Yesterday, Jason Zweig tweeted about an interesting paper from a trio of researchers out of Hong Kong University and DePaul regarding IPOs. The finding, in short, is that the more coverage a company gets prior to its IPO, the higher the market will value the company after the IPO.
You can get all of the wonky details by checking out the paper here. But basically what the researchers found is that pre-IPO media coverage generally leads to enduring attention to the stock, which positively impacts things like liquidity, institutional investor ownership, and valuations.
If you ask me, this is a pretty scary finding. Why? Here's what the researchers had to say at the outset of the paper:
Traditional asset-pricing theory would argue that media coverage should not affect asset prices unless it provides genuine news in the sense of new hard information that had not previously been available. Yet numerous recent studies raise the possibility that media coverage may be significantly related to asset prices even when it does not reveal hard, breaking news.
In other words, media coverage doesn't have to be adding any insight or new revelations about a company to increase investor interest in its stock, the coverage just has to be keeping the company's name in front of investors.
While the laurel may wither quicker than the rose when it comes to athletes, the same doesn't appear to be true when it comes to pre-IPO coverage. According to the research, five years out, the companies that got the most pre-IPO media coverage still had higher analyst coverage and institutional ownership, while trading with a lower bid-ask spread (i.e. experiencing higher liquidity).
A few IPOs that stand out in my mind from the past year that received significant pre-IPO media coverage are Molycorp (NYSE: MCP), Kohlberg Kravis Roberts (NYSE: KKR), and General Motors (NYSE: GM). All three were in the news prior to their IPOs: Molycorp due to concerns over China and rare-earth metals, KKR due to its iconic status in the buyout world, and GM thanks to its size and the government bailout it received. Interestingly, all three have also outperformed the S&P 500 since their respective IPOs.
This, of course, has implications for future IPOs and how investment banks might think about handling the pre-offering period. Referring to the findings of the paper, Zweig quipped in his Twitter post: "y'think [Goldman Sachs (NYSE: GS)] & Facebook know this?"
