Pre-IPO Acquirers' Issuance Cost and Long-Run Performance: Do Their M&A Disclosures Matter?

This paper investigates whether the activities and disclosures of mergers and acquisitions (M&As) preceding initial public offerings (IPOs) are associated with issuers (1) issuance cost and (2) long-run performance. The results show that pre-IPO acquirers have higher opportunity costs of issuance (OCI) than their matching companies (without pre-IPO M&As) but their underpricing does not differ significantly, indicating that they tend to raise more funds by issuing a greater number of shares. This action can be due to issuers intention to undertake more M&As or fear of their inability to successfully issue equity in the future. We also find that pre-IPO acquirers underperform their matching companies in the long run, with those undisclosing M&A information in the prospectus performing worse than those who did. These results reveal that investors valuation of disclosing pre-IPO acquirers is lower, but not low enough, because they underestimate the difficulty of M&A integration. Further, investors overvalue undisclosing acquirers more seriously because they know little about their pre-IPO M&A activities. These phenomena suggest that information disclosure in the prospectus does affect investors valuation.