered from 2006 onwards.
3
See Vismara et al. (2012) for a detailed description of the EurIPO database.
4
The population of IPOs is composed of issuers that have successfully gone through all the phases of the listing
process, and does not account for issuers that had initially filed for an IPO and subsequently withdrawn their decision.
Helbing and Lucey (2018) document a 12% withdrawal rate in the European IPO market. IPO attempts by firms that
failed to meet listing requirements are also ignored, which may expose the empirical analysis to a potential selection
issue.
5
Given the real options nature of natural resources firms, the absence of revenues may not necessarily due to the
inability to bring products to the market. Additional tests in Section 5 address this issue.
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3.2 Variables

Two sets of dependent variables are used in the empirical analysis. The first set is employed to

shed light on the two possible motivations pushing zero-revenue firms to go public, namely

investments and M&A activity. Investments are proxied by two measures, namely annual capital

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expenditure and R&D expenses, obtained from Orbis and Datastream. Capital expenditure is

defined as the ratio of capital expenditure, that is, addition to fixed assets other than those

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associated with acquisitions, to total assets. R&D expenses are also divided by total assets.6 The

SC
two variables are measured by computing the average of the ratios across the three years post-IPO.
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As for M&A activity, the list of IPOs is matched with Thomson Financial SDC to identify issuers

that have been involved in an M&A as acquirer or target within three years of going public. Thus,
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the variable acquirer equals one if the firm has completed an acquisition, while the variable target

equals 1 if the firm has been acquired within three years of the IPO.7
D

The second set of dependent variables is aimed at investigating the effect of the zero-revenue
E

status on IPO outcomes, namely (1) IPO underpricing, (2) stock liquidity, (3) stock return volatility,
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and (4) survival rate. Underpricing is defined as the difference between the first day closing price
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and the offer price, divided by the offer price (Loughran and Ritter, 2004). Stock liquidity is

measured using three different proxies: bid-ask spread, defined as the average ratio of the difference
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between bid and ask prices divided by their midpoint; Amihud’s (2002) illiquidity ratio, defined as

the average ratio of the daily absolute return of a firm’s stock to the monetary trading volume on

that day; and zero return days, defined as the percentage of trading days in which the closing price

is the same as that of the day before. Stock return volatility is defined as the standard deviation of

6
A number of papers measure R&D expenses in terms of R&D-to-sales ratio (e.g., Dambra et al., 2015). The choice of
total assets as denominator is motivated by the fact that the R&D-to-sales ratio is impossible to compute for zero-
revenue firms. In line with prior literature, R&D expenses are set to zero if missing.
7
The paper sheds light on the IPO motivations of firms by looking ex-post at their involvement in M&A activity, which
does not necessarily imply that they decided to go public with this particular intent.
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daily stock returns minus the standard deviation of daily returns of the primary equity index of the

stock exchange where the firm goes public, as in Lowry and Murphy (2007). Liquidity and

volatility measures are computed from one month after the IPO date till the minimum between

thirteen months after the IPO date and one month before any truncation event, such as acquisition or

delisting. The first month post-IPO is excluded because the effects of price stabilization by financial

intermediaries may influence the results. Finally, survival rate is measured by tracking whether a

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firm gets delisted for reasons other than takeover within three years of the IPO. The data source of

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these variables is Datastream. All continuous dependent variables are winsorized at the 1% level.

SC
Among the independent variables, the key explanatory variable of the paper is the zero-revenue

dummy, equal to one if the issuing firm has reported zero revenues in the last fiscal year before the
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IPO, according to the official prospectus. The following independent variables are then included in

the multivariate analyses as controls.8 Firm size is defined as the log of the firm’s pre-IPO total
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assets. Firm age is the log of one plus the difference between the IPO year and the year the

company was founded. Both size and age capture the firm’s degree of information asymmetry,
E D

which is known to affect various outcomes of the IPO process (e.g., Ellul and Pagano, 2006).
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Leverage is defined as the previous fiscal year’s total debt divided by total assets, and controls for

the presence of credit relationships that may reduce the level of uncertainty about the issuer (James
CE

and Wier, 1990). Offer size is the log of the product between the number of shares sold in the IPO
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and the offer price (as in Bajo et al., 2016). Dilution is defined as the number of newly issued shares

sold in the IPO divided by the number of pre-IPO shares outstanding, and aims at capturing the

owners’ attitude towards the listing decision (Habib and Ljungqvist, 2001). VC backing is a dummy

equal to one if the issuer is backed by a venture capitalist, and controls for the role played by this

type of investor in the IPO market (Bessler and Seim, 2012). Underwriter reputation is calculated as

8
There are no control variables about the corporate governance characteristics of issuing firms. Their absence is due to
the international nature of the sample, which makes the cross-country definition of corporate governance metrics
problematic. Thus, accounting for corporate governance effects in the multivariate analysis is left with country and
market (regulated vs. second-tier) fixed effects.
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the lead underwriter’s market share in terms of proceeds raised in European stock exchanges during

1995-2014 (Migliorati and Vismara, 2014), and allows to capture the reputational effect of

prestigious investment banks (Beatty and Ritter, 1986). Market momentum is defined as the local

equity index return over the 100 trading days before the IPO date, and aims at controlling for the

effects of current market conditions on the IPO decision (Lowry, 2003). Second-tier market is a

dummy equal to one if the IPO takes place on a second-tier, exchange-regulated market,

PT
characterized by looser regulatory requirements than official markets (Vismara et al., 2012).

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Finally, regulatory environment is the average between the property rights and government integrity

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indices published by the Heritage Foundation for each country-year, both ranging from 0 to 100.

This variable aims at capturing the effects of different legal frameworks on IPO outcomes.9
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3.3 Methodology
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The behavior of zero-revenue IPOs is investigated in a multivariate setting by means of cross-

sectional regressions where the zero-revenue dummy identifies such issuers. Probit regressions are
D

estimated in case of binary dependent variables, such as the likelihood of making an acquisition
E

within three years of the IPO. Also, the likelihood of being delisted is modeled by means of both
PT

probit and Cox proportional hazard models. To alleviate endogeneity concerns arising from the
CE

possible selection on observable characteristics, each zero-revenue firm is matched with a revenue-

generating firm that (1) goes public in the same calendar year, (2) operates in the same industry
AC

(Fama-French 17 classification), and (3) has the closest value of pre-IPO total assets. This ensures a

certain degree of comparability between zero-revenue and other IPO firms throughout the analysis.

The matching procedure is performed with replacement due to the substantial presence of zero-

revenue firms in the mining and oil and gas industries, resulting in a limited number of candidate

comparable firms. In these industries, observations in the treatment vs. control groups are 110 vs.

9
The Heritage Foundation, a U.S. research and educational institution, is increasingly employed as data source by
finance researchers (e.g., Lerner et al., 2018). The property rights index measures the degree to which a country’s laws
protect private property rights, thereby allowing individuals to accumulate private property. The government integrity
index measures the extent to which corruption prevents a country’s government to enforce laws.
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63 and 72 vs. 71, respectively. With the aim of decreasing bias, revenue-generating firms that look

similar to more than one zero-revenue firm are therefore employed multiple times, but no control

firm is matched more than five times.

3.4 Descriptive statistics

Table 2 reports descriptive statistics distinguishing between zero-revenue and other IPOs, with

PT
univariate tests on the difference between the two groups. Panel A reports mean, median, and

standard deviation of post-IPO investments and M&A variables. On average, capital expenditure by

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zero-revenue firms over the three years post-IPO accounts for 10.8% of total assets, which is

SC
slightly higher than the 9.5% associated with revenue-generating IPOs. Post-IPO R&D expenses by
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zero-revenue firms account for 5.1% of total assets relative to 3.2% among revenue-generating

issuers. The univariate tests document significant differences between R&D expenses of the two
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groups. As for M&A activity, zero-revenue IPOs are less frequently acquired and targeted than

ordinary IPOs.
D

In Panel B, zero-revenue IPOs exhibit higher underpricing than ordinary IPOs (18.2% vs. 11%,
E

on average), with the difference being statistically significant. In the aftermarket, they are
PT

associated with a lower level of stock liquidity, as the values of all the three proxies, namely bid-ask
CE

spread, illiquidity ratio, and the fraction of zero return days, are higher than those of other IPOs

(higher values indicate lower liquidity). Statistical significance is robust across the different proxies.
AC

Zero-revenue stocks also exhibit a higher degree of volatility of returns, with an average of 2.4%

compared to 1.7%. The likelihood of post-IPO delisting is also higher among revenue-less issuers,

with 7.9% of them being delisted within three years of going public relative to 4.8% of other

issuers.

Concerning firm and offer characteristics, Panel C shows that zero-revenue IPOs are conducted

by smaller and younger firms, as expected. They also tend to be less indebted than firms with prior

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revenues, with an average 16.2% leverage compared to 33.4%. This is in line with the idea that

banks and other financial intermediaries are hesitant to provide private revenue-less firms with

access to debt financing. A considerable fraction of zero-revenue issuers, namely 27.9%, are backed

by a VC, with this percentage being not statistically different from that associated with revenue-

generating issuers.10 The high similarity of market momentum between the two groups of firms

indicates that the absence of revenues does not seem to affect a firm’s market timing considerations

PT
of the IPO decision. Finally, a remarkable difference lies in the type of market where the offerings

RI
take place, with 91.5% of the zero-revenue firms choosing second-tier markets compared to 61.8%

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of firms with revenues. This is coherent with the minimal regulatory requirements imposed by

second-tier markets.
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[ TABLE 2 ]
E D

3.5 Persistence of the zero-revenue status

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Figure 1 illustrates the post-IPO scenarios faced by zero-revenue firms and allows to assess the
CE

persistence of the zero-revenue status beyond the IPO. Starting from the listing date, the graph

reports on a quarterly basis the fraction of zero-revenue firms that still lack revenues, those that
AC

report positive sales, those targeted in an M&A deal, and those that are delisted within three years

of the IPO. At the three-year anniversary, a considerable fraction of zero-revenue firms, namely

18.6%, is still categorized as such. On the other hand, 61.5% are no longer without revenue at that

time. The fraction of firms starting to report revenues persistently increases at a quite stable rate

10
Additional analyses aimed at testing whether the behavior of VC-backed issuers is different from that of other, non-
VC-backed zero-revenue firms are presented in Section 5.
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across quarters. The rest of the firms has been either targeted in an acquisition (12%) or delisted

(7.9%).11

[ FIGURE 1 ]

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3.6 IPO motivation vs. outcome

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All zero-revenue firms state in the official prospectus that the main reason to go public is to

SC
speed products to the market, as their intended use of proceeds is either to fund new investments or
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to support working capital required to sustain ongoing investments aimed at generating revenues.

There are, however, firms that mention other reasons, namely the repayment of existing debt and
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the owners’ decision to sell (part of) their equity stakes. One may expect both the post-IPO behavior

of issuers and the outcomes of the listing decision to vary according to the above mentioned
D

motivations. For instance, going public to retire debt or to provide insiders with the possibility to
E

cash out even before succeeding in bringing products to the market may raise concerns among
PT

investors and therefore result in disappointing IPO outcomes. Table 3 addresses this concern by
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reporting descriptive statistics of the three subsamples of zero-revenue IPOs based on the

motivation declared in prospectus, that is, whether speeding products to the market was cited as the
AC

only motivation (303 IPOs) or it was accompanied by the cashing out (27 IPOs) or debt retirement

(36 IPOs) reasons.

In terms of post-IPO investments, capital expenditure does not vary according to prospectus

declarations, while the amount of R&D expenses undertaken by zero-revenue firms citing debt

retirement as IPO motivation is sensibly lower, on average, than that of other firms (1.4% of total

11
11 out of 29 zero-revenue firms that are delisted within three years of the IPO started to generate revenues before
being delisted but are categorized as delisted.
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assets vs. 5.5% and 4.9%). This suggests that the need to repay debt may restrain the firm’s

commitment in R&D. In terms of M&A activity, there are significant differences in the behavior of

firms across the various IPO motivations. In particular, firms going public to retire debt exhibit the

lowest propensity to make acquisitions within three years (13.8%), while those going public

exclusively to speed their products to market show the highest propensity to acquire (32.7%).

Together with the previous evidence on R&D investments, this indicates that both internal and

PT
external growth are more constrained for more indebted firms. As for the IPO outcomes, significant

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differences stand out in terms of underpricing and likelihood of post-IPO delisting. IPOs whose

proceeds are entirely allocated to bring the issuer’s products to market are more underpriced

SC
(19.6%, on average) and less likely to be delisted within three years of the IPO (5.6%). At the same
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time, one-fourth of the zero-revenue firms going public to retire debt ends up being delisted. This

provides further evidence that zero-revenue firms going public in an attempt to rebalance their
MA

capital structure perform worse than other revenue-less issuers after the IPO.
E D

[ TABLE 3 ]
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4. Empirical tests and results

AC

This section presents the results of the multivariate analyses aimed at testing the predictions of

the zero-revenue status on IPO motivations and outcomes. In each table, the behavior of zero-

revenue IPOs is benchmarked against that of two different samples, namely the entire population of

IPOs and a matched sample of revenue-generating issuers. Standard errors are double clustered by

year and country of listing in all regressions.

4.1 IPO motivations

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4.1.1 Investments

The growth opportunities explanation predicts that zero-revenue IPOs are conducted in an

attempt to fund value-enhancing projects that would be missed if these firms remained private. If

this is the case, then we should observe zero-revenue firms investing more than other firms after the

IPO. In particular, given the nature of these firms, investments should largely consist of R&D

PT
expenses. Table 4 tests this prediction. Models 1 and 2 are estimated on the entire population of

IPOs and the matched samples, respectively. The dependent variable in both models is the average

RI
ratio of capital expenditure to total assets over the first three years post-IPO. In Models 3 and 4, the

SC
dependent variable is the average ratio of R&D expenses to total assets over the same period.
NU
The evidence in Models 1 and 2 reveals that zero-revenue firms invest significantly less in

capital expenditure than other firms after going public, both with respect to the full sample and the
MA

matched sample of IPOs. In particular, the magnitude of the coefficient of the zero-revenue dummy

documents that the average capital expenditure is approximately 2.7 points lower than that of
D

ordinary IPOs (2.4 relative to the matched sample). This result seems to contradict the prediction of
E

the growth opportunities hypothesis by showing that zero-revenue firms undertake fewer
PT

investments after going public. However, Models 3 and 4 document that these firms invest
CE

significantly more in R&D than other issuers, with an average difference of 2.3 percentage points

(2.4 relative to the matched sample). Thus, zero-revenue firms invest significantly less in capital
AC

expenditure and more in R&D than both the rest of the population of IPOs and the sample of

revenue-generating peers. This is in line with the predictions of the growth opportunities hypothesis

conditioned on the characteristics of zero-revenue firms. Given their small size and young age, the

growth opportunities to which these firms allocate IPO proceeds are mostly early-stage investments

aimed at speeding products to the market, as typically are R&D projects. Among the control

variables, the coefficient of firm size is negatively correlated with both capital expenditure and

R&D investments, indicating that the extent of growth opportunities faced by already established

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firms tends to be smaller. Better regulatory environments are associated with fewer investments in

capital expenditure and more R&D expenses, consistent with a more effective enforcement of

intellectual property protection.

[ TABLE 4 ]

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4.1.2 M&A activity

SC
Another possible reason pushing zero-revenue firms to go public is to facilitate their
NU
involvement in the market for corporate control. In particular, some of the growth opportunities

faced by these firms may be pursued through external acquisitions, although their inability to bring
MA

products to the market before the IPO may decrease this likelihood. Alternatively, the IPO can be

used as an intermediate step aimed at removing market inefficiency before selling out to an
D

acquirer. The estimates (marginal effects) reported in Table 5 test these predictions. Models 1 and 2
E

are probit regressions where the dependent variable equals one if the firm has completed an M&A
PT

transaction as acquirer within three years of the IPO. In Models 3 and 4, the dependent variable
CE

equals one if the firm has been targeted in an M&A transaction during the same time window.

Models 1 and 2 document that zero-revenue firms are significantly less likely to become
AC

acquirers shortly after the IPO relative to both the full and the matched samples of IPOs. The

marginal effect of the zero-revenue dummy documents a 4.8% lower likelihood relative to the rest

of the population of IPOs, and a 10.8% lower likelihood relative to the control sample of revenue-

generating issuers. This documents that zero-revenue firms are less active than other firms as

acquirers. Among the control variables, firm size, age, and offer size are strong predictors of a

newly listed firm’s propensity to acquire. Also, the issuance of new shares (as proxied by dilution)

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is associated with a higher likelihood, as a larger fraction of IPO proceeds raised by the firm

increases its propensity to acquire.

Concerning zero-revenue firms’ propensity to be targeted post-IPO, Models 3 and 4 document

that this likelihood is not statistically different from that of other issuers. Thus, zero-revenue firms

are not acquired at a higher rate than other newly listed firms. As for the control variables, more

PT
indebted firms are more likely to be targeted, arguably due to the need of financial support by an

incumbent that may help to lower the risk of distress. Dilution is also significant, suggesting that

RI
cash-rich firms may be more attractive towards potential acquirers. A similar argument may apply

SC
to the evidence on VC backing. Although the VC market in Europe is characterized by a higher

degree of heterogeneity compared to the U.S. (Groh et al., 2010), there is evidence of a positive
NU
effect of both the presence of a VC (Bessler and Kurth, 2007) and its reputation (Pommet, 2017) on
MA

IPO performance, which may raise the profile of the issuing firm in the eye of potential acquirers.

Finally, firms going public on second-tier markets are significantly less likely to be acquired.
E D
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[ TABLE 5 ]
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4.2 IPO outcomes

AC

4.2.1 Underpricing

If the absence of revenues contributes to increase the level of information asymmetry between

firm insiders and outsiders, then the shares of zero-revenue issuers should be more underpriced than

those of revenue-generating issuers at the IPO. The evidence reported in Table 6 tests this

prediction. The coefficient of the zero-revenue dummy is positive and significant both in the full

and matched sample estimation, documenting that zero-revenue IPOs exhibit higher underpricing.

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The magnitude of the coefficients reveals an average difference of approximately 2.3 percentage

points. This is consistent with the view that the firm’s inability to bring products to the market

significantly increases the level of information asymmetry faced by IPO investors, who require a

remuneration in the form of underpricing as a compensation for their increased risk taking. From

the issuer’s perspective, this implies that zero-revenue firms have to leave a larger amount of money

on the table.

PT
Among the control variables, underpricing decreases with firm size and age, consistent with an

RI
information asymmetry-based explanation, and increases with dilution, consistent with the weak

SC
incentive of firm owners to minimize underpricing when they sell very few shares (Habib and

Ljungqvist, 2001). Prestigious underwriters are also associated with lower underpricing, in line with
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previous European evidence (Migliorati and Vismara, 2014). Predictably, underpricing is higher
MA

during hot market periods. Although prior studies document differences between main and second-

tier markets (Giudici and Roosenboom, 2004), the coefficient of the second-tier market dummy is

not significant.
E D
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[ TABLE 6 ]
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AC

4.2.2 Stock liquidity

If the absence of revenues increases the degree of information asymmetry, this should reflect in

a lower level of stock liquidity in the aftermarket trading of zero-revenue IPOs relative to revenue-

generating issuers. In order to further investigate whether information asymmetry is actually caused

by the firm’s inability to bring products to the market, firms are split according to the degree of

persistence of their revenue-less status. Since liquidity is measured till the minimum between

thirteen months after the IPO date and one month before any truncation event, firms that still lack
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revenues at the 1-year IPO anniversary are distinguished from those that have generated revenues

within one year. If the absence of revenues is what keeps investors away from these stocks, then

issuers that are still without revenues after one year, which are identified by the persistent zero-

revenue dummy, should exhibit less liquid trading than those that started to generate revenues in the

meantime, which are identified by the positive revenues dummy. Table 7 reports the estimates of

the regressions on three stock liquidity proxies, namely bid-ask spread (Models 1-4), Amihud’s

PT
illiquidity ratio (Models 5-8), and the fraction of zero-return days (Models 9-12). The significance

RI
levels of the tests of the difference between the coefficients of the persistent zero-revenue and

SC
positive revenues dummy variables are also reported at the bottom of the table.

The coefficient of the zero-revenue dummy is positive and significant across all the three
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liquidity proxies, both in the full and matched sample estimation, documenting that zero-revenue
MA

IPOs develop on average less liquid trading than other IPOs in the aftermarket. This is consistent

with the effect of increased information asymmetry, leading to lower participation by investors in

aftermarket trading due to the higher risk of being unable to swiftly liquidate their positions.
E D

Furthermore, the coefficients of the persistent zero-revenue and positive revenues variables
PT

document that this effect is primarily driven by firms whose revenue-less status is more prolonged

after the IPO. The tests on the difference between the two coefficients are always statistically
CE

significant, except for the matched sample estimations of the illiquidity and zero-return days
AC

models. This provides further support to the view that the inability to generate revenues and the

consequent absence of the firm from the product market significantly contributes to increase

information asymmetry, leading to less liquid aftermarket trading. This effect becomes more

pronounced the more persistent is the firm’s inability to bring its products to the market.

The coefficients of the control variables all have the expected signs. In particular, the

aftermarket liquidity improves with firm size, in the presence of reputable third-party agents such as

VCs and prestigious underwriters, and during favorable market conditions. On the other hand,

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second-tier market IPOs develop less liquid trading, in line with prior literature (Gerakos et al.,

2013).

[ TABLE 7 ]

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4.2.3 Stock return volatility

RI
Increased information asymmetry associated with the absence of revenues also predicts a

SC
higher degree of volatility in the aftermarket of zero-revenue stocks. The evidence reported in Table
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8 addresses this point. Again, the sample of zero-revenue issuers is divided between those that

generate revenues within one year of the IPO (positive revenues dummy) and those that do not
MA

(persistent zero-revenue). In Models 1 and 3, the coefficients of the zero-revenue dummy are

positive and statistically significant. This documents that, on average, zero-revenue firms are
D

associated with a higher level of volatility than both the rest of the population of IPOs and the
E

matched sample of revenue-generating peers. The magnitude of the coefficients reveals a sizeable
PT

effect, as the standard deviation of daily stock returns is 30.7% and 19.1% higher, respectively, than
CE

that of other IPOs and the matched sample. This evidence provides further support to the prediction

generated by the information asymmetry argument, as the absence of revenues is associated not
AC

only to less liquid but also more volatile trading. The coefficients of the persistent zero-revenue and

positive revenues dummy variables in Models 2 and 4 document that the statistical significance of

the aggregate evidence is mainly ascribed to persistent zero-revenue firms.12 Overall, the combined

evidence on stock liquidity and volatility provides support to the view that the zero-revenue status

exposes issuers to increased liquidity and volatility risk in the aftermarket.

12
Unreported tests document that the difference in magnitude between the two coefficients is not significant.
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The coefficients of the control variables are coherent with their expected effects on the

volatility of stock returns. In particular, the coefficients of firm and offer sizes are negative and

significant, as investments in larger firms tend to have a lower risk profile, and so is the coefficient

of the VC backing dummy, in line with the above-documented evidence on aftermarket liquidity.

Tykvová and Walz (2007), who assume that VCs have an information advantage over investors,

document a risk-reduction effect associated with reputable VCs, as stock returns of issuers backed

PT
by this type of investors are less volatile than those of non-VC-backed firms in the aftermarket.

RI
SC
[ TABLE 8 ]
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4.2.4 Survival rate

The presence of increased information asymmetry implies that zero-revenue IPOs are less able
D

to satisfy ongoing listing requirements and therefore face a higher likelihood of being delisted
E

shortly after the IPO than revenue-generating issuers. Table 9 reports estimates of the regressions
PT

on the likelihood and the hazard rate of delisting. Models 1-2 are probit regressions on the
CE

likelihood of being delisted within three years of the IPO, with the dependent variable being equal

to 1 if delisting occurs. Marginal effects are reported. Models 3-4 are Cox proportional hazard
AC

models that allow to assess the conditional probability of delisting given that it has not occurred up

to the current time (i.e., the hazard rate). The positive (negative) effect of an independent variable is

interpreted as an accelerator (decelerator) of the time to delisting and, therefore, increasing

(decreasing) its probability.

The marginal effects of the zero-revenue dummy in Models 1 and 2 are positive and significant,

documenting that the average delisting rate of zero-revenue IPOs is higher than that of other IPOs.

In particular, revenue-less issuers are 3.2% and 3.8% more likely to be delisted relative to the
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population and the matched sample of IPOs, respectively. Results are confirmed by accounting for

the time dimension in the estimation of the hazard ratios in Models 3 and 4, although statistical

significance decreases to the 5% level. Overall, the evidence is consistent with the previously

documented results on stock liquidity and volatility, which suggest that zero-revenue firms suffer

from a larger extent of information asymmetry and develop less liquid and more volatile trading,

which contributes to expose them to a higher risk of delisting.

PT
Among the control variables, larger and older issuers are less likely to be delisted in line with

RI
previous literature, while the opposite is true for more levered firms, arguably due to the greater risk

SC
of financial distress. Contrary to prior studies (e.g., Pommet, 2017), VC backing does not play a

significant effect on the survival rate of IPO firms. Second-tier market IPOs are also more likely to
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be delisted, coherent with Vismara et al. (2012).
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[ TABLE 9 ]
E D
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5. Additional tests
CE

5.1 Natural resources firms

Nearly half of the zero-revenue IPOs are conducted by firms operating in the mining and oil
AC

and gas industries. These are typically exploration-stage firms that hold licenses over reserves of

natural resources and therefore acquire the traits of real options.13 This peculiarity differentiates

them from other zero-revenue firms because the absence of revenues does not necessarily reflect

their inability to bring products to the market, but indicates that the payoff on extraction has not yet

13
An example is the IPO by Hurricane Energy, an oil and gas UK-based company gone public in 2014. The company,
focused on the exploration and exploitation of fractured basement reservoirs, was holding exploration-stage offshore
licenses at the time of the IPO. Its only activity as of the IPO date consisted in exploration drilling and testing.
According to the official prospectus, the intended use of proceeds was to fund a new drilling program and other
operating and resourcing costs.
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exceeded the costs associated with developing the resource. In light of this peculiarity, this section

replicates the analyses on IPO motivations and outcomes by adding an interaction term that

identifies zero-revenue IPOs from the mining and oil and gas industries (Fama-French 17

classification). The coefficient of this variable indicates whether the behavior of natural resources

firms is different from that of other firms within the zero-revenue group. Models 1 and 2 of Table

10 report the coefficients and standard errors of the zero-revenue dummy and of the interaction term

PT
for each regression. The dependent variable is reported in the left-hand side of the corresponding

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row. All regressions have the same set of control variables employed in the previous models (not

SC
reported for brevity), including industry, year, and country fixed effects.

In Panel A, the coefficient of the zero-revenue dummy in the capital expenditure model is not
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statistically different from zero, as opposed to the full sample estimates where it was negative and
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significant. The coefficient of the interaction term is instead significant at the 5% level, indicating

that the lower investment rate of the average zero-revenue firm is mainly driven by natural

resources issuers. The results on R&D expenses also reveal a certain degree of heterogeneity, as
E D

natural resources firms invest significantly less, on average, than other zero-revenue firms. Overall,
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growth opportunities seem to be less relevant for natural resources firms, arguable due to the fact

that they already hold licenses over reserves of natural resources, and IPO proceeds are likely to be
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used to maintain existing licenses, acquire new ones, and fund operating costs. As for M&A
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activity, there is no difference relative to other zero-revenue issuers. Panel B reveals that the higher

level of volatility associated with zero-revenue issuers is entirely ascribed to natural resources

firms, as the coefficient of the zero-revenue dummy becomes insignificant. The strong dependence

of these firms’ value on industry-specific factors, such as the variation in the price of natural

resources and the technological advancement in the exploration and extraction processes may

explain the higher volatility of their stocks. Also, firms operating in these industries are

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characterized by high levels of capital intensity and incidence of fixed costs, which contribute to

increase their systematic risk.

5.2 Venture capital backing

Among zero-revenue firms that decide to go public, 27.9% have obtained prior VC financing.

VCs play an important third-party certification role in the IPO market (Megginson and Weiss,

PT
1991) due to the selection effect associated with their ability to pick promising firms (e.g., Chan,

1983), and the treatment effect arising from the provision of financing and other value-enhancing

RI
services (e.g., Casamatta, 2003). The magnitude of these effects increases with the level of

SC
reputation of the VC (Nahata, 2008). Prior literature has documented that VCs take public the most
NU
successful firms of their portfolio and are able to effectively time their exit via IPO (Lerner, 1994).

In the context of zero-revenue firms, it is reasonable to expect VCs not to take a revenue-less firm
MA

public unless it faces a promising growth potential. This leads to the prediction that, within zero-

revenue IPOs, those that are backed by a VC may face even greater growth opportunities than other,
D

non-VC backed issuers. Thus, this section replicates the analyses on IPO motivations and outcomes
E

by adding an interaction term that identifies zero-revenue IPOs backed by a VC. Models 3 and 4 of
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Table 10 report the results.

CE

Panel A shows that zero-revenue issuers backed by a VC invest on average 1.8 percentage

points more in R&D than other zero-revenue firms (2.9 compared to the matched sample) after
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going public. In Panel B, the results reveal that zero-revenue issuers backed by a VC face a 6.7%

lower likelihood of being delisted relative to zero-revenue issuers that are not backed by a VC

(7.3% relative to the matched sample). Overall, the above evidence is consistent with the view that

VC backing is associated with superior quality within zero-revenue firms.

[ TABLE 10 ]

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5.3 Geographic region and legal origin

The international sample used in the paper offers the opportunity to investigate whether the

behavior of zero-revenue firms varies across countries. This section addresses the above issue by

focusing on two factors that may act as sources of heterogeneity in firm behavior, namely

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geographic region and legal origin. To this end, Table 11 presents the evidence of the multivariate

analyses on IPO motivations and outcomes after splitting the sample into countries belonging to

RI
three different regions (Western Europe, Eastern Europe, Scandinavian and Baltic) and those having

SC
different legal origins (Common Law, which includes the UK only, and Civil Law). The table
NU
reports the coefficients and standard errors of the zero-revenue dummy for each regression with the

dependent variable reported in the left-hand side of the corresponding row.

MA

Concerning differences across geographic regions, the evidence reported in Models 1-3 of

Panel A reveals a certain degree of heterogeneity in the IPO motivations of zero-revenue firms. In
D

particular, the aggregate results in terms of capital expenditure, R&D, and acquisition activity are
E

mainly driven by issuers based in Western Europe and Scandinavia. The coefficient of the zero-
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revenue dummy in the Eastern European subsample is indeed never significant. Panel B documents
CE

a similar situation in terms of IPO outcomes, as the differences between zero-revenue and other

issuers is mainly ascribed to Western European and Scandinavian firms. The only exceptions are
AC

the underpricing and delisting outcomes, where the coefficient of the zero-revenue dummy is

positive and significant also among Eastern European firms, in line with both the other regions and

the aggregate evidence. Concerning the effect of a country’s legal origin, Models 4-5 reveal that

heterogeneity in the behavior of zero-revenue firms is less pronounced. Overall, the analysis reveals

a certain degree of heterogeneity across geographic regions, while legal origin does not seem to

make a difference.

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[ TABLE 11 ]

6. Conclusions

PT
Over the last decade, a significant fraction of companies decided to go public with no revenues.

While the increased information asymmetry associated with the lack of track records may

RI
undermine the outcomes of such decision, the absence of revenues may indicate the presence of

SC
superior growth opportunities in which these firms have been investing. If so, revenue-less issuers

may accept larger information production costs in order to raise funds and unlock value-enhancing
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projects that would otherwise be missed if they remained private. The paper sheds light on the
MA

motivation that pushes zero-revenue firms to go public and investigates whether the inability to

bring products to the market until then affects the outcomes of the IPO decision.
D

The empirical evidence documents that zero-revenue firms go public mainly to invest in R&D
E

projects, which provides support to the growth opportunities explanation and indicates that these
PT

opportunities consist of early stage, innovation-oriented investments rather than increases in fixed
CE

assets or acquisitions of other firms. This is coherent with the young age and industry distribution of

these firms. The absence of revenues, however, is found to negatively affect the outcomes of the
AC

IPO decision. In particular, zero-revenue issuers leave a larger amount of money on the table at the

IPO, and develop less liquid and more volatile trading in the aftermarket. Also, they face a higher

risk of delisting shortly after going public. Overall, the paper sheds light on the IPO motivations of

zero-revenue firms, which are mainly associated with the need to fund growth opportunities, but

highlights the downside risk of this decision, as increased information asymmetry and uncertainty

due to the firm’s absence from the product market until then raise the cost of raising capital for the

firm and the risk of being subsequently delisted.

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PT
RI
SC
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MA
DE
PT
CE
AC

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Table 1. Distribution of zero-revenue IPOs. Number of IPOs and zero-revenue IPOs by year, industry
(Fama-French 17 classification), and country of listing.

No. Zero-revenue IPOs

Panel A. Year IPOs No. %
2002 98 14 14.3
2003 76 17 22.4
2004 251 56 22.3
2005 338 67 19.8
2006 434 53 12.2
2007 409 49 12.0
2008 85 11 12.9

PT
2009 22 3 13.6
2010 115 26 22.6
2011 120 21 17.5

RI
2012 91 15 16.5
2013 135 18 13.3
2014 258 16 6.2

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Panel B. Industry
Business & Personal Services 623 43 6.9
Computers & Equipment 241 20 8.3
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Mining 173 110 63.6
Oil and Gas 143 72 50.3
Construction 125 7 5.6
Retail & Consumer Goods 122 6 4.9
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Pharmaceutical 104 22 21.2

Wholesale 99 9 9.1
Transportation 98 9 9.2
Communication 79 5 6.3
D

Entertainment 75 10 13.3
Chemicals 54 10 18.5
E

Other 496 43 8.7

Panel C. Country
PT

United Kingdom 1,193 302 25.3

France 288 10 3.5
Poland 182 3 1.6
CE

Germany 167 6 3.6

Italy 129 2 1.6
Sweden 115 10 8.7
Norway 91 17 18.7
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Belgium 51 0 0.0
Denmark 35 4 11.4
Spain 24 0 0.0
Other 157 12 7.6
Total 2,432 366 15.0

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Table 2. Descriptive statistics and univariate tests. Panel A shows post-IPO investment variables, Panel B
shows IPO outcome variables, and Panel C shows firm and offer characteristics. In Panel A, Capital
expenditure is the average ratio of capital expenditure to total assets across the three years post-IPO. R&D
expenses is the average ratio of R&D expenses (set to zero if missing) to total assets across the three years
post-IPO. Acquirer (target) is equal to 1 if the firm has completed an M&A as acquirer (target) within three
years of the IPO. In Panel B, Underpricing is the difference between the first day closing price and the offer
price, divided by the offer price. Bid-ask spread is the average ratio of the bid-ask spread divided by the
midpoint of the bid and ask prices. Illiquidity is the average ratio of the daily absolute return of a firm’s stock
to the monetary trading volume on that day. Zero-return days is the fraction of trading days with zero return.
Stock return volatility is the standard deviation of daily stock returns minus the standard deviation of the
returns of the primary equity index of the stock exchange where the firm goes public. Liquidity and volatility

PT
measures are computed from 1 month after the IPO date till the minimum between 13 months after the IPO
date and 1 month before any truncation event. Delisting is equal to 1 if the firm is delisted for reasons other
than takeover within three years of the IPO. In Panel C, Firm size is the firm’s pre-IPO total assets. Firm age

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is the difference between IPO year and incorporation year. Leverage is pre-IPO total debt divided by total
assets. Offer size is the number of shares sold in the IPO multiplied by the offer price. Dilution is the number

SC
of newly issued shares sold in the IPO divided by the number of pre-IPO shares outstanding. VC backing
equals 1 if the issuer is backed by a VC. Underwriter reputation is the lead underwriter’s market share in
terms of proceeds raised in European stock exchanges during 1995-2014. Market momentum is the local
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equity index return over the 100 trading days before the IPO date. Second-tier market equals 1 if the IPO
takes place on a second-tier, exchange-regulated market. Regulatory environment is the average between the
property rights and government integrity indices for each country-year (source: Heritage Foundation).
MA

Differences between mean and median values are reported in the right-hand side. ***, **, and * indicate
significance at the 1, 5, and 10 percent levels, respectively, of the t-test and Wilcoxon signed-rank test on the
difference between the two groups (z-test of difference in proportions in case of binary variables).
D

Panel A. Post-IPO Zero-revenue IPOs Other IPOs Difference

investments and M&A mean median std dev mean median std dev Zero rev. - Other
E

Capital expenditure (%) 10.8 3.5 17.7 9.5 4.7 13.1 1.3 -1.2**
R&D expenses (%) 5.1 0.0 14.3 3.2 0.0 7.7 1.9*** 0.0*
PT

Acquirer (%) 30.1 0.0 45.9 38.8 0.0 48.7 -8.7*** -

Target (%) 12.0 0.0 32.6 16.1 0.0 36.7 -4.1* -
Panel B. IPO outcomes
CE

Underpricing (%) 18.2 10.0 29.4 11.0 6.5 18.8 7.2*** 3.5***
Bid-Ask spread (%) 9.2 7.2 6.9 5.7 3.5 6.5 3.6*** 3.7***
Illiquidity (%) 8.5 3.9 10.5 7.1 2.8 9.0 1.3** 1.1*
AC

Zero return days (%) 60.7 66.9 24.7 42.0 36.3 30.1 18.7*** 30.7***
Stock return volatility (%) 2.4 2.2 1.8 1.7 1.3 1.6 0.7*** 0.9***
Delisting (%) 7.9 0.0 27.0 4.8 0.0 21.4 3.1** -
Panel C. Firm and offer characteristics
Firm size (total assets, €m) 21.0 4.2 61.4 320.4 17.0 2,713.3 -299.4** -12.8***
Firm age (years at IPO) 4.8 3.0 7.8 14.8 7.0 25.5 -10.0*** -4.0***
Leverage (%) 16.2 0.0 28.2 33.4 26.7 32.3 -17.2*** -26.7***
Offer size (€m) 23.4 7.0 59.0 124.2 12.9 890.0 -100.8*** -5.9***
Dilution (%) 57.6 51.3 44.4 44.8 40.9 34.2 12.8*** 10.4***
VC backing (%) 27.9 0.0 44.9 24.4 0.0 43.0 3.5 -
Underwriter reputation (%) 0.6 0.3 1.1 1.2 0.5 2.0 -0.6*** -0.2***
Market momentum (%) 4.7 5.9 10.1 4.8 5.8 10.0 -0.2 0.2
Second-tier market (%) 91.5 100.0 27.9 61.8 100.0 48.6 29.8*** -
Regulatory environment (%) 85.9 88.0 6.1 78.0 86.0 14.7 7.9*** 2.0***

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Table 3. Behavior of zero-revenue firms by IPO motivation declared in prospectus. Descriptive

statistics of zero-revenue firms divided according to the IPO motivation cited in the official prospectus.
Panel A shows post-IPO investment variables, Panel B shows IPO outcomes variables, defined as in Table 2.
***, **, and * indicate significance at the 1, 5, and 10 percent levels, respectively, of the t-test and Wilcoxon
signed-rank test on the difference between the corresponding group and the rest of the sample of zero-
revenue firms (z-test of difference in proportions in case of binary variables).

Speed products to market Cash out Retire debt

Panel A. Post-IPO (303 IPOs) (27 IPOs) (36 IPOs)
investments and M&A mean median std dev mean median std dev mean median std dev
Capital expenditure (%) 10.6 3.1 16.5 12.4 7.6 11.7 11.5 2.8 17.9

PT
R&D expenses (%) 5.5 0.0 15.3 4.9 0.0 9.4 1.4 0.0 5.4
Acquirer (%) 32.7** 0.0** 47.0 22.2 0.0 42.4 13.8** 0.0** 35.1
Target (%) 11.6 0.0 32.0 14.8 0.0 36.2 13.9 0.0 35.1

RI
Panel B. IPO outcomes
Underpricing (%) 19.6** 10.8* 30.7 7.8* 6.5* 11.5 13.6 8.2 25.8
Bid-Ask spread (%) 9.4 7.6 7.0 8.0 5.3 6.8 8.6 7.0 6.4

SC
Illiquidity (%) 8.6 3.7 10.2 7.0 4.0 13.0 8.6 4.3 11.5
Zero return days (%) 60.9 66.9 24.4 63.6 66.9 22.5 56.3 64.7 28.9
Stock return volatility (%) 2.4 2.2 1.8 1.8* 1.6* 1.5 2.4 2.0 2.0
NU
Delisting (%) 5.6*** 0.0*** 22.6 11.1 0.0 32.0 25.0*** 0.0*** 43.9
MA
E D
PT
CE
AC

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Table 4. Regressions on post-IPO investments. OLS regression on capital expenditures (Models 1-2) and
R&D expenses (Models 3-4). Capital expenditure is the average ratio of capital expenditure to beginning-of-
year total assets across the three years post-IPO. R&D expenses is the average ratio of R&D expenses (set to
zero if missing) to beginning-of-year total assets across the three years post-IPO. Firm size, firm age, and
offer size are the natural logarithms of the variables. Other independent variables are the same as defined in
Table 2. Standard errors in brackets are double clustered by country of listing and year. ***, **, and *
indicate significance of the coefficients at the 1, 5, and 10 percent levels, respectively.

Capital expenditure R&D expenses

Full Matched Full Matched
sample sample sample sample

PT
(1) (2) (3) (4)
Zero-revenue -2.673*** -2.449*** 2.276*** 2.379***
[0.978] [0.722] [0.701] [0.771]

RI
Firm size -0.782*** -0.116 -0.487*** -0.225*
[0.135] [0.146] [0.055] [0.129]
Firm age -0.049 1.845* 0.205** 0.312

SC
[0.438] [0.957] [0.095] [0.359]
Leverage 1.892** 5.977* -1.142** -0.897
[0.763] [3.554] [0.509] [2.037]
NU
Offer size 1.039** 0.888* 0.382* 0.535
[0.494] [0.448] [0.197] [0.378]
Dilution 1.375* 1.673* -0.705 -0.593*
[0.742] [0.941] [0.524] [0.330]
MA

VC backing -0.249 1.036 0.904* 1.014*

[0.621] [0.744] [0.460] [0.525]
Underwriter reputation -0.063 0.425 0.174 0.698**
[0.076] [0.419] [0.144] [0.270]
D

Market momentum 1.133 -5.557 3.726*** 9.891**

[1.716] [6.082] [1.135] [4.858]
E

Second-tier market 6.415 1.402 0.053 1.200

PT

[5.991] [4.102] [0.735] [2.059]

Regulatory environment -0.100** -0.565*** 0.114** 0.131**
[0.048] [0.208] [0.057] [0.061]
Constant 14.695*** 27.785*** -3.562 -6.423
CE

[5.825] [7.886] [3.018] [6.611]

Year fixed effects Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes
AC

Industry fixed effects Yes Yes Yes Yes

Adjusted R-squared 0.064 0.039 0.118 0.110
Observations 2,432 732 2,432 732

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Table 5. Regressions on post-IPO M&A activity. Probit regressions modeling the likelihood of becoming
acquirer (Models 1-2) and target (Models 3-4) in an M&A transaction within three years of the IPO. The
dependent variable equals 1 if the firm has completed an M&A as acquirer (target) within three years of the
IPO. Marginal effects are reported. Firm size, firm age, and offer size are the natural logarithms of the
variables. Other independent variables are the same as defined in Table 2. Standard errors in brackets are
double clustered by country of listing and year. ***, **, and * indicate significance of the coefficients at the
1, 5, and 10 percent levels, respectively.

Acquirer Target
Full Matched Full Matched
sample sample sample sample

PT
(1) (2) (3) (4)
Zero-revenue -0.048*** -0.108*** 0.007 0.039*
[0.017] [0.016] [0.017] [0.021]

RI
Firm size 0.020*** 0.023*** 0.009*** 0.010
[0.006] [0.007] [0.004] [0.006]
Firm age -0.017*** -0.044*** -0.004 -0.001

SC
[0.005] [0.010] [0.006] [0.004]
Leverage 0.031 -0.047 0.076*** 0.097***
[0.027] [0.065] [0.029] [0.023]
NU
Offer size 0.034*** 0.011*** 0.004 0.002
[0.009] [0.003] [0.007] [0.007]
Dilution 0.050** 0.072*** 0.068*** 0.052*
[0.021] [0.026] [0.016] [0.027]
MA

VC backing 0.068*** 0.074*** 0.032*** 0.021*

[0.012] [0.024] [0.011] [0.012]
Underwriter reputation 0.004 -0.010 0.001 -0.007
[0.003] [0.017] [0.003] [0.006]
D

Market momentum 0.268** 0.130 0.014 -0.033

[0.109] [0.127] [0.118] [0.114]
E

Second-tier market -0.129 -0.090 -0.072*** -0.091***

PT

[0.171] [0.111] [0.027] [0.029]

Regulatory environment -0.001 -0.003 -0.001 0.000
[0.001] [0.002] [0.001] [0.001]
Year fixed effects Yes Yes Yes Yes
CE

Country fixed effects Yes Yes Yes Yes

Industry fixed effects Yes Yes Yes Yes
Pseudo R-squared 0.044 0.059 0.073 0.085
AC

Observations 2,432 732 2,432 732

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Table 6. Regressions on IPO underpricing. OLS regression with IPO underpricing as dependent variable,
defined as the difference between the first day closing price and the offer price divided by the offer price.
Firm size, firm age, and offer size are the natural logarithms of the variables. Other independent variables are
the same as defined in Table 2. Standard errors in brackets are double clustered by country of listing and
year. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10 percent levels, respectively.

Underpricing
Full sample Matched sample
(1) (2)
Zero-revenue 2.294*** 2.280**
[0.806] [0.918]

PT
Firm size -1.169*** -0.802***
[0.434] [0.182]
Firm age -0.783*** -1.641*

RI
[0.297] [0.845]
Leverage -0.755 -1.930**
[1.311] [0.919]

SC
Offer size -2.174*** -4.315***
[0.721] [1.000]
Dilution 3.900*** 6.551***
NU
[1.265] [0.727]
VC backing 0.204 1.397
[1.110] [1.832]
Underwriter reputation -1.390*** -2.753***
MA

[0.287] [0.398]
Market momentum 18.872*** 18.147**
[6.546] [8.209]
Second-tier market 3.108 4.733
D

[2.832] [4.858]
Regulatory environment -0.077 0.176
E

[0.218] [0.358]
Constant 35.966* 10.115**
PT

[18.407] [4.691]
Year fixed effects Yes Yes
Country fixed effects Yes Yes
CE

Industry fixed effects Yes Yes

Adjusted R-squared 0.147 0.152
Observations 2,432 732
AC

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Table 7. Regressions on stock liquidity. Bid-ask spread (Models 1-2), illiquidity ratio (Models 3-4), and zero-return days (Models 5-6) are the dependent
variables. Bid-ask spread is the average ratio of the bid-ask spread divided by the midpoint of the bid and ask prices. Illiquidity is the average ratio of the daily
absolute stock return to the monetary trading volume on that day. Zero-return days is the fraction of trading days with zero return. Dependent variables are
measured from 1 month after the IPO date till the minimum between 13 months after the IPO and 1 month before any truncation event. Persistent zero-revenue
equals 1 if the firm is still revenue-less at the one-year IPO anniversary. Positive revenues equals 1 if the firm has generated revenues within one year of the IPO.
‘Diff. persistent-positive’ reports the significance of the test of the difference between the two coefficients. Firm size, firm age, and offer size are the natural

and year. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10 percent levels, respectively.
P T
logarithms of the variables. Other independent variables are the same as defined in Table 2. Standard errors in brackets are double clustered by country of listing

Bid-Ask spread Illiquidity ratio

R I Zero-return days

Zero-revenue
(1)
0.860***
Full sample
(2)
Matched sample
(3)
1.542***
(4) (5)
Full sample

2.167**
(6)

S C Matched sample
(7)
2.576**
(8) (9)
Full sample

1.427***
(10)
Matched sample
(11)
2.342**
(12)

Persistent zero-revenue
[0.259]
1.436***
[0.387]
[0.369]
1.991***
[0.733]
[0.906]
2.247***

N
[0.797] U [1.298]
2.378**
[1.002]
[0.163]
2.437***
[0.826]
[1.028]
2.571*
[1.377]

A
Positive revenues -0.989 -0.018 1.938 3.184 -1.489 1.636*
[0.793] [0.779] [1.391] [2.145] [1.073] [0.901]
Firm size -0.730***
[0.149]
-0.731***
[0.149]
-0.713***
[0.165]
-0.707***
[0.162]
-0.377
[0.328]
M -0.377
[0.327]
-0.231
[0.193]
-0.232
[0.194]
-2.360***
[0.049]
-2.360***
[0.056]
-1.931***
[0.339]
-1.929***
[0.338]

D
Firm age -0.192 -0.187 -0.075 -0.075 0.391 0.391 0.528 0.529 -0.128 -0.129 -0.184 -0.185
[0.134] [0.132] [0.128] [0.121] [0.285] [0.285] [0.343] [0.341] [0.279] [0.280] [0.334] [0.335]
Leverage

Offer size
0.295
[0.734]
-1.492***
0.365
[0.720]
-1.485***
0.129
[1.071]
-1.518***
T
0.236
[1.099]
-1.515*** E 1.592
[1.567]
-1.188**
1.600
[1.560]
-1.189**
1.396
[0.962]
-1.577***
1.357
[0.935]
-1.585***
2.989
[1.807]
-4.539***
3.090*
[1.780]
-4.524***
2.993*
[1.572]
-4.252***
3.039*
[1.540]
-4.254***

Dilution
[0.117]
-0.765
[0.799]
[0.118]
-0.805
[0.800]
E P
[0.163]
-0.186
[0.920]
[0.167]
-0.249
[0.962]
[0.569]
-0.439
[0.725]
[0.571]
-0.446
[0.721]
[0.597]
-0.18
[1.155]
[0.595]
-0.143
[1.137]
[0.713]
0.189
[0.444]
[0.728]
0.103
[0.420]
[0.604]
0.582
[0.369]
[0.614]
0.572
[0.376]
VC backing

Underwriter reputation
-0.281*
[0.161]
-0.203***
-0.252

C C
[0.158]
-0.205***
-0.100
[0.086]
-0.185**
-0.049
[0.097]
-0.184**
-2.846***
[0.518]
-0.361***
-2.841***
[0.525]
-0.361***
-3.355***
[0.300]
-0.584***
-3.389***
[0.360]
-0.586***
-1.221
[1.240]
-1.716***
-1.153
[1.203]
-1.718***
0.309
[1.238]
-1.742***
0.348
[1.280]
-1.739***

Market momentum

Second-tier market
[0.047]
-8.808***
[3.080]
2.809***
A [0.051]
-8.870***
[3.022]
2.778***
[0.073]
-4.329
[3.418]
2.719***
[0.081]
-4.553
[3.413]
2.710***
[0.082]
-9.583**
[3.932]
2.323**
[0.082]
-9.585**
[3.927]
2.323**
[0.132]
-11.346***
[4.155]
2.331*
[0.136]
-11.270***
[4.187]
2.319
[0.213]

[3.938]
19.963***
[0.212]
-27.680*** -27.716***
[3.948]
19.966***
[0.127]

[0.714]
19.908***
[0.136]
-22.874*** -22.068**
[8.899]
19.922***
[0.396] [0.407] [0.481] [0.477] [1.132] [1.131] [1.301] [1.526] [2.019] [1.970] [1.369] [1.357]
Regulatory environment 0.020 0.021 -0.025 -0.025* -0.486* -0.486* -0.549** -0.551** -0.638*** -0.639*** -0.609** -0.611**
[0.013] [0.014] [0.016] [0.015] [0.266] [0.266] [0.268] [0.267] [0.153] [0.151] [0.243] [0.240]
Constant 16.010*** 16.000*** 14.571*** 14.444*** 5.386*** 5.386*** 5.599*** 5.615*** 44.902** 44.871** 58.194*** 58.004***
[2.476] [2.450] [3.432] [3.361] [1.606] [1.606] [1.863] [1.851] [21.593] [21.531] [20.662] [20.527]
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
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Diff. persistent-positive *** *** ** **
Adjusted R-squared 0.315 0.317 0.327 0.330 0.206 0.206 0.225 0.225 0.581 0.581 0.550 0.550
Observations 2,432 2,432 732 732 2,432 2,432 732 732 2,432 2,432 732 732

P T
R I
S C
N U
M A
E D
P T
C E
A C

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Table 8. Regressions on stock return volatility. OLS regressions with stock return volatility as dependent
variable, defined as the standard deviation of daily stock returns minus the standard deviation of the returns
of the primary equity index of the stock exchange where the firm goes public, computed from 1 month after
the IPO date till the minimum between 13 months after the IPO date and 1 month before any truncation
event. Persistent zero-revenue equals 1 if the firm is still revenue-less at the one-year IPO anniversary.
Positive revenues equals 1 if the firm has generated revenues within one year of the IPO. Firm size, firm age,
and offer size are the natural logarithms of the variables. Other independent variables are the same as defined
in Table 2. Standard errors in brackets are double clustered by country of listing and year. ***, **, and *
indicate significance of the coefficients at the 1, 5, and 10 percent levels, respectively.

Full sample Matched sample

PT
(1) (2) (3) (4)
Zero-revenue 0.307*** 0.191**
[0.052] [0.087]

RI
Persistent zero-revenue 0.307*** 0.175*
[0.049] [0.098]

SC
Positive revenues 0.307* 0.244
[0.162] [0.155]
Firm size -0.135*** -0.135*** -0.205*** -0.210***
[0.030] [0.030] [0.071] [0.068]
NU
Firm age -0.012 -0.012 0.013 0.009
[0.064] [0.064] [0.039] [0.039]
Leverage -0.167* -0.167* -0.293 -0.297
MA

[0.097] [0.100] [0.279] [0.284]

Offer size -0.270*** -0.270*** -0.339*** -0.341***
[0.013] [0.014] [0.065] [0.068]
Dilution -0.157* -0.157* -0.133 -0.131
[0.089] [0.087] [0.276] [0.272]
D

VC backing -0.214*** -0.214*** -0.428*** -0.432***

[0.076] [0.079] [0.131] [0.144]
E

Underwriter reputation 0.011 0.011 -0.105* -0.105*

PT

[0.015] [0.014] [0.062] [0.062]

Market momentum -0.219 -0.219 -2.001** -2.002**
[0.531] [0.534] [0.837] [0.839]
CE

Second-tier market 0.295 0.295 -0.050 -0.047

[0.487] [0.487] [0.350] [0.352]
Regulatory environment -0.002 -0.002 0.002 0.002
[0.013] [0.013] [0.036] [0.036]
AC

Constant 5.078*** 5.078*** -2.172 -0.780

[1.647] [1.648] [3.186] [1.259]
Year fixed effects Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes
Adjusted R-squared 0.155 0.155 0.144 0.143
Observations 2,432 2,432 732 732

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Table 9. Regressions on the likelihood of being delisted. Probit regressions modeling the likelihood of
being delisted within three years of the IPO (Models 1-2) and Cox proportional hazard models on the
likelihood of being delisted (Models 3-4). Firm size, firm age, and offer size are the natural logarithms of the
variables. Other independent variables are the same as defined in Table 2. Standard errors in brackets are
double clustered by country of listing and year. ***, **, and * indicate significance of the coefficients at the
1, 5, and 10 percent levels, respectively.

Likelihood of delisting Hazard rate of delisting

Full sample Matched sample Full sample Matched sample
(1) (2) (3) (4)
Zero-revenue 0.032*** 0.038*** 0.161** 0.131**

PT
[0.007] [0.008] [0.075] [0.065]
Firm size -0.003** -0.003 -0.032** -0.056***
[0.002] [0.002] [0.014] [0.020]

RI
Firm age -0.006** -0.003* -0.125*** -0.114***
[0.002] [0.002] [0.026] [0.033]
Leverage 0.018** 0.021* 0.359*** 0.183**

SC
[0.009] [0.012] [0.105] [0.093]
Offer size -0.008*** -0.010*** -0.011 -0.015
[0.003] [0.003] [0.033] [0.041]
NU
Dilution -0.001 -0.009 0.048 0.039
[0.009] [0.006] [0.055] [0.056]
VC backing -0.006 -0.003 0.139* 0.156
[0.010] [0.010] [0.078] [0.104]
MA

Underwriter reputation -0.004* -0.019** -0.031 -0.020

[0.002] [0.009] [0.027] [0.038]
Market momentum -0.049** 0.015 -0.103 -0.263
[0.024] [0.058] [0.430] [0.504]
D

Second-tier market 0.049** 0.041* 0.299** 0.239*

[0.024] [0.022] [0.139] [0.127]
E

Regulatory environment -0.001* -0.001 -0.019** -0.008

[0.001] [0.001] [0.008] [0.009]
PT

Year fixed effects Yes Yes Yes Yes

Country fixed effects Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes
CE

Pseudo R-squared 0.076 0.097 0.057 0.061

Observations 2,432 732 2,432 732
AC

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Table 10. Natural resources industry and VC backing. The table reports the coefficients and standard
errors of the zero-revenue dummy and of its interaction with the X variable (as indicated in the header of the
column), in each of the regressions where the dependent variable is reported in the corresponding row. All
regressions have the same set of control variables employed in the previous models (not reported for
brevity), including industry, year, and country fixed effects. Marginal effects are reported in the acquirer,
target, and delisting models. Standard errors in brackets are double clustered by country of listing and year.
***, **, and * indicate significance of the coefficients at the 1, 5, and 10 percent levels, respectively.

X = Natural resources dummy X = VC backing dummy

Panel A. Post-IPO investments and M&A Full sample Matched sample Full sample Matched sample
Dependent variable Explanatory variable (1) (2) (3) (4)

PT
Capital expenditure Zero-revenue -0.977 -1.564 -2.189* -1.951*
[0.838] [1.603] [1.301] [1.136]
Zero revenue * X -4.670** -1.861 -1.737 -2.349
[1.804] [2.017] [1.231] [1.684]

RI
R&D expenses Zero-revenue 3.422*** 4.272*** 1.818** 1.624**
[0.948] [0.877] [0.716] [0.710]

SC
Zero revenue * X -3.382*** -3.704*** 1.778*** 2.854***
[1.154] [0.410] [0.171] [0.175]
Acquirer Zero-revenue -0.045** -0.097** -0.063*** -0.151***
[0.018] [0.046] [0.016] [0.040]
NU
Zero revenue * X -0.008 -0.027 0.054 0.154
[0.023] [0.093] [0.039] [0.102]
Target Zero-revenue 0.003 0.053** 0.021 0.041**
[0.025] [0.022] [0.018] [0.017]
MA

Zero revenue * X 0.003 -0.026 -0.037* -0.009

[0.040] [0.048] [0.021] [0.017]
Panel B. Post-IPO outcomes
Underpricing Zero-revenue 3.396** 4.987* 1.747*** 3.153**
[1.474] [2.757] [0.516] [1.442]
D

Zero revenue * X -3.362 -5.188 1.961 0.326

[2.293] [4.133] [1.816] [0.942]
E

Bid-ask spread Zero-revenue 0.852* 2.097* 0.857** 1.404***

[0.484] [1.263] [0.385] [0.454]
PT

Zero revenue * X 0.165 -0.618 0.287 0.966

[0.226] [1.528] [0.794] [1.091]
Illiquidity ratio Zero-revenue 2.653*** 3.889*** 2.417*** 3.518***
CE

[0.836] [1.255] [0.825] [1.284]

Zero revenue * X -1.396 -1.696* -0.840 -3.001***
[1.179] [0.988] [0.844] [0.837]
Zero-return days Zero-revenue 3.022** 6.602*** 1.503*** 2.948
AC

[1.119] [1.766] [0.156] [1.824]

Zero revenue * X -4.905*** -8.031*** -0.391 -4.380*
[1.400] [1.847] [1.344] [2.355]
Stock return volatility Zero-revenue -0.166 -0.224 0.300*** 0.301**
[0.152] [0.177] [0.100] [0.133]
Zero revenue * X 0.946*** 0.841*** 0.024 -0.042
[0.222] [0.240] [0.147] [0.065]
Delisting Zero-revenue 0.035*** 0.045*** 0.048*** 0.048***
[0.008] [0.014] [0.007] [0.009]
Zero revenue * X -0.005 -0.018 -0.067** -0.073***
[0.013] [0.020] [0.033] [0.017]

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Table 11. Evidence by geographic region and legal origin. The table reports the coefficients and standard
errors of the zero-revenue dummy in each of the regressions estimated on the full sample with the dependent
variables reported in rows. Western Europe includes: Austria, Belgium, France, Germany, Iceland, Ireland,
Italy, Malta, the Netherlands, Portugal, Spain, Switzerland, UK. Eastern Europe includes: Cyprus, Czech
Republic, Greece, Hungary, Poland, Romania, Slovenia, Turkey. Scandinavia and Baltic includes: Denmark,
Estonia, Finland, Latvia, Lithuania, Norway, Sweden. Common Law includes the UK only, while Civil Law
includes all other countries. All regressions have the same set of control variables employed in the previous
models (not reported for brevity), including industry, year, and country fixed effects (not included in Model
4). Marginal effects are reported in the acquirer, target, and delisting models. ***, **, and * indicate
significance of the coefficients at the 1, 5, and 10 percent levels, respectively.

PT
Geographic region Legal origin
Dependent variable Western Eastern Scandinavia Common Civil
Panel A. Post-IPO Europe Europe and Baltic Law Law

RI
investments and M&A (1) (2) (3) (4) (5)
Capital expenditure -3.179*** 1.239 -1.098* -3.766*** -1.694**

SC
[0.838] [1.664] [0.613] [1.355] [0.803]
R&D expenses 2.190*** 0.654 2.568** 1.664** 4.769***
[0.565] [0.433] [1.082] [0.735] [1.494]
NU
Acquirer -0.029** -0.124 -0.210*** -0.053* -0.094**
[0.012] [0.252] [0.065] [0.030] [0.044]
Target 0.005 -0.033 0.034 0.010 0.007
[0.011] [0.218] [0.083] [0.025] [0.060]
MA

Panel B. Post-IPO outcomes

Underpricing 2.434*** 2.664** 1.363* 2.556** 1.788*
[0.876] [1.236] [0.772] [1.214] [0.994]
Bid-ask spread 0.901*** 0.433 0.766** 0.761** 0.853**
D

[0.286] [1.367] [0.361] [0.351] [0.365]

Illiquidity ratio 1.610** 2.603 6.352*** 1.140* 3.697***
E

[0.737] [2.963] [1.911] [0.648] [1.011]

PT

Zero-return days 1.653*** 2.120* 1.056** 1.053** 1.709**

[0.564] [1.221] [0.482] [0.429] [0.741]
Stock return volatility 0.362*** 0.126 0.159** 0.434*** 0.159*
CE

[0.065] [0.120] [0.072] [0.121] [0.084]

Delisting 0.029*** 0.037*** 0.068*** 0.023** 0.036**
[0.005] [0.012] [0.014] [0.011] [0.015]
AC

Observations 1,936 225 271 1,193 1,239

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Figure 1. Evolution of zero-revenue firms over the first three years post-IPO. Quarterly distribution of
zero-revenue firms across the possible scenarios up to three years after the IPO. At the IPO, zero-revenue
firms represent 100%. From quarter 1 onwards, a zero-revenue firm can be categorized as: still zero-revenue
(white), positive revenues (light grey), acquired by another firm (dark grey), or delisted (black).

PT
RI
SC
NU
MA
E D
PT
CE
AC

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 ACCEPTED MANUSCRIPT

Highlights of the paper “Zero-revenue IPOs”

 15% of firms going public in Europe have not reported revenues prior to the IPO
 More than half belong to the natural resources and pharmaceutical industries
 They go public to fund growth opportunities, mainly in the form of R&D investments
 Their shares are more underpriced and develop less liquid and more volatile trading
 Zero-revenue issuers face a higher risk of being delisted shortly after the IPO

PT
RI
SC
NU
MA
E D
PT
CE
AC

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