Does franchising matter on IPO performance?: An examination of underpricing and post-IPO performance

Abstract

Purpose - This paper has two main purposes. First, this paper aims to examine whether pre-initial public offering (IPO) franchising activity of issuing firms is priced in the financial markets and results in pricing differential between franchising and non-franchising firms at the time of IPO. Second, the paper aims to find out whether firms with pre-IPO franchising achieve better post-IPO stock performance compared to non-franchising firms.

Design/methodology/approach - To test research hypotheses, empirical models were developed and tested through ordinary least square regression analysis. Several data sources were used including Thomson One Banker's SDC database, Compustat/CRSP and IPO prospectuses.

Findings - The paper provides further insights to the underpricing phenomenon surrounding IPOs and long-run performance of IPO shares subsequent to listing. Particularly, the study reveals that franchising firms underprice their issues to a higher degree compared to non-franchising firms, and franchising positively affects the post-IPO benchmark adjusted cumulative abnormal returns (CARs) over a three-year observation period.

Research limitations/implications - Because the study tests the proposed hypotheses using data only from the restaurant industry, the research results may lack generalizability. Therefore, researchers are encouraged to test similar hypotheses using larger sample sizes from other industries.

Practical implications - The study's findings have important implications both for IPO issuers in positioning their offering and for IPO investors in comparing IPO stocks and forming long-run portfolios.

Originality/value - This paper contributes both to the IPO and franchising literatures by providing primary insights about how investors perceive pre-IPO franchising and incorporate their perception into their pricing at an IPO.