Do Direct Listings Lead to Higher Price Volatility than IPOs? The Role of Peer Firms’ Disclosures

• In Event: 3.02. Accounting Information and Firm Risk Assessment

Abstract

Initial Public Offerings (IPOs) and direct listings offer two distinct routes for firms to go public. In an IPO, a firm employs an investment bank underwriter and can raise new capital. In contrast, direct listings do not use an underwriter or raise new capital, and merely facilitate the transfer of existing shares to new owners. Since underwriting activities such as book building help reduce investor uncertainty, it is widely believed that direct listings will have higher levels of aftermarket price volatility than IPOs. However, this question has not been previously studied. We test this question using data for IPOs and direct listings on major stock markets in the E.U., where direct listings are more common than in the U.S. We show that, on average, direct listings are associated with higher aftermarket price volatility than IPOs. However, controlling for firm characteristics, we find that direct listings only have higher aftermarket price volatility than IPOs when industry peer firms’ accounting disclosures have relatively low value relevance; this is true both for IPOs where underwriters do and do not contract to provide price stabilization in the aftermarket. Our evidence suggests that the value-relevance of industry peer firms’ public disclosures plays an important informational role in resolving investors’ uncertainty regarding the valuation of newly listed firms, and therefore in determining whether direct listings are associated with higher price volatility than IPOs.

Authors

• Donal Byard, Baruch College

• Anna Bergman Brown, Clarkson University

• Jangwon Suh, New York Institute of Technology-NYC