生技產業IPO風險因子與長期獲利能力之關聯性研究 - 政大學術集成

全文

(1)國立政治大學會計學系碩士論文. 指導教授：諶家蘭治博士. 立. 政. 大. ‧ 國. 學 ‧. 生技產業 IPO 風險因子與長期獲利能力之關聯. sit. y. Nat. 性研究. n. er. io. The association between the risk factor al vand path-toi disclosures in IPO prospectus n Ch engchi U profitability of biotech firms. 研究生：黃庭翊. 中華. 民. 撰. 國一百零四年一月. 1.

(2) 謝辭轉瞬間，短短兩年半的碩士班生活即將要畫上句點，在這段時間中，充滿了許多回憶，不管是在課業上，與同學挑燈夜戰一起做報告，一起修課，或是生活上，一起為自己的夢想努力，讓我不僅習得許多專業知識，更讓我成長。如今能夠順利的完成論文，需要感謝的人太多，如果沒有指導教授的照顧與提點、家人在背後默默的支持、朋友給予的關心與打氣，這篇論文可能無法如期完成，在此，我想對一路走來照顧我並支持我的人表達我最誠摯的謝意。首先，感謝諶家蘭教授在碩班期間對論文指導所付出的用心與耐心，對研究. 政治大王大維老師，在進行研究的期間，不辭辛苦地給予許多幫助及指導，並給予許多立. 內容及方向給予幫助及引導，使我的論文能順利圓滿地完成。另外，也十分感謝. ‧ 國. 學. 意見，使我能更嚴謹的探討研究內容。. 同時也要感謝口試委員廖芝嫻教授和李艷榕教授，在百忙之中抽空審閱論文，. ‧. 並給予我許多寶貴的意見，使我的論文能更臻完善及充實。. sit. y. Nat. 在這兩年半中我也要感謝我的家人始終陪伴在我身邊，在我失落及壓力大時. al. er. io. 給予支持及鼓勵，謝謝爸媽對我無微不至的照顧及關懷，謝謝妹妹傾聽我的煩惱，. v. n. 因為有我最愛的家人在我旁邊，使我能無後顧之憂順利完成我的學業。. Ch. engchi. i n U. 最後，要感謝在這段日子中，始終陪伴在我身邊並給予我許多幫助的好朋友，因為有你們的陪伴，使我度過我最煎熬困難的日子。謝謝洪上琄給予我莫大的幫助，即便已踏入職場，仍在我不知方向時，傾聽我的煩惱並給予我意見，對於我的叨擾總是不厭其煩地給予解答。感謝怡靜給予我鼓勵，在我不會使用軟體時，協助我並指導我。最後，要感謝唯真及怡全，總是在我感到焦慮不安時，鼓勵我並支持我，使我能夠充滿動力再次往前走。因為有這群好朋友，使我的研究所生涯能夠完美的畫下句點，謝謝你們。如今論文順利完成，內心充滿複雜的情緒，感慨於即將脫離學生生活，但又充滿期待可以進入人生的另一個階段，迎向新的挑戰，往自己的目標前進。 2.

(3) 摘要本研究主要探討生技產業公開說明書之風險因子揭露對首次公開發行公司 5 年內的獲利能力做研究，想得知風險因子的揭露是否會影響公司獲利時間的長短。本研究以美國生技產業首次公開發行公司為研究對象，樣本期間為 1997 年至 2012 年。許多文獻指出越來越多公司在尚未獲利前即先行上市，但公司未來的前景及獲利能力卻充滿高度的不確定性，而透過資訊的揭露可使該不確定性下降，因透過揭露，投資者可以了解公司營運狀況及表現，對公司價值能做較正確之判斷，此時願意提供資金給公司營運，充足的資金使公司未來獲利機會上升。. 政治大寡，系統性地衡量生技公司公開說明書之風險因子，並以存活分析檢測假說。實證立本研究參考過去文獻，建立資訊揭露的四級指標加上風險因子所揭露的項目多. ‧ 國. 學. 結果顯示：風險因子的內容描述越著重在某些特定資訊，例如：顧客資訊、重要員工資訊、量化資訊的表達、公司未來不確定性、財務需求時，公司未來獲利能力機. ‧. 會大增，而當更進一步的探究時，又發現對顧客資訊和量化資訊的表達越具體，越. n. al. er. io. sit. y. Nat. 詳細時，也會使公司未來獲利機會上升。. Ch. engchi. i n U. v. 關鍵字：首次公開發行、生技產業、公開說明書、風險因子、獲利能力、長期績效. 3.

(4) Abstract This study investigates whether disclosure of risk factors in the prospectus will influence the probability of the biotech firms to attain profitability. Data is collected for biotech companies of U.S IPOs issued from1997 to2012 as the research sample. Many extant empirical evidences indicate that the proportion of firms going public prior to achieving profitability has been increasing over time. There is considerable uncertainty regarding the long-term economic viability of these firms at the time of going public. Disclosures in the prospector may mitigate the effects of ex-ante uncertainty about firm’s value, and disclosures are potentially important means for management to communicate firm performance and governance to outside investors.. 治政 prospectors, because more information reperesent lower 大uncertainty between investors and firms.This study uses 立 risk factors in the prospectus as concern issue and expects Therefore, firms can raise more money by disclosing more information in IPO. ‧ 國. 學. that the quantity of risk factors and the content or description of risk factors will influence the uncertainty and would mitigate investors’ concern. Referring to past. ‧. literature, this study builds four-class index for disclosure score and uses two classifications of risk factors to systematically measure risk factors in the prospectus.. Nat. sit. y. The empirical results show that a biotech IPO with more information or some. io. er. specific information of risk factors, like disclosures of main customers and key employees, will experience good performance after IPO. In addition, more detail. n. al. i n U. v. descriptions in quantitative risk factors and customers’ information contributed to better. Ch. engchi. performance in the future. In conclusion, disclosure of risk factors in the prospectus are related to firms’ probability of profitability after IPO as expected. .. Keywords: Initial public offerings, Biotech industry, Profitability, Prospectus, Risk factor. 4.

(5) Table of Contents Abstract ..................................................................................................................................... 4 List of Tables ............................................................................................................................. 7 List of Figures ........................................................................................................................... 8. 1.1. Research Purpose and Motivation............................................................................ 9. 1.2. Research Questions ................................................................................................ 10. 1.3. Research Structure ................................................................................................. 11. LITERATURE REVIEW ................................................................................................ 13 2.1 2.2 2.3. Risk Factor Disclosures and Content Analysis....................................................... 16. 2.4. The Biotech Industry.............................................................................................. 18. 學. METHODOLOGY .......................................................................................................... 20. ‧. Hypothesis Development........................................................................................ 20. 3.2. Data Collection ....................................................................................................... 21. 3.3. Research Design ..................................................................................................... 23. y. Nat. 3.1. io. sit. 3. 政治大 Disclosures and Cost 立of Capital ............................................................................. 15 Asymmetric Information when IPO ....................................................................... 13. n. al. er. 2.. INTRODUCTION ............................................................................................................. 9. ‧ 國. 1.. i n U. v. 3.3.1 Approaches to Measure Risk Factors ..................................................................... 23. Ch. engchi. 3.3.2 Cox Proportional Hazards models .......................................................................... 31 3.4 Research Model ............................................................................................................. 32 3.4.1 Dependent Variable and Independent Variables .................................................... 32 3.4.2 Control Variables.................................................................................................... 33 4. RESEARCH RESULTS AND ANALYSIS ....................................................................... 35 4.1. Descriptive Statistics .............................................................................................. 35. 4.2. Empirical Results.................................................................................................... 41. 4.2.1 Results for Control Variables ................................................................................. 41 4.2.2 Results for profitability after IPO and types of Risk Factors ................................. 43 4.2.3 Results for profitability after IPO and score of Risk Factors ................................. 47 5.

(6) 5. CONCLUSIONS AND DISCUSSION ............................................................................... 57 6. RESEARCH LIMITATION AND FUTURE RESEARCH WORKS ................................ 59 References ............................................................................................................................... 60 Appendix ................................................................................................................................. 65. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 6. i n U. v.

(7) List of Tables Table 3-1 Frequency Distribution ................................................................ 22 Table 3-2 Four subgroups of types of risk factors ....................................... 28 Table 3-3 Four-class index ........................................................................... 31 Table 4-1. Descriptive Statistics .................................................................. 36 Table 4-2. Differences in characteristics based on whether the firm achieves post-IPO operating profitability ........................................................... 38 Table 4-3. Estimation of Cox proportional hazards models ........................ 43 Table 4-4. Estimation of Cox proportional hazards models ........................ 45 Table 4-5. Estimation of Cox proportional hazards models ........................ 47 Table 4-6. Estimation of Cox proportional hazards models ........................ 49 Table 4-7. Estimation of Cox proportional hazards models ........................ 51. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 7. i n U. v.

(8) List of Figures Figure 1-1. Research Structure .................................................................... 12 Figure 1-2. Cumulative Hazard Function and Item ..................................... 52 Figure 1-3. Cumulative Hazard Function and Item19 ................................. 52 Figure 1-4. Cumulative Hazard Function and Financial Risk Factors......... 53 Figure 1-5. Cumulative Hazard Function and Quantitative Risk Factors .... 53 Figure 1-6. Cumulative Hazard Function and Uncertainty Risk Factors..... 54 Figure 1-7. Cumulative Hazard Function and Score of Item8 ..................... 54 Figure 1-8. Cumulative Hazard Function and Score of Quantitative Risk Factors .................................................................................................. 55. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 8. i n U. v.

(9) 1. INTRODUCTION 1.1 Research Purpose and Motivation Public offering represents a stage in the growth phase of a corporation and, therefore, all private firms with growth prospects eventually go public to finance investments. Jain and Kini (1994) and Mikkelson (1997) provide evidence that US startup companies go public to finance expansion. This is especially important for biotech company, which burns money to conduct research, and they basically unprofit when they go public offering. Besides, the biotech industry is growing fast and its products under development are novel. Thus, there is the large information asymmetry between managers and investors and it is difficult for investors to evaluate the value of the. 治政 have tried to moderate investors’ concern is to provide大 more information to investors. 立about company and can evaluate the value the company, When investors know more biotech firms. So how biotech company raise money? One way that biotech companies. ‧ 國. 學. they are willing to finance firms. More money support biotech firms, firms performance better in the future. Therefore, there is a negative association between the ex ante uncertainty. ‧. about the value of an initial public offering and its expected long-term performance.. Subsequently, there is a great deal of literature that uses different measurement as. Nat. sit. y. a proxy for exante uncertainty including the information disclosed in the prospectus.. io. er. Disclosure of use-of-proceedsor risk factors in the prospectus is regarded as a proxy for ex-ante uncertainty. Beatty and Ritter (1986) finds that issues for which there is greater. n. al. Ch. i n U. v. ex ante uncertainty tend to have greater the number of use-of-proceeds listed.. engchi. According to previous research, this study regards disclosure of risk factors as a proxy for ex-ante uncertainty. Three major issues surrounding corporate disclosure of information are actively researched in accounting and related fields: (1) the presumed objectives of disclosure, (2) the determinants of how much and by what means firms disclose, and (3) the consequences of corporate disclosure.The third issue is essentially empirical. The typical methodology is to examine the association between a disclosure index constructed by the researcher (Botosan 1997), or a quality of disclosure indicator publicly available (Lang and Lundholm 1996, and Sengupta 1998), and the presumed consequences of disclosure represented by cost of capital estimates or information asymmetry proxies, such as bid-ask spreads, stock return volatility, or dispersion of analysts' forecasts. In my research, I use path to profitability after IPO to measure consequences of disclosure. I will discuss the association between disclosure and 9.

(10) probability of profitability of firms after IPO. In order to measure risk factors in the prospectus, two approaches are applied. The first approach that counting the number of captioned risks in the risk factors section is similar with past study. In addition to the quantity of disclosure, this study also focuses on the content and description of risk factors which is coded on the basis of four-class index to be disclosure score under the second approach. Therefore, this study examines the association between disclosure of risk factors and long-term performance of firms by the number of risk factors and disclosure score separately. Moreover, because there are not only way to classify the risk factor, I will use two kinds of classification to analyze association between risk factors and long-term performance of firms. Based on above discussion, this study analyzes biotech firms of IPOs in America. 政治大. during 1997-2012 to examine the effect of disclosure of risk factors on the long-term. 立. 學. ‧ 國. performance of biotech firms.. 1.2 Research Questions. According to the research purpose and motivation, the research questions of this. ‧. study are as follows:. 1. How do different kinds of risk factors effect firm’s long-term performance?. sit. y. Nat. io. er. 2. How detail firm describe in prospectors effect firm’s long-term performance?. al. n. v i n C described in Section literatures. Research methodologyhise n g c h i U 3. In Section 4, the study The remainder of this paper is organized as follows. Section 2 presents relevant. presents the empirical results. Finally, conclusion is provided in Section 5.. 10.

(11) 1.3 Research Structure My research structure has seven steps. First, I will identify research questions, and go to find related literature. After studying a wide range of literatures, I develop my hypothesis, that more certain kinds of disclosures in the prospectus lead to better performance of firms. Morever, stating more clearly also contributed to probability of profitability of firms. Second, knowing my hypothesis, I can start to collect data. My data comes from SDC and IPO prospectors. In order to know each description of risk factors item and score them, I need to read each firm’s risk factors one by one. It was kind of a big work. After collecting all data I need, instead of linear regression, I use Cox Proportional Hazards models to test whether risk factors identified by my theoretical framework significantly impact the probability of post-IPO profitability as. 政治大 coefficient on an explanatory variable in the CPH model indicates that an increase in 立 the variable is associated with an increase in the hazard rate and consequently lower. a function of time. Dependent variable is the logarithm of the hazard rate, a positive. ‧ 國. 學. duration. In the context of my application, a positive (negative) coefficient indicates that an increase in the variable leads to an increase (decrease) in the probability of. ‧. attaining profitability and a decrease (increase) in the time-to-profitability. At last, after running data through Stata, I finally get my empirical results. I will analyze them and. y. Nat. n. al. er. io. sit. do conclusions. The research structure in this study is presented as follows:. Ch. engchi. 11. i n U. v.

(12) Figure 1-1. Research Structure. Identify Research Question. Review Related Literature. 政治大. Develope Hypothesis. 學. ‧ 國. 立. Collect Data. y. ‧. Nat. n. er. io. al. sit. Conduct Empirical Study. Ch. engchi. i n U. Analyze Empirical Results. Conclusions and Disclosures. 12. v.

(13) 2. LITERATURE REVIEW 2.1 Asymmetric Information when IPO Conventional wisdom suggests that the public offering represents a stage in the growth phase of a corporation and, therefore, all private firms with growth prospects eventually go public to finance investments. It is, therefore, not surprising that the empirical evidence on the `stage in the growth' motive for public offerings is also mixed. For instance, Jain and Kini (1994) and Mikkelson (1997) provide evidence that US start-up companies go public to finance expansion. On the other hand, Pagano et al. (1998), using a sample of Italian IPOs, find evidence that suggests that companies go public not to finance growth but rather to rebalance their accounts after a period of high. 治政 similar results for Swedish IPOs and Spanish IPOs, respectively. 大 Besides, information立 asymmetry at IPO—a time when. investment and growth. Rydqvist and Hogholm (1995) and Planell (1995) document. no prior statutory. ‧ 國. 學. disclosures are available to investors—is abnormally high. The reasons for high ex ante uncertainty are different. One of causes is the risks IPO firms encounter. There are. ‧. generally no established histories of sales, earnings or cash flows for the firms going public. The biotech firms, particularly, face greater uncertainty and risk in IPO market. Nat. sit. y. because of intense competition, long period in research and development and great need. io. er. for capital. Besides, in biotech IPOs the primary assets are intangibles which are notoriously difficult to value (Guo 2005). So how to lessen this kind of uncertainty?. n. al. Ch. i n U. v. There are some ways that firms use to signal to investors that they have good future.. engchi. First, Megginson and Weiss (1991) use firm age as a control for the degree of information asymmetry. Similar to Muscarella and Vetsuypens(1989), there is a significantly negative relationship between the age of the firm and information asymmetries. In general, more public information is available about the value of older firms, which can reduce information asymmetries. This implies that older firms have a lower degree of information asymmetry than do younger firms. Second, Beatty and Ritter (1986) use the inverse of the gross proceeds to be a proxy for ex ante uncertainty because smaller offerings are more speculative, on average, than larger offerings. Hence, offering size can send signals to the market about the relative quality and stability of an offering (Ibbotson and Ritter 1995). And the empirical analysis indicates that smaller offerings, ceteris paribus, have substantially higher information asymmetry (Beatty and Ritter 1986). 13.

(14) Third, some previous research has suggested that the certification and monitoring role of venture capitalists diminishes information asymmetry. (Barry, Muscarella, Peavyand Vetsuypens 1990; Megginson and Weiss1991). The certification and value added roles of venture capitalists (VC) in legitimizing, financing, nurturing, developing, monitoring, and ultimately positioning entrepreneurial firms for an IPO has been widely documented (Barry et al., 1990; Barry, 1994; Gorman and Sahlman, 1989; Gompers and Lerner, 1997; Wright and Robbie, 1998; Arthurs and Busenitz, 2006). The certification role of VCs is derived from their reputation capital as well as from the rigorous process by which they select ventures that receive financing. As a result of their access to inside information on the prospects of the firm and with the value of their reputation capital at stake, VCs are in a credible position to provide certification to. 政治大 1991; Jain and Kini, 1995). The value added potential of VCs, on the other hand, is 立 derived from the fact that in addition to providing financing, they are active investors outside investors and bestow legitimacy on the venture firm (Megginson and Weiss,. ‧ 國. 學. participating in activities such as raising funds, monitoring managers, serving on the board, participating in strategic planning, providing financial and operational expertise,. ‧. and formulating human resource policies (Gorman and Sahlman, 1989; Barry et al., 1990; Sahlman, 1990; Lerner, 1997; Gompers and Lerner, 1997; Kaplan and Stromberg,. y. Nat. sit. 2001; Hellman and Puri, 2002).. er. io. As can be seen from the above discussion, while a substantial body of literature. al. v i n little is known regarding whether their companies with the C hthey are able to endow U i e h n g cthe IPO (Arthurs and Busenitz, 2006). capacity to achieve superior performance after n. has focused on the certification and value added role of VCs prior to the IPO, relatively. Since their compensation is contingent on the success of their investments and the fact that lock up agreements restrict VC exit immediately after the IPO, with the average time of exit being in the range of a year and a half, VCs have a strong incentive to remain engaged in nurturing their portfolio companies even after the IPO (Sahlman, 1990; Gompers and Lerner, 1998; Bradley et al., 2001). Applying a resource based perspective to entrepreneurship, Arthurs and Busenitz (2006) argue that VCs have the capacity to provide their ventures with greater dynamic capabilities during the post-IPO phase, thereby allowing venture managers to more effectively assess how well the firm's resource base is aligned to meet performance objectives as well as to identify adjustments needed to reconfigure the resource base to 14.

(15) address the various weaknesses and threats that endanger the survival and success of the firm. Additionally, as a consequence of their industry specialization, reputation, and networks, VCs can provide their venture firm with access to resources from various sources as well as assuage the concerns of these resource providers regarding attempts at opportunism or poor quality decision-making by venture managers (Grant, 1996; Stuart et al., 1999; Arthurs and Busenitz, 2006). Further, the board of directors of VCbacked firms tend to be more experienced and better positioned to accelerate management's strategic and operational learning, and consequently have greater ability to bring about needed changes and strategic adjustments to the resource base as required by the nature of competition during the post-IPO phase (Rosenstein, 1988; Gorman and Sahlman, 1989; Sapienza, 1992; Barney et al., 1996; Fried et al., 1998). As such, on the. 政治大 certification mechanism to ensure a successful IPO but also as an indicator that the firm 立 is well positioned to meet competitive product and capital market challenges during the. basis of the above discussion, I argue that VC involvement can serve not only as a. ‧. ‧ 國. 學. post-IPO phase.. 2.2 Disclosures and Cost of Capital and Long-Term Performance A critical challenge for any economy is the optimal allocation of savings to. y. Nat. sit. investment opportunities. There are usually many new entrepreneurs and existing. al. er. io. companies that would like to attract household savings, which are typically widely. v i n savings to U. n. distributed, to fund their business ideas. While both savers and entrepreneurs would. Ch. like to do business with each other, matching. business investment. e n greasons. c h i First, entrepreneurs typically have opportunities is complicated for at least two better information than savers about the value of business investment opportunities and incentives to overstate their value. Savers, therefore, face an ‘‘information problem’’ when they make investments in business ventures. Second, once savers have invested in their business ventures, entrepreneurs have an incentive to expropriate their savings, creating an ‘‘agency problem’’. Therefore, many studies discuss how to lower this problem. Bertomeu, Beyer, and Dye (2008) study whether firms’ voluntary disclosures can reduce asymmetric information in financial markets and lead to cheaper financing. Arya and Mittendorf (2007) show that more voluntary disclosure by firms can lead to higher value for shareholders. Botosan (1997) and Botosan and Plumlee (2002) show that firms disclosing more information in their annual reports have lower cost of capital. 15.

(16) Francis, Nanda, and Olsson (2008) also find that more voluntary disclosure is associated with a lower cost of capital. Most of these papers relate to information that is in large part voluntarily given, and their effects on cost of capitals and cheaper financing. Cheynel (2012) explores the links between firms’ voluntary disclosures and their cost of capital and relate the differences in costs of capital between disclosing and nondisclosing firms. It shows that firms that voluntary disclose their information have a lower cost of capital than firms that do not disclose and firms that do not disclose have, on average, low value. This paper also concludes that firms that did not disclose may not be financed. Welker (1995) and Sengupta (1998) analyze firm disclosure rankings given by financial analysts and find that firms rated as more transparent have a lower cost of capital. Verrecchia (2001) suggested that a commitment to greater. 政治大 firm’s cost of capital that arises from information asymmetry. In the context of financial 立 information, Foster (2003) show that better disclosure results in a lower cost of capital. disclosure reduces information asymmetry; this, in turn, lowers that component of a. ‧ 國. 學. In short, information asymmetry reduction provides a rationale for efficient disclosure choice. This paper also interpret this statement as speaking to the notion that a. ‧. commitment to higher quality disclosure is efficient in that it leads to a reduction in the information asymmetry component of the cost of capital. There are a number of studies. y. Nat. sit. that use different measurement as a proxy for ex-ante uncertainty, including risk. er. io. disclosure in the prospectus.In my study, I focus on risk factors in the prospectus.. al. Examples of the types of issues listed as risk factors in the sampled firms’. n. v i n prospectuses include manufacturing rapid technological change, C h capacity limitations, U i e h n g c and uncertainty regarding patents and intense competition, need for additional capital,. protection of proprietary rights. In America, SEC expects that full disclosure of material facts about the offering will help investors evaluate the condition of the company and may make informed investment decisions. David (2004) shows that the cost of capital influences the operations of the firm and its subsequent profitability. Certo, Covin, Daily and Dalton (2001) think that risk factors associated with a firm can affect both performance expectations and realized performance.. 2.3 Risk Factor Disclosures and Content Analysis Firm risk can be measured in a number of ways, and there is a considerable literature on assessing firm risk for IPO firms. One of proxy for risk is the number of 16.

(17) risk factors described in the IPO registration statement, where top management must explicitly list and discuss the risk factors facing the IPO firm. Since personal legal liability stemming from the Securities Act of 1933 is imposed on top management's presentation of risk factors in the registration statement, differences in the number of risks described in the registration statements capture fundamental differences in the riskiness of IPO firms (Feltham, Hughes, and Simunic 1991). The most commonly used approach to measure risk factors in the prior literature is the number of risk factors listed in the prospectus. For example, Beatty and Zajac (1994) regard the number of risk factors described in the IPO registration statement as a proxy for risk and has shown that this measure is a useful way to code risk. Welbourne and Andrews (1996) code risk factors to be a summated risk measure indicating the level of a firm's risk. The presence. 政治大 new product, few or limited products, low number of years in operation, inexperienced 立 management, technical risk, seasonality, customer dependence, supplier dependence,. of the following risk factors is included in this measure:technological obsolescence,. ‧ 國. 學. inexperienced underwriters, competition, legal proceedings against company, liability, and government regulation. Consistent with prior research (Welboume and Andrews. ‧. 1996, Cyr, Johnson, and Welbourne 2000) use a summated measure of eighteen different types of risk factors. Some of the more commonly cited risk factors include. y. Nat. sit. competition, dependence on key employees, competitive labor markets, technological. er. io. obsolescence, government regulation, and few or limited products.. al. v i n prospectus to study a variety of topics. the influence of word content, C h In order to analyze U i e h n c is content analysis which is a set of there is a common way to be applied. Thegway n. Besides, some literature has dealt with information disclosure in annual report or. procedures to make valid inferences from messages (Weber 1990). In other words, content analysis is a technique for gathering data that involves codifying qualitative and quantitative information into predefined categories to derive patterns in presenting and reporting information. Thus, content analysis seeks to analyze published information systematically, objectively and reliably (Krippendorf, 1980; Guthrie and Parker, 1990). Therefore, Walden and Schwartz (1997) use two systems of enumeration to capture the quantity of disclosures and establish assessments of the quality. The first system of enumeration considers the quantity of disclosures. The quantity score is the summation of the number of sentences or financial statement lines per environmental theme. The second system of enumeration considers the quality or information content 17.

(18) of the disclosures. It is referred to as a disclosure score which is the summation of the disclosure quality per environmental theme. The nature, extent, and timing of environmental disclosures are examined to measure objectively the information contained in the disclosures and to provide a systematic numerical basis for analysis. Hughesa, Andersonb and Goldenc (2001) evaluate the content of each sentence in listed 23 items by weighting score. Content is classified as: 1)Quantitative which carries a weight of four - the environmental impact is clearly defined in monetary terms or actual physical quantities; 2)Descriptive which carries a weight of three - the impact on the company or its policies is clearly evident; 3)Vague which carries a weight of two disclosures are limited to passing comments of environmental effects within discussions of other topics; and 4)Immaterial which carries a weight of one- those. 政治大. disclosures that state environmental issues are immaterial to the financial condition and. 立. 學. ‧ 國. results of the corporation. 2.4 The Biotech Industry. Pisano (1991) indicates that due to the long product development cycles and the. ‧. needs for cash in the hundreds of millions of dollars, biotechnology firms tend to be far from generating revenues when they try to go public. Also, the young biotech firms are. y. Nat. sit. in an intense competition to discover and patent a new drug because biotech firms are. er. io. highly dependent on the intellectual property generated through their large R&D. al. v i n value chain of the typical biotech 10–15 years from founding C hfirms stretches some U i e h n g cand product sales. Therefore, it has large through patenting to successful FDA approval n. expenditures and, as such, are among the most intangible-intensive of businesses. The. capital needs over a long period of time. However, capital needs are typically so large that they can only be satisfied through an IPO or mergers and acquisitions by a large pharmaceutical company. Successful biotech firms therefore tend to go public rapidly. Consequently, biotechnology is a very risky but potentially very lucrative equity investment (Hand 2005). Due to many industrial characteristics in the biotech industry such as the complexity of biotech products, long development time and rapid pace of innovation, there is the large information asymmetry between managers and investors. This characteristic leads to the benefits of disclosure. The benefits of disclosure by biotech companies are in terms of stock price increases and low cost of capital. However, 18.

(19) because most companies develop only a few products and the entrance of a competitor poses a serious survival threat, the disclosure costs are generally high. Therefore, how much information can be disclosed is an important issue to biotech firms. They need to balance between the benefits and the cost to make firm performance well in the future.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 19. i n U. v.

(20) 3 METHODOLOGY 3.1 Hypothesis Development In this section, I want to discuss the Relation between probability of profitability after IPO and risk factor and discussion provided as follows. At a certain stage in its development, the firm attempts to raise additional capital through an IPO. Especially biotech firms, their growth opportunities require large investments. Spending more money in R&D expenditures secure for the firm a competitive advantage that makes survival more likely. Besides, the development period for biotech products is among the longest of any science- or technology-based product. It is widely reported that a pharmaceutical innovation takes six to eight years to reach the FDA approval stage.. 政治大. The development process of biotech and pharmaceutical products is well specified by the FDA (Food and Drug Administration), generally starting with preclinical (e.g.,. 立. animal) trials, followed by three phases of human clinical trials. Successful clinical. ‧ 國. 學. trials lead to a FDA application and the granting or rejection of approval. Long time for development burns money. Therefore, firms will be forced to go public to finance. ‧. investments.In the post-IPO phase, this firm can evolve into one of three basic states. It can survive as an independent firm, fail outright, or get acquired and lose its current. Nat. sit. y. identity. Post-IPO survival as an independent company should be a logical outcome for. io. er. issuers going public to finance their growth prospects.. In the light of prior theoretical literature, there are many factors influence. n. al. i n U. v. probability and timing of post-IPO profitability of biotech firms. Signaling. Ch. engchi. consideration is one of theories to identify factor. If biotech firms can signal their probability of profitability after IPO to investors, they can raise more money to support their operating. Disclosuring risk factors in prospectors is a way , because publicly traded firms are legally required to list risk factors in their IPO prospectuses (Feltham, Hughes, and Simunic, 1991). Examples of the types of issues listed as risk factors in the prospectuses include manufacturing capacity limitations, rapid technological change, intense competition, need for additional capital, and uncertainty regarding patents and protection of proprietary rights. The risk factors associated with a firm can affect both performance expectations and realized performance. Because disclose can reduce information asymmetry, which leads to lower cost of capital and, in turn, to enhanced corporate investment and growth (e.g., Glosten and Milgrom 1985, Amihud and Mendelson 1986, Verrecchia 2001). Many empirical findings of the corporate 20.

(21) disclosure research strand generally support the existence of the theoretically predicted negative relation between the quality and quantity of corporate disclosure and cost of capital. The benefits of disclosure by biotech companies in terms of low cost of capital are commensurately high, given the large information asymmetries between managers and investors due to the novelty and complexity of biotech products under development. I expect a negative relation between information disclosures and cost of capitals, and a negative relation between cost of capitals and long-term performance. In a word, there is a positive relationship between information disclosure and long-term performance. In my study, I use two ways to measure the risk factors disclosures, types and scores. This analysis serves a dual purpose: finding a significant relationship between the disclosure and long-term performances of firms. However, my. 政治大. classification is subjective, like other literatues. Below is my hypothesis：. 立. H1: More contents of risk factors disclosed in prospectus are positively associated. ‧ 國. 學. with the profitability of firms.. H2:The disclosure of details of risk factors in prospectus is positively associated. ‧. with the profitability of firms.. y. Nat. n. al. er. io Risk Factors Disclosures in Prospectors. sit. Positively Related (My Hypothesis). Ch. Cost of Capital. engchi. Negatively Related. i n U. v. Negatively Related. Long-Term Performance of Firms. 3.2 Data Collection This study focuses on biotech companies in the U.S IPO market and the influence of risk factors in the prospectus and probability of profitability after IPO. The choice of the biotech industry is driven by the fact that this industry has several interesting characteristics which make it a good candidate for a single industry study of IPOs.The biotech industry is highly competitive and faces significant technological change. And itis also characterized simultaneously by prospects for high profits, as well as significant downside risks due to regulatory and legal uncertainties.This provides 21.

(22) opportunities for many start-upsand, consequently, a relatively large number of IPOs(Galant 1992). The sample data consists of 231 biotech companies of U.S IPOs issued from1997 to 2012. To be included in our sample, financial and accounting information for sample firms is available on the Center for Research in Security Prices (CRSP) and Compustat files and IPO offering related information is accessible from the Securities Data Corporation's (SDC) Global NewIssues database .Number of risk factors is collected from the offering prospectuses. Therefore, the sources of variables in this study including venture capital backed and gross proceeds raised at the IPO are from SDC, and risk factors listed in the IPO prospectus are obtained from S-1 filings in Securities and Exchange Commission’s (SEC’s) website. However, S-1 filings of sample. 政治大 are 210 S-1 filings altogether. Therefore, the summated items and disclosure score of 立 risk factors in each company can be collected from these 210 companies.. 學. ‧ 國. companies are obtained from Securities and Exchange Commission’s website. There. To show the outcome of 231 firms in this study, two panels consolidated in Table 3-1 regarding frequency distributions by year, by industry. They are given in Table 3-1. 1999. al. 21. Ch. e n10g c h i U 9. y. sit. Number of firms. Percentage. er. Panel A. By Year. n. 1998. io. 1997. Nat. Year. Table 3-0-1 Frequency Distribution. ‧. Panel A and Panel B, respectively.. v ni. 9.09% 3.90% 4.33%. 2000. 49. 21.21%. 2001. 5. 2.16%. 2002. 3. 1.30%. 2003. 8. 3.46%. 2004. 28. 12.12%. 2005. 17. 7.36%. 2006. 24. 10.39%. 2007. 20. 8.66%. 2008. 2. 0.87%. 2009. 2. 0.87%. 22.

(23) 2010. 13. 5.63%. 2011. 9. 3.90%. 2012. 11. 4.76%. Total. 231. 100.00%. Table 3-1Panel A shows that the number of firms is concentrated in 2000 (49 firms), 2004 (28 firms) and 2006 (24 firms). And the proportionof firms in these three years is 43.72%. In Table 3-1Panel B, the largest industry is biotech industry in Pharmaceutical Preparations (54.98%).. Table 3-1 Frequency Distribution. 政治大 Definition Number of 立 firms Panel B. By Industry. 4-digit. 2834. Pharmaceutical Preparations. 2835. In Vitro and In VivoDiagnostic. 7. 3.03%. 66. Diagnostic Substances. sit. al. Total. Ch. 28.57%. y. n. Research. engchi. 31. er. Commercial Physical and Biological. io. 8731. 54.98%. Biological Products, Except. Nat. 2836. 127. ‧. Substances. 學. ‧ 國. SIC. Percentage. iv n U 231. 13.42%. 100%. 3.3 Research Design 3.3.1 Approaches to Measure Risk Factors For the purpose of analyzing the influence of risk factors on IPO probability of profitability after IPO, this study adopts four approaches to measure 210 biotech firms from 1997 to 2012 to provide for a source of subsequent empirical analysis. This section is mainly to explain the content of the approaches. Referring to prior research on risk factors being a proxy for ex ante uncertainty, the first approach is to count the number of risk factors listed in the prospectus.Consistent with Beatty and Zajac (1994) considering a firm’s risk position is operationalized as the number of risk factors reported in the prospectus, the assumption is that while all risk factors are not equally 23.

(24) impactful, more risk factors generally indicate a higher risk position.On the basis of previous research (e.g. Welboume and Andrews1996; Cyret al. 2000; Certo et al. 2001),the presence of the following twenty different types of risk factors commonly listed in the prospectus are included in this measure and are coded (i.e. 0 = No, 1 = Yes): (1) Technological obsolescence/ rapid technological change (2) New product (3) Few or limited products (4) Low number of years in operation (5) Inexperienced management (6) Technical risk (7) Seasonality. 政治大. (8) Customer dependence (9) Supplier dependence. 立. (10) Inexperienced underwriters. ‧ 國. 學. (11) Intense competition (12) Legal proceedings against company. ‧. (13) Liability. (14) Government regulation. y. Nat. sit. (15) Manufacturing capacity limitations. al. n. (17) Uncertainty regarding patents or proprietary rights (18) Terminationof contract. Ch. (19) Dependence on key employees. engchi. er. io. (16) Need for additional capital. i n U. v. (20) Competitive labor markets Although these twenty different types of risk factors are commonly listed in the prospectus, the oral committee gives advice to me that whether government regulation and inexperienced underwriters can removed from these classification. Because the disclosure of government regulation is mandatory and inexperienced underwriters is a bad news that firms are inclined not to disclose this information, each firm must disclose government regulation and not disclose inexperienced underwriters. Due to this, there is no difference in dealing with these two disclosures among firms in my sample. And after running the data, the results are exactly unsignificant. So whether or not I include them in the prospectors seems not so important. Therefore, I will take the advice of the 24.

(25) oral committee as a good advice and take it into consideration in the future research. In addition the method based on previous research (e.g. Welboume and Andrews1996; Cyret al. 2000; Certo et al. 2001), I want to discuss more, and turn to a more detailed analysis of the content of IPO risk declarations. Risk declarations are not just categorized by the method described above, but also by another kind of classification, by reference to the studies of Beattie et al. (2004), Beretta and Bozzolan (2004) Accordingly, I undertake analyses based on both and discuss each in turn. First, I commence with an analysis of risk types by the twenty items. Second, I analyse risk types. along. the. following. dimensions:. (i). financial/non-financial;. (ii). quantitative/qualitative; (iii) uncertainty risks , and (iv) downside risks. These four. 政治大 The financial/non-financial dichotomy is classified by the criteria whether this risk 立 factor is associated with financial issue. Across the sample, three types of risk factors dimensions are re-categorization of those twenty risk items.. ‧ 國. 學. are financial risk factors: (i) Legal proceedings against company; (ii) Liability, and (iii) Need for additional capital.. ‧. In respect of the quantitative/qualitative dichotomy, I find that across the sample a quantity tends to be specified for five types of risk: (i) Where a company is dependent. y. Nat. sit. on one or a few major customers or contracts (ii) Keyman insurance(companies who. er. io. declare a dependence on key personnel, have indicated the amount of Keyman. al. v i n company (iv) Liability (v) NeedC for additional capital hengchi U Risk declarations across our sample relate either to increased volatility or to a n. insurance taken out in respect of these personnel) (iii) Legal proceedings against. potential reduction in income/increase in costs and, therefore, we might categorize risks according to whether they express (i) uncertainty (upside and downside) or (ii) solely downside. The former would include statements, for example, that the sector is at an early stage of development or that sector demand in cyclical; the latter would include concerns over, for example, key employees leaving, competition from other businesses and inadequate financing being available for expansion, all of which would be expected to have a negative impact upon revenues. I present the four subgroups of risk types in Table 3-2. Panel A deals with the financial/non-financial, Panel B with the quantitative/qualitative , Panel C with the uncertainty risks and Panel D with the downsides risks. 25.

(26) In panel A the financial/non-financial dichotomy is classified by the criteria whether this risk factor is associated with financial issue. Across the twenty different types of risk factors commonly listed in the prospectus, three types of risk factors are financial risk factors: (i) Legal proceedings against company; (ii) Liability, and (iii) Need for additional capital. First, legal proceedings against company is acociated with firms’ allocation of fund. If firm has legal proceedings, it must effect operating performance of firm, due to limitation of fund using. If the legal proceedings are so large that firms may be short of money, therefore jeopardizing firms. The worst situation is bankruptcy. So I think that information about legal proceedings against company in the prospectus is kind of financial risk factor. Second, liability is also kind of financial issue. The reason firms have liabilities is due to lack of money. Only firms. 政治大 must need to pay off liabilities, so they need to reserve some cash. However, this will 立 affect performance of firms, because not all the money can free to use to support firms’. are short of money that they need to borrow money from others. In the future, firms. ‧ 國. 學. operating. Therefore, I think that this kind of risk is financial risk. At last, the firms’ need for additional capital are definitely the financial issue. It represent that firms are. ‧. lack of money to operate, they wish that more investors can lend them money. Except for the three risk factors item described above, the remain seventeen risk factors are. y. Nat. sit. classified as non-financial risk factors.. er. io. In panel B the quantitative/qualitative dichotomy, I find that across the sample a. al. v i n on one or a few major customers insurance(companies who C orh contracts (ii) Keyman U i e h n c indicated the amount of Keyman declare a dependence on key personnel,ghave n. quantity tends to be specified for five types of risk: (i) Where a company is dependent. insurance taken out in respect of these personnel) (iii) Legal proceedings against company (iv) Liability (v) Need for additional capital, so I select them from the twenty different types of risk factors commonly listed in the prospectus, and defined them as quantitative risk factors. The remainder are qualitative risk factors. In panel C are the uncertainty risks. Risk declarations across my sample relate to increased volatility are categorized as uncertainty risks because they express uncertainty (upside and downside). The statements would include, for example, that the sector is at an early stage of development or that sector demand in cyclical. According to this guideline, five of twenty risk factors are categorized as uncertainty risks. They are technological obsolescence/ rapid technological change, low number of years in 26.

(27) operation, seasonality, customer dependence, and supplier dependence. Technological obsolescence and rapid technological change maybe let firms’ products quickly out-ofdate, and they don’t know how long their products can survive in the market. The worst thing is that the product life is too short to cover costs. The production is unprofitable. So the uncertainty about market situation will also lead to uncertainty about the future of firms. Not only technological obsolescence/ rapid technological change but also seasonality will let firms’ profits full of uncertainty. Seasonality lead to unstable income of firms, and this will jeopardize operating of firms, due to unstable earnings and income cash flow. Firms can’t plan their investments in advance, and can’t use their money in the best way. This totally lets firms future full of uncertainty. Besides, firms. 政治大 firms don’t have many operating experiences so whether they can survive in the long 立 time is full of uncertainty.. have low number of years in operation represent that the firms are unmature. The young. ‧ 國. 學. At last, customer dependence and supplier dependence are also kind of problems. The more dependence on someone, the less power firms have to negotiate with someone.. ‧. Customer dependence and supplier dependence mean the revenues and costs of firms are controlled by third parties. Firms don’t have ability to decide their profit and cash. y. Nat. sit. flow, and can’t well arrange their future investment plan, even they have opportunities.. er. io. This uncertainty will also jeopardize firms’ survive chance in the future. Due to these. al. v i n In panel C are the downsides declarations across my sample relate to a C risks. U h e nRisk i h c g potential reduction in income/increase in costs might be categorized as downsides risks. n. reasons described above, I classify those five risk factors as uncertainty risk factors.. They express solely downside, and would include concerns over, for example, key employees leaving, competition from other businesses and inadequate financing being available for expansion, all of which would be expected to have a negative impact upon revenues. In my classification, half of twenty risk factors meet with the criteria. They are inexperienced management, technical risk, intense competition, legal proceedings against company, liability, manufacturing capacity limitations, need for additional capital, termination of contract, dependence on key employees,and competitive labor markets. First, inexperienced management, and manufacturing capacity limitations will have bad effects on firms’ operating ability. Inexperienced management might not 27.

(28) provide good advices to firms and manage firms well. Besides, manufacturing capacity limitations means that firms can’t produce enough products to sell, and they lose potential customers. Even if their products are hot in the market, their profits always fix in there, due to limit quantities of products. Second, legal proceedings against company, liability, and need for additional capital are the signals that firms are short of money now or in the future. Legal proceedings against company is a risk that if the amount of fine is so big that firms might be bankruptcy. A firm has liability, and need for additional capital represent that they don’t have full cash now. This means that they might lose some potential opportunities to invest in some profitable investment. This is bad for the future of firms. Third, technical risk, intense competition,and competitive labor markets means. 政治大 chance of obsolescence products is also big. Fourth, dependence on key employees is 立 also a problem, because this means that they contributed to most of firms’ profits. They that firms are in a competitive environment. The probability of unprofit is high, and the. ‧ 國. 學. might have some excellent abilities, like good experience in this area, the core technology, exclusive patent, and excellent expertise. If they leave, it definitely. ‧. jeopardize firms future. Even worse, firms might go out of business. At last, termination of contract lets firms lose opportunities to earn money. This is kind of a bad news to. y. Nat. sit. firms and investors. Finally, in a word, many situation will harm firms’ profits and these. al. er. io. risks are categorizes as downsides risks in my research model.. v. n. Table 3-2 Four subgroups of types of risk factors. Ch. i n U. Panel A：Risk factors related to the financial/non-financial A. Financial. engchi. 1. Legal proceedings against company 2. Liability 3. Need for additional capital B. Non-financial 1. Technological obsolescence/ rapid technological change 2. New product 3. Few or limited products 4. Low number of years in operation 5. Inexperienced management 6. Technical risk 28.

(29) 7. Seasonality 8. Customer dependence 9. Supplier dependence 10. Inexperienced underwriters 11. Intense competition 12. Government regulation 13. Manufacturing capacity limitations 14. Uncertainty regarding patents or proprietary rights 15. Terminationof contract 16. Dependence on key employees 17. Competitive labor markets. 政治大 Table 3-2 Four subgroups of types of risk factors(continued) 立 Panel B：Risk factors related to the quantitative/qualitative. ‧ 國. 學. A. Quantitative. 1. Customer dependence. y. Nat. 3. Liability. sit. 4. Need for additional capital. al. n. v i n C h rapid technological Technological obsolescence/ e n g c h i U change New product. B. Qualitative. 2.. er. io. 5. Dependence on key employees. 1.. ‧. 2. Legal proceedings against company. 3. Few or limited products 4. Low number of years in operation 5. Inexperienced management 6. Technical risk 7. Seasonality 8. Supplier dependence 9. Inexperienced underwriters 10. Intense competition 11. Government regulation 12. Manufacturing capacity limitations 29.

(30) 13. Uncertainty regarding patents or proprietary rights 14. Terminationof contract 15. Competitive labor markets. Table 3-2 Four subgroups of types of risk factors(continued) Panel C：Risk factors related to the uncertainty 1. Technological obsolescence/ rapid technological change 2. Low number of years in operation 3. Seasonality 4. Customer dependence 5. Supplier dependence. 政治大 Table 3-2 Four subgroups of types of risk factors(continued) 立. Panel D：Risk factors related to the downsides. ‧ 國. 學. 1. Inexperienced management 2. Technical risk. ‧. 3. Intense competition. y. n. al. 7. Need for additional capital. Ch. 8. Terminationof contract. engchi. sit. io. 6. Manufacturing capacity limitations. er. 5. Liability. Nat. 4. Legal proceedings against company. i n U. v. 9. Dependence on key employees 10. Competitive labor markets. In addition to capturing the quantity of disclosure, this study creates and tests a coding scheme similar to other studies (e.g. Hughesaet al.2001; Cerbioni and Parbonetti 2007; Hali 2002).Coding is the process by which raw data are transformed systematically and aggregated into units, which permit precise description of relevant content characteristics (Holsti 1969). Two researchers who shared the same approaches conduct the coding scheme and code for the content analysis. In order to consider the content or description of the disclosure, the result of the coding scheme is referred to as a disclosure score. The disclosure score per sample 30.

(31) company is the summation of per risk factors coded. This study uses a four-class index which attempts to assess the disclosure related to per risk factor presented among 20 items and the four subgroups. Table 3-3 shows the four-class index used in this study. The results of the content analysis about risk factors from 210 biotech companies contain total items presented in the prospectus, total score summed by per risk factor coded and total words calculated to completely present the content of risk factors. The outcome is listed in the Appendix 2. Table 3-3 Four-class index Class Quantitative. Score. Description. 4. If it provides quantitative information. Or the risk factor. 政治大 quantities. 立 If it provides qualitative information specific as. is clearly defined in monetary terms or actual physical. toactions, persons, events, or places. Or the impact on the company is clearly evident. If it is mentioned only generally, not specific.. ‧. 2. y. Those disclosures are immaterial to the financial. io. sit. 1. condition and results of the corporation.. n. al. er. Nat. Immaterial. 學. Vague. 3. ‧ 國. Descriptive. Ch. i n U. v. This study applies the descriptive statistics to analyze the data from sample. engchi. companies including five-years profits after IPO, items of risk factors, scores of risk factors and control variables known to affect firms’s long-term performance. The means, medians, first quartiles, third quartiles, and standard errors are calculated and observed to determine whether there is any extreme observation. 3.3.2 Cox Proportional Hazards models I estimate Cox Proportional Hazards models to test whether risk factors identified by our theoretical framework significantly impact the probability of post-IPO profitability as a function of time. Dependent variable is the logarithm of the hazard rate, a positive coefficient on an explanatory variable in the CPH model indicates that an increase in the variable is associated with an increase in the hazard rate and consequently lower duration. In the context of my application, a positive (negative) 31.

(32) coefficient indicates that an increase in the variable leads to an increase (decrease) in the probability of attaining profitability and a decrease (increase) in the time-toprofitability. A detailed discussion of CPH models is available in Cox (1972). In addition to identifying coefficient signs of variabes, it is also useful to assess the economic impact of these variables by evaluating their impact on the risk or hazard that a currently unprofitable biotech firm will be profitable in the future. For continuous independent variables the hazard ratio represents the estimated percent change in the hazard of the event (attainment of profitability) for a one unit increase in the covariate of interest (controlling for other covariates) and is obtained by subtracting one from the hazard ratio and multiplying by 100. For indicator variables, the hazard ratio is interpreted as the estimated hazard of the event of interest occurring for those with a. 政治大. value of 1 relative to the estimated hazard for those with a value of 0 after controlling. 立. for other covariates.. In order to test the linear relationships between variables, this study uses Pearson. ‧ 國. 學. Correlation and Spearman Correlation to make sure whether there are collinear problems between independent variables.1. ‧. 3.4 Research Model. y. Nat. sit. 3.4.1 Dependent Variable and Independent Variables. io. er. I use quarterly operating income before depreciation as my measure of operating profitability. I define the event in my analysis as the attainment of a quarter of operating. n. al. Ch. i n U. v. profitability for a period of five years after the IPO. In the post-IPO period, firms will. engchi. either attain profitability, fail, or remain unprofitable until the end of our tracking period. Censored observations represent IPO firms that are unable to attain profitability by the end of our tracking period. If a firm has a quarter of operating profitability after the IPO then we assign it the profitable status and compute the time-to-profitability as the number of quarters elapsed between the IPO quarter and the quarter for which the firm first reported operating profitability. The construction of the dependent variable is on the basis of combining the time to occurrence of event (profitability) with the dichotomous status variable (attained profitability status versus remains unprofitable at. 1. See Allison (2000) for further details on the interpretation of hazard ratios for quantitative and. indicator variables. Hellman and Puri (2002) interpret the hazard ratio in a similar manner to that described above for indicator variables. 32.

(33) end of tracking period). The dependent variable in the hazard model, therefore, denotes the likelihood that an Internet IPO firm will attain profitability in each period. About independent variables, on the basis of previous research (e.g. Welboume and Andrews1996; Cyret al. 2000; Certo et al. 2001), I use twenty different types of risk factors commonly listed in the prospectus as my independent variables. These twenty different types of risk factors are dummy variables in my model. They are coded one if firms disclose them in the prospectors, otherwise, coded zero. Besides, I also use four subgroups of them to represent another kind of classification. They are dummy variables, too. They are coded one if firms disclose them in the prospectors, otherwise, coded zero. In addition to types of disclosures, I also score them. Score of each item and four. 政治大 disclosures that provides quantitative information, or the risk factor is clearly defined 立 in monetary terms or actual physical quantities. Score3 gives to disclosures that subgroups are independent variables, too. I score them in four levels. Score 4 gives to. ‧ 國. 學. provides qualitative information specific as toactions, persons, events, or places. Or the impact on the company is clearly evident. Score 2 gives to disclosures mentioned only. ‧. generally, not specific. Score1 gives to disclosures are immaterial to the financial condition and results of the corporation. In a word, each item has a score, ranging from. y. Nat. n. al. er. io. 3.4.2 Control Variables. sit. four to one, the best to the worse.. Ch. i n U. v. First, the extant literature has widely recognized the potential for third party. engchi. certification as a solution to the information asymmetry problem in the IPO market (Beatty, 1989; Carter and Manaster, 1990; Megginson andWeiss, 1991; Jain and Kini, 1995, 1999b; Zimmerman and Zeitz, 2002). The theoretical basis for third party certification is drawn from the signaling models which argue that intermediaries such as investment bankers, venture capitalists, and auditors have the ability to mitigate the problem of information asymmetry by virtue of their reputation capital (Booth and Smith, 1986; Megginson and Weiss, 1991; Jain and Kini, 1995, Carter et al., 1998). In addition to certification at the IPO, intermediaries, through their continued involvement, monitoring, and advising role have the ability to enhance performance after the IPO. I use dummy variables to measure them. If a firm is venture-backed, coded 1, otherwises, coded 0. Second, I include the number of employees at the IPO (NUMEMP) as a control 33.

(34) variable. It proxies for the extent of human capital deployed in the IPO firm. Firms operating in the Internet industry have balance sheets that look considerably different from firms operating in more traditional industries because to a large extent they are less dependent on tangible assets and more reliant on intangible assets such as ideas, knowledge, and creativity. Therefore, one of the main assets for technological firms is their human capital base consisting of developers, programmers, designers, and similar knowledge based workers. As such, I expect the likelihood of attaining post-IPO profitability to be positively related to the number of employees. Third, I include the variable FIRMAGE measured as one plus the age of the firm at IPO as a control variable. Firms that go public prematurely are unlikely to be adequately prepared and financed to withstand the various challenges in the product. 政治大 to be on the path to achieving profitability compared to firms that had developed 立 sufficiently prior to going public. As such, I expect that the probability of attaining post-. and financial markets facing newly public firms. Therefore, these firms are less likely. ‧ 國. 學. IPO profitability is likely to be positively related to the age of the firm at the time of going public.. ‧. Finally, consistent with several studies in the IPO literature I include firm size (LSIZE) as measured by the natural logarithm of gross proceeds at the IPO as control. sit. y. Nat. variables.. er. al. n. clearly.. io. Combine all the factors I use in this research, and I draw the diagram to present. Ch. engchi. 34. i n U. v.

(35) 4. RESEARCH RESULTS AND ANALYSIS In this chapter, the descriptive statistics of the variables are presented in section 4.1, and then move to section 4.2 to discuss the empirical results to verify the hypotheses and understand the effect of dependent variables on the probability of profitability after IPO.. 4.1 Descriptive Statistics Table 4-1 Panel A provides descriptive statistics regarding all variables for full sample of 210 biotech IPOs during 1997-2012. My final sample of biotech IPO firms has the following attributes. About 27.5% of the IPOs have VC backed. The average. 政治大. number of employees for the firms in our sample is 315, and the mean of firm age is between eight and night years. In this sample, close to 86% of the IPOs have VC backed.. 立. And among selected twenty risk factors, firms tends to disclose only six of them, intense. ‧ 國. 學. competition, liability, government regulation,need for additional capital, uncertainty regarding patents or proprietary rights, and dependence on key employees. Besides,. ‧. among four subgroups of selected twenty risk factors , 62.37% of firms disclose the financial risk factors；56.96% of firms disclose the quantitative risk factors；27.72%. Nat. sit. y. of firms express the uncertainty in risk factors, and 44.29% express the solely. io. er. downsides in risk factors. Moreover, firms prefer to disclose more quantitative and descriptive information among six risk factors, intense competition, liability,. n. al. Ch. i n U. v. government regulation,need for additional capital, uncertainty regarding patents or. engchi. proprietary rights, and dependence on key employees, same with previous results. At last, 37.3% of firms disclose more quantitative and descriptive information in the financial risk factors, 36.17% in quantative risk factors, 18.81% in uncertainty risk factors, and 28.39% in downsides risk factors. It implies that half of firms may disclose these factors. however, not in a detail description. In table 4-2, I provide a comparison of the characteristics of firms that attain postIPO profitability versus firms that remain unprofitable during the post-IPO phase. There appears to be no difference between the two groups in venture capitalist participation and in selection of twenty risk factors and four subgroups to disclose. While the item disclosed is not significantly different in two groups, score1(technological obsolescence/ rapid technological change), score7 (Seasonality) and score of risk factors expressing uncertainty are higher for the unprofitable group. The profitable 35.

(36) group of firms have significantly higher score in score3 (few or limited products), score11(intense competition), score of quantitative risk factors, and score of risk factors expressing downside. Table 4-3 provides the spearman correlations among all the variables included in this study.The correlation matrix for the most part indicates low correlations among the independent variables. However, there are too many variables in this study, so the table 4-3 was too big. Therefore, I put table 4-3 in the appendix 3. Table 4-1 Descriptive Statistics Variable. Item3. 1.000. 62.500. 106.000. 8.000. 10.000. 63.381. 85.880. 33.750. 49.750. 72.050. 210. 0.195. 0.397. 0.000. 0.000. 0.000. 210. 0.067. 0.250. 0.000. 0.000. 210. 0.157. 0.365. 0.000. 0.000. 0.000. 210. 0.367. 0.483. 0.000. 210. 0.014. 0.119. 0.000. 210. al. n. Item6. 1.000. 210. io. Item5. 0.810. Nat. Item4. 治 1.000 政 0.394 大 210 315.491 2936.556 35.000 立 8.514 5.724 5.000 210 210. Q3. v i n 0.000 C0.257 U h e n g0.438 i h c 0.100 0.301 0.000 0.029. 0.167. ‧. Item2. Q2. 0.000. y. Item1. Q1. 學. LSIZE. Quartiles. 0.000. 1.000. 0.000. 0.000. 0.000. 0.000. 0.000. 1.000. 0.000. 0.000. sit. FIRMAGE. Std.Dev.. er. NUMEMP. Mean. ‧ 國. VC. N. 0.000. Item7. 210. Item8. 210. Item9. 210. 0.467. 0.500. 0.000. 0.000. 1.000. Item10. 210. 0.000. 0.000. 0.000. 0.000. 0.000. Item11. 210. 0.900. 0.301. 1.000. 1.000. 1.000. Item12. 210. 0.062. 0.242. 0.000. 0.000. 0.000. Item13. 210. 0.914. 0.281. 1.000. 1.000. 1.000. Item14. 210. 0.890. 0.313. 1.000. 1.000. 1.000. Item15. 210. 0.410. 0.493. 0.000. 0.000. 1.000. Item16. 210. 0.895. 0.307. 1.000. 1.000. 1.000. Item17. 210. 0.957. 0.203. 1.000. 1.000. 1.000. Item18. 210. 0.224. 0.418. 0.000. 0.000. 0.000. 36.

(37) Item19. 210. 0.876. 0.330. 1.000. 1.000. 1.000. Item20. 210. 0.105. 0.307. 0.000. 0.000. 0.000. Fianacial. 210. 1.871. 0.487. 2.000. 2.000. 2.000. Quantity. 210. 2.848. 0.567. 3.000. 3.000. 3.000. Uncertainty. 210. 1.386. 0.978. 1.000. 1.000. 2.000. Downside. 210. 4.429. 0.927. 4.000. 4.000. 5.000. Score1. 210. 0.448. 0.933. 0.000. 0.000. 0.000. Score 2. 210. 0.157. 0.602. 0.000. 0.000. 0.000. Score 3. 210. 0.429. 1.034. 0.000. 0.000. 0.000. Score 4. 210. 1.210. 1.684. 0.000. 0.000. 3.000. Score 5. 210. 0.033. 0.283. 0.000. 0.000. 0.000. Score 6. 210. 0.067. 0.000. 0.000. Score 7. 210. 0.000. 1.000. 0.000. 0.000. 立 210. 1.243. 1.391. 0.000. 0.000. 3.000. 210. 0.000. 0.000. 0.000. 0.000. 0.000. 210. 2.448. 0.923. 2.000. 210. 0.190. 0.733. 0.000. 210. 2.095. 0.830. 2.000. 210. 2.286. 0.946. 2.000. al. v i n 2.000 C2.190 U h e n g0.954 i h c 2.652 0.775 2.000 1.038. 1.297. y. 210. n. Score 15. io. Score 14. Nat. Score 13. 3.000. 2.000. 2.000. 2.000. 3.000. 0.000. 2.000. 2.000. 3.000. 3.000. 3.000. sit. Score 12. 210. ‧. Score 11. 0.000. er. Score 10. 1.017. 學. Score 9. 0.329. ‧ 國. Score 8. 治 0.000 政 0.398 大 0.533 0.989 0.000. 0.000. 3.000 0.000. 0.000. Score 16. 210. Score 17. 210. Score 18. 210. 0.633. 1.208. 0.000. 0.000. 0.000. Score 19. 210. 2.429. 1.011. 2.000. 3.000. 3.000. Score 20. 210. 0.233. 0.697. 0.000. 0.000. 0.000. Fianacial Score. 210. 4.476. 1.491. 4.000. 4.000. 5.000. Quantity Score. 210. 7.233. 1.806. 6.000. 7.000. 8.000. Uncertainty Score. 210. 3.762. 2.769. 2.000. 3.000. 5.000. Downside Score. 210. 11.357. 2.695. 10.000. 12.000. 13.000. 37.

(38) This table provides descriptive statistics regarding all variables. VC is a dummy variable equals to 1 if the firm is venture capital (VC) backed and 0 otherwise. NUMEMP is pre-IPO number of employees. FIRMAGE is the natural logarithm of the years between IPO year and the firm’s founding year. LSIZE is the log of gross proceeds raised at the IPO. Item1 to Item20 are dummy variables equal to 1 if the firm discloses this kind of risk factor and 0 otherwise. Financial, Quantity, Uncertainty and Downside are subgroups of selected twenty different types of risk factors, and each is a dummy variable equals to 1 if the firm discloses this kind of risk factor and 0 otherwise. Score1 to Score20 are the scores of selected twenty different types of risk factors commonly listed in the prospectus. Financial Score, Quantity Score, Uncertainty Score and Downside Score are the scores of those four subgroups.. 政治大 Table 4-2 Differences in characteristics based on whether the firm achieves post立IPO operating profitability. Item2 Item3. 8.16 (7.00). y. 0.00 (0.00). Ch. 0.00 (0.00). en hi U g c(0.00) 0.00. 209.07 (77.00). sit. 9.5 (9.00). 69.03 (50.00). er. al. 0.82 (1.00). 312.87 (54.00). 59.36 (46.25). n. Item1. io. LSIZE. mean (median). 0.81 (1.00). Nat. FIRMAGE. ‧ 國. NUMEMP. mean (median). profitable. ‧. VC. Unprofitable. 學. Variable. v ni. 0.00 (0.00) 0.00 (0.00) 0.00 (0.00). Item4. 0.00 (0.00). 0.00 (0.00). Item5. 0.00 (0.00). 0.00 (0.00). Item6. 0.00 (0.00). 0.00 (0.00). Item7. 0.00 (0.00). 0.00 (0.00). Item8. 0.00 (0.00). 0.00 (0.00). Item9. 0.00 (0.00). 0.00 (0.00). Item10. 0.00 (0.00). 0.00 (0.00). Item11. 1.00 (1.00). 1.00 (1.00). Item12. 0.00 (0.00). 0.00 (0.00). Item13. 1.00 (1.00). 1.00 (1.00). 38.

(39) Item14. 1.00 (1.00). 1.00 (1.00). Item15. 0.00 (0.00). 0.00 (0.00). Item16. 1.00 (1.00). 1.00 (1.00). Item17. 1.00 (1.00). 1.00 (1.00). Item18. 0.00 (0.00). 0.00 (0.00). Item19. 1.00 (1.00). 1.00 (1.00). Item20. 0.00 (0.00). 0.00 (0.00). Fianacial. 2.00 (2.00). 2.00 (2.00). Quantity. 3.00 (3.00). 3.00 (3.00). Uncertainty. 1.00 (1.00). 1.00 (1.00). Downside. 4.00 (4.00). 4.00 (4.00). Score1. 立. Score 2. Score 11 Score 12. 1.00 (0.00). al. 0.00 (0.00). Ch. U i en h c g 0.00 (0.00) 2.00 (3.00). 0.00 (0.00). y. 0.00 (0.00). n. Score 10. 0.00 (0.00). 1.00 (0.00). io. Score 9. 0.00 (0.00). Nat. Score 8. 0.00 (0.00). 0.00 (0.00). sit. Score 7. 0.00 (0.00). 1.00 (0.00). ‧. Score 6. 1.00 (0.00). 1.00 (0.00). 1.00 (0.00). er. Score 5. 0.00 (0.00). 學. Score 4. 0.00 (0.00). 0.00 (0.00). ‧ 國. Score 3. (0.00) 政1.00 治 0.00 (0.00) 大. v ni. 0.00 (0.00) 3.00 (3.00) 0.00 (0.00). Score 13. 2.00 (2.00). 2.00 (2.00). Score 14. 2.00 (3.00). 2.00 (2.00). Score 15. 1.00 (0.00). 1.00 (0.00). Score 16. 2.00 (2.00). 2.00 (2.00). Score 17. 3.00 (3.00). 3.00 (3.00). Score 18. 1.00 (0.00). 1.00 (0.00). Score 19. 2.00 (3.00). 2.00 (3.00). Score 20. 0.00 (0.00). 0.00 (0.00). Fianacial Score. 4.00 (4.00). 4.00 (4.00). Quantity Score. 6.00 (7.00). 7.00 (7.00). 39.

(40) Uncertainty Score Downside Score. 4.00 (3.00). 3.00 (3.00). 10.00 (11.00). 11.00 (12.00). The table reports differences in means (medians) of various characteristics based on whether the IPO firm achieves post-IPO operating profitability using a sample of 210 IPO issuers over the period 1997 through 2012. The time-to-profitability is measured as the number of quarters elapsed between the IPO quarter and the quarter in which the firm's operating profit is first positive after the IPO.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 40. i n U. v.