5. CONCLUSIONS AND DISCUSSION
5.2 Limitations and Future Research
suggests that strategic alliances provide a valuable market signal for investors and would mitigate investors’ concern. This study empirically demonstrates that strategic alliances would be an indicator to be negatively related to underpricing.
5.2 Limitations and Future Research
This study focuses on the biotech IPOs to analyze the relation between underpricing and the variables. Because limiting to only one industry, the sample companies in this study are mainly classified into four groups by 4-digit SIC code separately. Therefore, the number of sample companies is restricted. In addition, this study uses the four-class index to code risk factors for disclosure score. Although this approach is on the basis of prior research3 and conducted by two researchers, the result may be affected by the subjective judgment of investigators. Besides, the measurement of the number of risk factors is based on selected twenty different types of risk factors commonly listed in the prospectus according to the past research4. Therefore, the results may be confined to the range of disclosure.
Consequently, if the number of sample companies can be expanded or be abundant to investigate this topic deeply in the future, the phenomena or the relation would be identified further.
In the end, there are several aspects worthy further research. This study finds that in biotech IPOs underpricing is positively associated with disclosure of risk factors which is a proxy for ex-ante uncertainty. It seems that the cause of underpricing is from the potential risks which biotech IPOs encounter. Because risk factors will result in the difficulty for investors to evaluate the value of biotech IPOs, investors would expect more premiums to be compensated for accepting more
3 Hughesa, Andersonb and Golden (2001) ; Cerbioni and Parbonetti (2007) ; Hali (2002)
4 Welboume and Andrews(1996) ; Cyr, Johnson, and Welbourne (2000) ; Certo, Covin, Daily and Delton (2001)
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ex-ante uncertainty. Therefore, In order to reduce the level of ex-ante uncertainty and lower underpricing, how to mitigate investors’ concern and to reduce the requested premiums can be investigated for future study. In this field, there are still many indicators worthy to discuss.
Furthermore, this study finds that besides the quantity of risk factors disclosed to be the measurement of risk factors, the content or its description of risk factors can be measured and coded according to the four-class index. And the results show that the sum of the disclosure score per item coded has a significantly positive relation with underpricing. Therefore, the content or description of disclosure is worthy further researched. Moreover, in the future study this approach to measure the content or description of risk factors may be applied to another section in the prospectus to comprehensively investigate the relation between the disclosure in the prospectus and underpricing.
Last, this study also finds that a biotech IPO with strategic alliances before IPO date would experience lower underpricing. The research on strategic alliances in this study only focuses on whether there is any strategic alliance before IPO date. The type or the partners of the strategic alliance does not be contained in the scope of research. It may be worthy further researched into the association with underpricing.
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Variable Definition Data Source
IR The initial return from the IPO offer price to the first day of closing price.
CRSP
Alliance A dummy variable equals to 1 if the firm has a strategic alliance before IPO date and 0
otherwise.
SDC
Item Total items presented among the selected twenty different types of risk factors commonly listed in the prospectus.
IPO prospectus
Score Total scores, the sum of the index per item presented among the selected twenty different types of risk factors commonly listed in the prospectus.
IPO prospectus
Age The natural logarithm of the years between IPO year and the firm’s founding year.
SDC and IPO prospectus Size The natural logarithm of the original filing
amount.
SDC
VC A dummy variable equals to 1 if the firm is venture capital (VC) backed and 0 otherwise.
SDC
Adjustment The percentage change between the middle of the original file price range and the offer price.
SDC
Pre-file Return The return to the CRSP equal-weighted portfolio of NYSE-, AMEX-, and
NASDAQ-listed stocks for the thirty trading days preceding the filing date.
CRSP
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Appendix 2. The Results of the Content Analysis about Risk Factors from 210 Biotech Companies
Issuer Total
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100. Eyetech Pharmaceuticals Inc 10 5,154 515 26 115. Alnylam Pharmaceuticals Inc
8 5,481 685 19
101. GTx Inc 8 6,222 778 21 116. Inhibitex Inc 10 3,490 349 22
102. Renovis Inc 6 2,044 341 15 117. Metabasis Therapeutics Inc 10 5,146 515 23
103. Corgentech Inc 10 3,802 380 27 118. Momenta Pharmaceuticals Inc
10 5,605 561 25
104. Dynavax Technologies Corp 7 3,955 565 22 119. Senomyx Inc 8 4,763 595 19
105. Tercica Inc 8 3,681 460 22 120. Xenogen Corp 11 4,280 389 29
106. Xcyte Therapies Inc 10 5,287 529 27 121. Auxilium Pharmaceuticals Inc
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134. XenoPort Inc 10 6,025 603 26 147. Vanda Pharmaceuticals
Inc
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159. Artes Medical Inc 8 6,254 782 24 174. Novabay Pharmaceuticals Inc
7 4,605 658 14
160. Molecular Insight Pharm Inc 9 3,545 394 19 175. ARYx Therapeutics Inc 7 5,305 758 19
161. Synta Pharmaceuticals Corp 10 4,919 492 23 176. Medgenics Inc 7 4,194 599 14
162. Optimer Pharmaceuticals Inc 8 6,032 754 22 177. Bioheart Inc 8 9,600 1200 20
163. Orexigen Therapeutics Inc 10 9,614 961 26 178. Cumberland
Pharmaceuticals Inc
10 4,905 491 26
164. Pharmasset Inc 8 6,273 784 22 179. Omeros Corp 6 4,315 719 15
165. Neurogesx Inc 7 4,911 702 16 180. Ironwood Pharmaceuticals
Inc
8 5,457 682 18
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6 7,096 1183 17 203. Merrimack Pharmaceuticals Inc
6 5,320 887 15 204. Supernus Pharmaceuticals Inc
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