International Review of Financial Analysis 57 (2018) 106–121

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

Zero-revenue IPOs T
⁎
Andrea Signori
Catholic University of Milan, Italy

A R T I C LE I N FO A B S T R A C T

Keywords: Information-based models of the IPO decision suggest that going public before having generated revenues is
IPOs inefficient. Still, 15% of firms going public in Europe have not reported revenues prior to the IPO. This paper
Zero revenues investigates why these firms decide to conduct an IPO and examines whether the absence of revenues affects the
Growth opportunities outcomes of this decision. The evidence shows that zero-revenue firms go public to fund investments, mainly in
Information asymmetry
the form of R&D. However, their shares are more underpriced at the IPO and develop less liquid and more
JEL classifications: volatile aftermarket trading than those of revenue-generating issuers. These effects are driven by firms whose
G32 revenue-less status is more persistent, as 18.6% still report no revenues at their three-year IPO anniversary. Also,
G33
zero-revenue issuers face a higher risk of being delisted shortly after the IPO. Overall, the evidence indicates that
G34
zero-revenue firms go public in an attempt to fund superior growth opportunities, but the high levels of in-
formation asymmetry and uncertainty increase the cost of raising capital and the risk of an early delisting.

1. Introduction IPO timing may result in increased costs of raising capital for the firm.
On the other hand, the IPO provides the company with greater flex-
Over the last decade, 15% of the companies going public in Europe ibility in accessing financial resources and unlocks value-enhancing
had no revenues at the time of the IPO. A firm's decision to issue public projects thanks to the fresh infusion of cash. The young age and the
equity even before bringing its products to the market is somehow absence of revenues imply that the value of these firms is almost ex-
puzzling. Information-based models of the IPO decision predict that clusively ascribed to growth opportunities. These opportunities are
firms should go public only after a sufficient amount of information likely to be missed if the firm remains private longer, because the lack
about them has accumulated among potential investors (Chemmanur & of an established stream of revenues that can serve as collateral to new
Fulghieri, 1999). Similarly, product market-based models indicate that debt issuance further exacerbates financial constraints, typically more
firms should first finance projects with the greatest revenue-generating severe for private rather than public firms in the first place. Thus, if the
ability privately, and then rely on public markets to fund the remaining expected benefits from pursuing such growth opportunities offset the
investment opportunities that contribute to incremental growth expected costs of raising capital in the presence of increased informa-
(Spiegel & Tookes, 2008). Most of the empirical evidence is consistent tion asymmetry, then zero-revenue firms may find it optimal to go
with the above theoretical predictions, as a private firm's likelihood of public.
going public becomes significant only after reaching certain critical size The first objective of this paper is to identify the reasons why a firm
and productivity levels (Chemmanur, He, & Nandy, 2010; Pagano, decides to go public despite its inability to generate revenues until then.
Panetta, & Zingales, 1998). This implies that going public in the ab- Since cashing out by existing shareholders and capital structure re-
sence of revenues may be an inefficient decision. Still, zero-revenue balancing are secondary motives due to the young age and low leverage
firms across Europe have succeeded in raising around nine billion euros of these firms, the analysis focuses on two factors, namely investments
over the last decade. This paper sheds light on the reasons pushing and M&A activity. The growth opportunities explanation predicts that,
these firms to conduct an IPO, and investigates whether the absence of in equilibrium, zero-revenue firms that decide to go public invest more
revenues affects the outcomes of this decision. than their revenue-generating peers after the IPO as they face superior
The trade-off faced by a zero-revenue firm evaluating the option to growth opportunities that are expected to offset the larger information
go public can be modeled as follows. On the one hand, the absence of production costs. These opportunities may consist of internal and ex-
revenues implies larger costs of information acquisition for outsiders, ternal growth, as IPO proceeds can be allocated to investments and
with investors possibly requiring extra compensation to participate in publicly traded stocks can be used as acquisition currency.
the offering, e.g. in the form of underpricing. Therefore, a premature Furthermore, as being acquired by an established incumbent is

⁎
Largo Gemelli 1, 20123 Milan, Italy.
E-mail address: [email protected].

https://doi.org/10.1016/j.irfa.2018.03.003
Received 25 November 2017; Received in revised form 27 February 2018; Accepted 14 March 2018
Available online 15 March 2018
1057-5219/ © 2018 Elsevier Inc. All rights reserved.
A. Signori International Review of Financial Analysis 57 (2018) 106–121

increasingly modeled as a successful outcome for new entrants (Gao, Second, aftermarket trading is characterized by a significantly lower
Ritter, & Zhu, 2013), it is possible that zero-revenue firms go public in level of stock liquidity, with the evidence being robust across three
an attempt to gain visibility and draw the attention of potential ac- different proxies, namely bid-ask spread, Amihud's (2002) illiquidity
quirers. ratio, and the fraction of zero-return days. Also, zero-revenue stocks are
The second objective of this paper is to assess whether the absence more volatile, as the standard deviation of returns is 19% higher than
of revenues affects the outcomes of the decision to go public in a way that of the matched sample. Consistent with the view that a firm's in-
that may increase the cost of raising capital for the firm. The link be- ability to generate revenues increases information asymmetry and un-
tween the product and financial market characteristics generates im- certainty among investors, the two above effects are primarily due to
portant implications for investors who consider participating in IPOs by issuers whose revenue-less status lasts longer after the IPO. Indeed, a
zero-revenue firms. First, the inability to bring products to the market significant fraction of firms, namely 18.6%, still report no revenues at
makes it unlikely that investors are acquainted with the firm at the time the three-year IPO anniversary. Third, zero-revenue firms face a higher
it goes public, thereby increasing the level of information asymmetry. risk of delisting. The likelihood of being delisted within three years of
Second, uncertainty about whether and when the firm will manage to going public is 3.8% higher than that of the matched sample.
start generating revenues increases the risk associated with the in- The contribution of this paper is two-fold. First, it adds to the recent
vestment. This predicts that zero-revenue firms are more underpriced literature relating product market characteristics and IPO outcomes
than revenue-generating issuers at the IPO, as investors would require a (see, e.g., Chemmanur & He, 2011). In particular, IPOs by loss-making
compensation for their superior risk exposure, and develop less liquid firms have received a great deal of attention (e.g., Yi, 2001). The
and more volatile trading in the aftermarket. Also, this may expose fraction of firms going public with negative earnings has indeed in-
zero-revenue IPOs to a higher risk of delisting. creased over time, with a peak during the dot-com bubble.1 Aggarwal,
The above predictions are tested on the population of 2432 non- Bhagat, and Rangan (2009) document that firms with more negative
financial European IPOs during the period 2002–2014. Although it is earnings are perceived as facing greater growth opportunities and ob-
unlikely that firms self-select into the zero-revenue status, their beha- tain higher valuations at the IPO. This paper takes another perspective
vior is benchmarked against both the rest of the population of IPOs and as the absence of revenues conveys information about the issuers that
a matched sample of revenue-generating issuers to alleviate possible are substantially different from those suggested by negative earnings.
endogeneity concerns. The reason for choosing the European context is While losses for the period may be due to the firm's temporary failure to
because of the presence of second-tier, loosely regulated markets, such cover its costs, the absence of revenues indicates its inability to bring
as London's Alternative Investment Market (AIM), designed to facilitate products to the market to date. In the latter case, the implications for
small firms' access to public equity capital (Vismara, Paleari, & Ritter, investors and other market participants are profoundly different from
2012). The minimal admission criteria set by these markets make it those generated by a loss-making IPO firm that has already commer-
easier for firms with no revenues to go public, thereby increasing the cialized its products. Second, the paper adds to the debate on the suc-
relevance of the zero-revenue IPOs phenomenon. In terms of industry cess factors that help early-stage firms to raise capital. The role played
distribution, more than half of these issuers belong to the natural re- by the presence of prior revenues (or “traction”) in attracting early-
sources and pharmaceutical industries. This is consistent with prior stage financing seems to depend on the type of capital suppliers, with
literature documenting that firms operating in industries characterized professional investors such as venture capitalists (VCs) and business
by greater capital intensity tend to go public at an earlier stage of their angels (Bernstein, Korteweg, & Laws, 2017) responding differently from
life cycle (Chemmanur et al., 2010). the crowd (Vismara, 2016). This paper adds to this debate by doc-
The empirical evidence can be summarized as follows. The analysis umenting that the absence of revenues leads to larger costs of raising
of IPO motivations documents that zero-revenue firms invest more in public equity capital and to a higher risk of an early delisting, consistent
research and development (R&D) than both the rest of the population with increased information asymmetry and uncertainty faced by in-
and the matched sample of revenue-generating issuers after going vestors.
public. This is consistent with the growth opportunities explanation. On The remainder of the paper is organized as follows. Section 2 re-
average, the R&D expenses to total assets ratio of zero-revenue firms views the related literature and formulates the hypotheses. Section 3
computed across the three years post-IPO is 2.4 percentage points presents the sample, data, and methodology used in the paper, and
higher than that of other firms. At the same time, capital expenditure is shows some descriptive statistics. Section 4 presents the results of the
2.4 percentage points lower, and the likelihood of making an acquisi- multivariate analyses on IPO motivations and outcomes. Section 5
tion decreases by 11%. In line with the young age and industry dis- provides evidence of additional tests about the effects of the natural
tribution of these firms, the evidence suggests that their growth op- resources industry, VC backing, geographic region, and legal origin.
portunities consist of early stage, innovation-oriented investments Section 6 concludes.
rather than increases in tangible fixed assets or acquisitions of other
firms. Inspection of official IPO prospectuses supports this view. For
2. Related literature and hypotheses
instance, the intended use of proceeds stated by Circassia
Pharmaceuticals, a UK-based biotech company gone public in 2014 and
The ability to quickly launch products to the market, and hence
focused on the development of immunotherapy products for allergies,
generate revenues, is a crucial factor for start-up firms to enable their
was to bring its lead product candidate to the market and advance the
development and survival. A large stream of literature across disciplines
development of its other clinical-stage product candidates. Still, there is
has addressed this issue by trying to identify the various sources of
a small fraction of firms that mention cashing out by existing share-
competitive advantage that make some firms better equipped than
holders and debt retirement as important IPO motivations. Zero-rev-
others to achieve this goal. Consensus has been reached over the pre-
enue firms that go public to retire debt invest less in R&D and face a
sence of a funding gap that prevents entrepreneurial ventures from
higher risk of being delisted. As for the likelihood of being targeted in
commercializing their products and services quickly (Frank, Sink,
an M&A shortly after going public, the results show that it does not
Mynatt, Rogers, & Rappazzo, 1996). This gap can be quantified as the
differ between zero-revenue and other issuers.
difference between the amount of capital that would be invested in the
The evidence on IPO outcomes documents that the absence of rev-
absence of information-based market frictions and the amount of
enues plays a negative role. First, zero-revenue IPOs are more under-
priced than ordinary IPOs, with an average difference of 2.3 percentage
points. This is consistent with the presence of increased information 1
See Jay Ritter's website for updated data on IPOs by companies with negative earn-
asymmetry that leads to a larger amount of money left on the table. ings.

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

capital actually invested. While various theories of the firm have relationship between a firm's market share and its probability of going
modeled the role played by human assets in alleviating information public. Chemmanur and He (2011) develop a theoretical model of IPO
asymmetry (e.g., Wernerfelt, 1984), young firms' difficulty in raising timing starting from the notion that going public enables a firm to grab
early-stage capital is also ascribed to the lack of nonhuman assets such market share from competitors in the product market. Chemmanur
as no or little credible track records, as in the case of zero-revenue firms et al. (2010) show that firm productivity peaks around the IPO, in-
(Busenitz, Fiet, & Moesel, 2005). Documented market acceptance of the dicating that both financial and product market considerations matter
firm's product is indeed a major predictor of success (Macmillan, in the timing of the going public decision.
Zemann, & Subbanarasimha, 1987). Bernstein et al. (2017) investigate In the specific context of zero-revenue firms, the revenue-less status
the effectiveness of firm traction in conveying information about an implies that cashing out by existing owners and debt retirement should
underlying idea's success and therefore attracting early-stage investors, not be relevant reasons to go public. First, the fact that the firm is still at
and finds that investors are more sensitive to the characteristics of the such an early stage of its life cycle makes it unlikely to be the appro-
founding team rather than traction. Vismara (2016) addresses this issue priate timing for existing shareholders to monetize their investment.
in an equity crowdfunding setting and finds that firms reporting prior One may argue that, if the absence of revenues is a consequence of the
revenues are more likely to be funded. firm's weak competitive position in the product market, owners might
be willing to cash out in an attempt to abandon the sinking ship. Still,
2.1. Zero-revenue status and IPO motivations the negative signal conveyed by the sale of secondary shares in the IPO
(Leland & Pyle, 1977), combined with the issuer's inability to bring
While the conventional wisdom associates a firm's choice to go products to the market until then, would probably prevent the firm
public with a natural stage in its growth process, several other factors from attracting sufficient demand for its shares, thereby undermining
play a relevant role. A survey by Brau and Fawcett (2006) reveals that the feasibility of the whole IPO process. Second, the lack of an estab-
the creation of publicly traded stocks to be used as acquisition currency lished stream of revenues that can serve as collateral to debt issuance is
is the most relevant motivation to go public, followed by the estab- likely to make these firms unable to take on debt when private (Stiglitz
lishment of a market value for the firm and reputation enhancement. & Weiss, 1981). Consistent with these arguments, the testable hy-
Consistently, Celikyurt, Sevilir, and Shivdasani (2010) document the potheses of the paper are formulated with respect to the following IPO
role played by the acquisition motive, and Zingales (1995) develops a motivations: (1) raising funds for investments, and (2) facilitating M&A
theoretical model according to which the IPO may increase the bar- activity.
gaining power of a newly listed firm vis-à-vis potential acquirers by
setting its valuation for a subsequent acquisition. Other relevant IPO 2.1.1. Investments
motivations are the firm's need to rebalance its capital structure and to Going public in the absence of revenues may be an efficient choice
provide shareholders with an exit mechanism. Pagano et al. (1998) only if the value-enhancing effect of unlocking superior growth op-
document that firms go public to reduce leverage following a period of portunities is expected to offset information production costs, which are
substantial investments. Lerner (1994) shows that VCs time their exit presumably larger for zero-revenue firms relative to revenue-generating
decision by taking portfolio firms public when equity valuations are issuers. Financial constraints, that become more severe in absence of an
high. established track record, may make the issuance of public equity the
Also, firms become more likely to go public in the presence of fa- only option available so as not to forgo such growth opportunities.
vorable windows of opportunity to take advantage of the positive in- Thus, these firms' likelihood to survive after going public depends ex-
vestor sentiment (Ritter, 1984). Starting with Ibbotson and Jaffe clusively on their ability to turn these opportunities into positive NPV
(1975), the literature on market timing has highlighted that IPOs tend investments by efficiently allocating IPO proceeds. If the decision to go
to occur in waves. A number of papers have focused on information public serves this purpose, then we should observe larger post-IPO in-
spillovers as the main driver of the so-called hot market phenomenon. vestments by zero-revenue firms relative to revenue-generating issuers.
Alti (2005) develops a model based on the idea that information gen- The absence of revenues allows us to draw implications also for the
erated in valuing pioneer firms makes the valuation of followers easier type of investment that these firms are likely to undertake. Indeed,
and hence triggers a larger number of IPOs. Lowry and Schwert (2002) investment strategies of small and young firms sensibly differ from
and Benveniste, Ljungqvist, Wilhelm, and Yu (2003) provide empirical those of large and established incumbents (Acs & Audretsch, 1988). In
evidence of such an effect by documenting that IPO volume depends on particular, established firms tend to be more concerned about gaining
the outcomes of recent issues. Benveniste, Busaba, and Wilhelm (2002) efficiency, minimizing risk, and safeguarding current assets as their
present a model in which pioneers' IPOs reveal the presence of industry- stream of revenues comes primarily from existing products. This lowers
wide growth opportunities. On the other hand, Yung, Çolak, and Wei their incentive to engage in R&D investments that may result in their
(2008) argue that variations of real investment opportunities over time own products being cannibalized (Arrow, 1962). On the other hand,
affect the degree of adverse selection in the IPO market, as an increase new entrants are motivated by the advantage of becoming first movers,
in investment opportunities induces more bad firms to pool. Whether leading to a division and specialization of the innovation effort, with
zero-revenue firms' decision to go public is driven by the desire to fund small firms investing mostly in radical innovation, and large firms en-
growth opportunities or by the attempt to issue overvalued equity by gaging in incremental innovation. This suggests that zero-revenue firms
pooling with high quality firms remains an open question. are more likely to allocate IPO proceeds to radical rather than incre-
A growing literature has highlighted that the extent of the benefits mental innovation projects. Radical innovation is typically pursued by
that a firm can enjoy by effectively timing its IPO decision, as predicted means of R&D investments, which measure a firm's commitment in
by market timing theories, is crucially shaped by its competitive posi- terms of innovative input (Signori & Vismara, 2014). Therefore, the
tion in the product market. Bhattacharya and Ritter (1983) and investments undertaken by zero-revenue firms are more likely to have
Maksimovic and Pichler (2001) model the trade-off faced by innovative the form of R&D expenses aimed at generating breakthroughs rather
private firms when evaluating the option to conduct an IPO. While than purchases of physical assets aimed at increasing productivity. This
going public allows to raise capital at a lower cost than private equity, it leads to the prediction that zero-revenue issuers invest more in R&D
has the disadvantage of releasing confidential information that can than revenue-generating issuers after going public.
harm the firm's competitive position. Therefore, firms that have a
smaller market share, face more competition, and operate in industries 2.1.2. M&A activity
characterized by a greater value of confidentiality are less likely to go Prior literature has documented that a firm's acquisition activity
public. Spiegel and Tookes (2008) derive similar implications for the soars after going public (e.g., Celikyurt et al., 2010). The fresh infusion

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

of cash, the creation of stock as alternative currency, and the reduction (Beatty & Ritter, 1986). Therefore, these theoretical arguments lead to
of uncertainty concerning potential takeover gains are all benefits that the hypothesis that IPOs by zero-revenue firms are more underpriced
tend to trigger acquisitions by newly listed firms (Hsieh, Lyandres, & compared to those by revenue-generating firms.
Zhdanov, 2011). The growth opportunities explanation predicts that
zero-revenue firms are more likely to conduct acquisitions than rev- 2.2.2. Stock liquidity and volatility
enue-generating issuers after going public as long as external growth is The ability to develop liquid trading in the secondary market is a
part of these opportunities. Also, potential targets may be more likely to critical component in the success of an IPO. Prior literature documents
accept an acquisition bid made by a firm facing promising growth that liquidity has beneficial effects on stock prices and stimulates
prospects (for a given bid and a given intrinsic value). trading by knowledgeable investors that make prices more informative
At the same time, however, an increasing fraction of firms is being (e.g., Amihud & Mendelson, 1986). Firms with more liquid shares pay
acquired shortly after going public (Gao et al., 2013). Previous litera- lower investment banking fees when conducting seasoned equity issues
ture has highlighted the role of the IPO as an intermediate step towards (Butler, Grullon, & Weston, 2009). In terms of information asymmetry,
the subsequent sale of the firm, given the benefits obtained in terms of Ellul and Pagano (2006) propose a model in which an issuer's after-
reduced information asymmetry (Reuer & Shen, 2004), increased bar- market liquidity is negatively related to its level of information asym-
gaining power (Zingales, 1995), and the possibility of investing the IPO metry. Diamond and Verrecchia (1991) show that reducing information
proceeds in value-enhancing projects that subsequently positions the asymmetry through enhanced disclosure lessens the price impact of
firm to have a better valuation (Poulsen & Stegemoller, 2008). These trades and improves stock liquidity. If the absence of revenues increases
effects should be particularly beneficial for zero-revenue firms, which the level of information asymmetry faced by firm outsiders, investors
suffer from more severe information asymmetry and financial con- would be discouraged to get involved in trading. This leads to the hy-
straints in light of the above theoretical arguments. Furthermore, in line pothesis that zero-revenue IPOs are characterized by a lower level of
with the predictions on R&D investments, the fact that zero-revenue stock liquidity than ordinary IPOs in the aftermarket.
firms are more likely to conduct more radical innovation than incum- A similar line of reasoning applies for stock return volatility.
bents implicitly shapes their role in the market for corporate control Uncertainty about whether and when the firm will be able to start
(Henkel, Rønde, & Wagner, 2015). Large and established firms, focused generating revenues in the future may increase investors' perceived risk
on harvesting innovation outputs, are indeed more likely to become of trading shares of zero-revenue issuers. Furthermore, increased in-
acquirers, while small and young firms, still putting a great deal of formation asymmetry implies that, in the presence of reduced stock
effort in innovation inputs, tend to become targets (Bena & Li, 2014). liquidity due to lower investor participation, stock prices become a
Overall, the predictions about the effect of the zero-revenue status noisier proxy of firm value. As trading activity becomes more sporadic,
on post-IPO M&A activity can be formulated as follows. First, zero- prices have to adjust to a larger amount of information revealed per
revenue firms' likelihood of making an acquisition is not expected to trade, and are therefore exposed to higher volatility. Consistently, the
differ from that of other revenue-generating issuers because, although effects of periodic surprises about a firm's performance, such as earn-
growth opportunities may unfold through acquisitions, the absence of ings announcements, are amplified in the presence of a higher degree of
revenues makes these firms less suitable to become acquirers. Second, information asymmetry, resulting in more volatile stock returns (Healy,
zero-revenue firms are more likely to be acquired than other revenue- Hutton, & Palepu, 1999). This leads to the hypothesis that zero-revenue
generating issuers after going public in light of the positive implications IPOs are characterized by a higher level of volatility of stock returns
that the IPO generates for new entrants in the market for corporate than ordinary IPOs in the aftermarket.
control.
2.2.3. Survival rate
2.2. Zero-revenue status and IPO outcomes Another crucial outcome of the IPO process that has received con-
siderable attention from the literature is the firm's ability to survive in
Although motivated by the need to fund superior growth opportu- the financial market. The documented determinants of IPO survival are
nities, the decision to go public may turn out to be inefficient if the manifold, spanning from the characteristics of the issuing firm (Pour &
issuer was unable to generate revenues until then and negatively affect Lasfer, 2013) to the affiliation with reputable third-party agents like
IPO outcomes. This subsection formulates testable hypotheses about the underwriters (Espenlaub, Khurshed, & Mohamed, 2012) and VCs (Jain
effect of a firm's absence of revenues on the following outcomes of the & Kini, 2000), to the requirements imposed by stock market regulators
going public decision: underpricing, stock liquidity, stock return vola- (Cattaneo, Meoli, & Vismara, 2015). The prediction generated by the
tility, and survival. presence of increased information asymmetry argues that zero-revenue
IPOs may develop less liquid trading in the aftermarket. A direct im-
2.2.1. IPO underpricing plication of this effect is that these IPOs may be less able to attract the
Information-based theories have played a prominent role in ex- amount of trading volume that is necessary to meet ongoing listing
plaining the existence of IPO underpricing and its cross-sectional var- requirements, thereby increasing their likelihood of being delisted.
iation. Starting from the winner's curse theory proposed by Rock Therefore, these arguments lead to the hypothesis that zero-revenue
(1986), the fact that information about the issuer's true value are not firms are more likely to be delisted than revenue-generating issuers
uniformly distributed across various market participants has been the shortly after the IPO.
premise of a number of theoretical explanations. Information revelation
(Benveniste & Spindt, 1989) and signaling (Ibbotson, 1975) theories are 3. Data
some of the most notable examples. In the presence of a revenue-less
issuer, the higher degree of information asymmetry faced by investors 3.1. Sample
should result in higher underpricing than that of ordinary IPOs as re-
muneration for investors' superior risk exposure. Furthermore, the ab- The empirical design of the paper is based on the population of 2432
sence of revenues makes IPO pricing particularly problematic as the non-financial firms going public in Europe during the period
most common methodology used to value IPOs, namely comparable 2002–2014. The stock exchanges of the following countries are cov-
firm multiples (Roosenboom, 2012), becomes unfeasible. With future ered: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia,
cash flows being difficult to forecast, fair value estimates are affected by Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
a considerable degree of uncertainty. A higher level of uncertainty Latvia, Lithuania, Malta, the Netherlands, Norway, Poland, Portugal,
about the issuer's value also leads to higher expected underpricing Romania, Slovenia, Spain, Sweden, Switzerland, Turkey, and the United

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Kingdom.2 The main data source is the EurIPO database, used in pre- Table 1
vious IPO studies (e.g., Chambers & Dimson, 2009).3 The population Distribution of zero-revenue IPOs. Number of IPOs and zero-revenue IPOs by year, in-
dustry (Fama-French 17 classification), and country of listing.
includes IPOs by operating companies identified after applying the
usual filters adopted by the IPO literature (e.g., Loughran & Ritter, No. Zero-revenue IPOs
2004), that is, after excluding introductions, readmissions, market
transfers, cross-listings, SPACs, and closed-end funds.4 IPOs No. %
Zero-revenue IPOs are defined as initial public offerings by firms
Panel A. Year
that reported zero revenues in the last fiscal year before the IPO date, as 2002 98 14 14.3
stated in the official listing prospectus. Table 1 reports the distribution 2003 76 17 22.4
of zero-revenue IPOs by year, industry, and country. Overall, they ac- 2004 251 56 22.3
count for a significant fraction of the population of European IPOs over 2005 338 67 19.8
2006 434 53 12.2
the sample period, namely 15%. The year distribution exhibits a certain
2007 409 49 12.0
degree of homogeneity. In terms of industry distribution, the phe- 2008 85 11 12.9
nomenon is predominant in the natural resources industries, namely oil 2009 22 3 13.6
and gas and mining. This is consistent with previous studies on the 2010 115 26 22.6
2011 120 21 17.5
influence of product market characteristics on IPO timing which
2012 91 15 16.5
document that firms operating in industries characterized by higher 2013 135 18 13.3
capital intensity tend to go public at an earlier stage (Chemmanur et al., 2014 258 16 6.2
2010).5 In terms of country distribution, the highest percentage is in the Panel B. Industry
UK, where one fourth of the IPOs are conducted by firms with no Business & personal services 623 43 6.9
revenues. This is mainly due to the presence of the AIM market. Computers & equipment 241 20 8.3
Mining 173 110 63.6
Oil and gas 143 72 50.3
3.2. Variables Construction 125 7 5.6
Retail & consumer goods 122 6 4.9
Two sets of dependent variables are used in the empirical analysis. Pharmaceutical 104 22 21.2
Wholesale 99 9 9.1
The first set is employed to shed light on the two possible motivations
Transportation 98 9 9.2
pushing zero-revenue firms to go public, namely investments and M&A Communication 79 5 6.3
activity. Investments are proxied by two measures, namely annual ca- Entertainment 75 10 13.3
pital expenditure and R&D expenses, obtained from Orbis and Chemicals 54 10 18.5
Datastream. Capital expenditure is defined as the ratio of capital ex- Other 496 43 8.7

penditure, that is, addition to fixed assets other than those associated Panel C. Country
with acquisitions, to total assets. R&D expenses are also divided by total United Kingdom 1193 302 25.3
France 288 10 3.5
assets.6 The two variables are measured by computing the average of
Poland 182 3 1.6
the ratios across the three years post-IPO. As for M&A activity, the list Germany 167 6 3.6
of IPOs is matched with Thomson Financial SDC to identify issuers that Italy 129 2 1.6
have been involved in an M&A as acquirer or target within three years Sweden 115 10 8.7
of going public. Thus, the variable acquirer equals one if the firm has Norway 91 17 18.7
Belgium 51 0 0.0
completed an acquisition, while the variable target equals 1 if the firm Denmark 35 4 11.4
has been acquired within three years of the IPO.7 Spain 24 0 0.0
The second set of dependent variables is aimed at investigating the Other 157 12 7.6
effect of the zero-revenue status on IPO outcomes, namely (1) IPO Total 2432 366 15.0
underpricing, (2) stock liquidity, (3) stock return volatility, and (4)
survival rate. Underpricing is defined as the difference between the first
different proxies: bid-ask spread, defined as the average ratio of the
day closing price and the offer price, divided by the offer price
difference between bid and ask prices divided by their midpoint;
(Loughran & Ritter, 2004). Stock liquidity is measured using three
Amihud's (2002) illiquidity ratio, defined as the average ratio of the
daily absolute return of a firm's stock to the monetary trading volume
2
For France, the French Paris Bourse is considered until the creation of Euronext on that day; and zero return days, defined as the percentage of trading
through the merger of the stock exchanges of Belgium, France, the Netherlands and days in which the closing price is the same as that of the day before.
Portugal, where the first listing took place on January 27, 2005. Afterwards, Euronext is
Stock return volatility is defined as the standard deviation of daily stock
considered in its entirety. The stock exchanges of the four largest European economies
(France, Germany, Italy, and UK) are covered over the whole sample period and represent returns minus the standard deviation of daily returns of the primary
76.5% of the observations. Other exchanges are covered from 2006 onwards. equity index of the stock exchange where the firm goes public, as in
3
See Vismara et al. (2012) for a detailed description of the EurIPO database. Lowry and Murphy (2007). Liquidity and volatility measures are com-
4
The population of IPOs is composed of issuers that have successfully gone through all puted from one month after the IPO date till the minimum between
the phases of the listing process, and does not account for issuers that had initially filed
thirteen months after the IPO date and one month before any truncation
for an IPO and subsequently withdrawn their decision. Helbing and Lucey (2018) docu-
ment a 12% withdrawal rate in the European IPO market. IPO attempts by firms that event, such as acquisition or delisting. The first month post-IPO is ex-
failed to meet listing requirements are also ignored, which may expose the empirical cluded because the effects of price stabilization by financial inter-
analysis to a potential selection issue. mediaries may influence the results. Finally, survival rate is measured
5
Given the real options nature of natural resources firms, the absence of revenues may by tracking whether a firm gets delisted for reasons other than takeover
not necessarily due to the inability to bring products to the market. Additional tests in
within three years of the IPO. The data source of these variables is
Section 5 address this issue.
6
A number of papers measure R&D expenses in terms of R&D-to-sales ratio (e.g., Datastream. All continuous dependent variables are winsorized at the
Dambra, Field, & Gustafson, 2015). The choice of total assets as denominator is motivated 1% level.
by the fact that the R&D-to-sales ratio is impossible to compute for zero-revenue firms. In Among the independent variables, the key explanatory variable of
line with prior literature, R&D expenses are set to zero if missing. the paper is the zero-revenue dummy, equal to one if the issuing firm
7
The paper sheds light on the IPO motivations of firms by looking ex-post at their
has reported zero revenues in the last fiscal year before the IPO, ac-
involvement in M&A activity, which does not necessarily imply that they decided to go
public with this particular intent. cording to the official prospectus. The following independent variables

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

are then included in the multivariate analyses as controls.8 Firm size is 3.4. Descriptive statistics
defined as the log of the firm's pre-IPO total assets. Firm age is the log of
one plus the difference between the IPO year and the year the company Table 2 reports descriptive statistics distinguishing between zero-
was founded. Both size and age capture the firm's degree of information revenue and other IPOs, with univariate tests on the difference between
asymmetry, which is known to affect various outcomes of the IPO the two groups. Panel A reports mean, median, and standard deviation
process (e.g., Ellul & Pagano, 2006). Leverage is defined as the previous of post-IPO investments and M&A variables. On average, capital ex-
fiscal year's total debt divided by total assets, and controls for the penditure by zero-revenue firms over the three years post-IPO accounts
presence of credit relationships that may reduce the level of uncertainty for 10.8% of total assets, which is slightly higher than the 9.5% asso-
about the issuer (James & Wier, 1990). Offer size is the log of the ciated with revenue-generating IPOs. Post-IPO R&D expenses by zero-
product between the number of shares sold in the IPO and the offer revenue firms account for 5.1% of total assets relative to 3.2% among
price (as in Bajo, Chemmanur, Simonyan, & Tehranian, 2016). Dilution revenue-generating issuers. The univariate tests document significant
is defined as the number of newly issued shares sold in the IPO divided differences between R&D expenses of the two groups. As for M&A ac-
by the number of pre-IPO shares outstanding, and aims at capturing the tivity, zero-revenue IPOs are less frequently acquired and targeted than
owners' attitude towards the listing decision (Habib & Ljungqvist, ordinary IPOs.
2001). VC backing is a dummy equal to one if the issuer is backed by a In Panel B, zero-revenue IPOs exhibit higher underpricing than or-
venture capitalist, and controls for the role played by this type of in- dinary IPOs (18.2% vs. 11%, on average), with the difference being sta-
vestor in the IPO market (Bessler & Seim, 2012). Underwriter reputa- tistically significant. In the aftermarket, they are associated with a lower
tion is calculated as the lead underwriter's market share in terms of level of stock liquidity, as the values of all the three proxies, namely bid-
proceeds raised in European stock exchanges during 1995–2014 ask spread, illiquidity ratio, and the fraction of zero return days, are higher
(Migliorati & Vismara, 2014), and allows to capture the reputational than those of other IPOs (higher values indicate lower liquidity). Statistical
effect of prestigious investment banks (Beatty & Ritter, 1986). Market significance is robust across the different proxies. Zero-revenue stocks also
momentum is defined as the local equity index return over the 100 exhibit a higher degree of volatility of returns, with an average of 2.4%
trading days before the IPO date, and aims at controlling for the effects compared to 1.7%. The likelihood of post-IPO delisting is also higher
of current market conditions on the IPO decision (Lowry, 2003). among revenue-less issuers, with 7.9% of them being delisted within three
Second-tier market is a dummy equal to one if the IPO takes place on a years of going public relative to 4.8% of other issuers.
second-tier, exchange-regulated market, characterized by looser reg- Concerning firm and offer characteristics, Panel C shows that zero-
ulatory requirements than official markets (Vismara et al., 2012). Fi- revenue IPOs are conducted by smaller and younger firms, as expected.
nally, regulatory environment is the average between the property They also tend to be less indebted than firms with prior revenues, with
rights and government integrity indices published by the Heritage an average 16.2% leverage compared to 33.4%. This is in line with the
Foundation for each country-year, both ranging from 0 to 100. This idea that banks and other financial intermediaries are hesitant to pro-
variable aims at capturing the effects of different legal frameworks on vide private revenue-less firms with access to debt financing. A con-
IPO outcomes.9 siderable fraction of zero-revenue issuers, namely 27.9%, are backed by
a VC, with this percentage being not statistically different from that
3.3. Methodology associated with revenue-generating issuers.10 The high similarity of
market momentum between the two groups of firms indicates that the
The behavior of zero-revenue IPOs is investigated in a multivariate absence of revenues does not seem to affect a firm's market timing
setting by means of cross-sectional regressions where the zero-revenue considerations of the IPO decision. Finally, a remarkable difference lies
dummy identifies such issuers. Probit regressions are estimated in case of in the type of market where the offerings take place, with 91.5% of the
binary dependent variables, such as the likelihood of making an acqui- zero-revenue firms choosing second-tier markets compared to 61.8% of
sition within three years of the IPO. Also, the likelihood of being delisted firms with revenues. This is coherent with the minimal regulatory re-
is modeled by means of both probit and Cox proportional hazard models. quirements imposed by second-tier markets.
To alleviate endogeneity concerns arising from the possible selection on
observable characteristics, each zero-revenue firm is matched with a 3.5. Persistence of the zero-revenue status
revenue-generating firm that (1) goes public in the same calendar year,
(2) operates in the same industry (Fama-French 17 classification), and Fig. 1 illustrates the post-IPO scenarios faced by zero-revenue firms
(3) has the closest value of pre-IPO total assets. This ensures a certain and allows to assess the persistence of the zero-revenue status beyond the
degree of comparability between zero-revenue and other IPO firms IPO. Starting from the listing date, the graph reports on a quarterly basis
throughout the analysis. The matching procedure is performed with re- the fraction of zero-revenue firms that still lack revenues, those that report
placement due to the substantial presence of zero-revenue firms in the positive sales, those targeted in an M&A deal, and those that are delisted
mining and oil and gas industries, resulting in a limited number of within three years of the IPO. At the three-year anniversary, a considerable
candidate comparable firms. In these industries, observations in the fraction of zero-revenue firms, namely 18.6%, is still categorized as such.
treatment vs. control groups are 110 vs. 63 and 72 vs. 71, respectively. On the other hand, 61.5% are no longer without revenue at that time. The
With the aim of decreasing bias, revenue-generating firms that look si- fraction of firms starting to report revenues persistently increases at a quite
milar to more than one zero-revenue firm are therefore employed mul- stable rate across quarters. The rest of the firms has been either targeted in
tiple times, but no control firm is matched more than five times. an acquisition (12%) or delisted (7.9%).11

8
There are no control variables about the corporate governance characteristics of is- 3.6. IPO motivation vs. outcome
suing firms. Their absence is due to the international nature of the sample, which makes
the cross-country definition of corporate governance metrics problematic. Thus, ac-
counting for corporate governance effects in the multivariate analysis is left with country All zero-revenue firms state in the official prospectus that the main
and market (regulated vs. second-tier) fixed effects. reason to go public is to speed products to the market, as their intended
9
The Heritage Foundation, a U.S. research and educational institution, is increasingly
employed as data source by finance researchers (e.g., Lerner, Schoar, Sokolinski, &
10
Wilson, 2018). The property rights index measures the degree to which a country's laws Additional analyses aimed at testing whether the behavior of VC-backed issuers is
protect private property rights, thereby allowing individuals to accumulate private different from that of other, non-VC-backed zero-revenue firms are presented in Section 5.
property. The government integrity index measures the extent to which corruption pre- 11
11 out of 29 zero-revenue firms that are delisted within three years of the IPO
vents a country's government to enforce laws. started to generate revenues before being delisted but are categorized as delisted.

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 2
Descriptive statistics and univariate tests. Panel A shows post-IPO investment variables, Panel B shows IPO outcome variables, and Panel C shows firm and offer characteristics. In Panel A,
Capital expenditure is the average ratio of capital expenditure to total assets across the three years post-IPO. R&D expenses is the average ratio of R&D expenses (set to zero if missing) to
total assets across the three years post-IPO. Acquirer (target) is equal to 1 if the firm has completed an M&A as acquirer (target) within three years of the IPO. In Panel B, Underpricing is the
difference between the first day closing price and the offer price, divided by the offer price. Bid-ask spread is the average ratio of the bid-ask spread divided by the midpoint of the bid and
ask prices. Illiquidity is the average ratio of the daily absolute return of a firm's stock to the monetary trading volume on that day. Zero-return days is the fraction of trading days with zero
return. Stock return volatility is the standard deviation of daily stock returns minus the standard deviation of the returns of the primary equity index of the stock exchange where the firm
goes public. Liquidity and volatility measures are computed from 1 month after the IPO date till the minimum between 13 months after the IPO date and 1 month before any truncation
event. Delisting is equal to 1 if the firm is delisted for reasons other than takeover within three years of the IPO. In Panel C, Firm size is the firm's pre-IPO total assets. Firm age is the
difference between IPO year and incorporation year. Leverage is pre-IPO total debt divided by total assets. Offer size is the number of shares sold in the IPO multiplied by the offer price.
Dilution is the number of newly issued shares sold in the IPO divided by the number of pre-IPO shares outstanding. VC backing equals 1 if the issuer is backed by a VC. Underwriter
reputation is the lead underwriter's market share in terms of proceeds raised in European stock exchanges during 1995–2014. Market momentum is the local equity index return over the
100 trading days before the IPO date. Second-tier market equals 1 if the IPO takes place on a second-tier, exchange-regulated market. Regulatory environment is the average between the
property rights and government integrity indices for each country-year (source: Heritage Foundation). Differences between mean and median values are reported in the right-hand side.
***, **, and * indicate significance at the 1, 5, and 10% levels, respectively, of the t-test and Wilcoxon signed-rank test on the difference between the two groups (z-test of difference in
proportions in case of binary variables).

Zero-revenue IPOs Other IPOs Difference

Mean Median Std dev Mean Median Std dev Zero rev. - other

Panel A. Post-IPO investments and M&A

Capital expenditure (%) 10.8 3.5 17.7 9.5 4.7 13.1 1.3 −1.2**
R&D expenses (%) 5.1 0.0 14.3 3.2 0.0 7.7 1.9*** 0.0*
Acquirer (%) 30.1 0.0 45.9 38.8 0.0 48.7 −8.7*** –
Target (%) 12.0 0.0 32.6 16.1 0.0 36.7 −4.1* –

Panel B. IPO outcomes

Underpricing (%) 18.2 10.0 29.4 11.0 6.5 18.8 7.2*** 3.5***
Bid-ask spread (%) 9.2 7.2 6.9 5.7 3.5 6.5 3.5*** 3.7***
Illiquidity (%) 8.5 3.9 10.5 7.1 2.8 9.0 1.4** 1.1*
Zero return days (%) 60.7 66.9 24.7 42.0 36.3 30.1 18.7*** 30.6***
Stock return volatility (%) 2.4 2.2 1.8 1.7 1.3 1.6 0.7*** 0.9***
Delisting (%) 7.9 0.0 27.0 4.8 0.0 21.4 3.1** –

Panel C. Firm and offer characteristics

Firm size (total assets, €m) 21.0 4.2 61.4 320.4 17.0 2713.3 −299.4** −12.8***
Firm age (years at IPO) 4.8 3.0 7.8 14.8 7.0 25.5 −10.0*** −4.0***
Leverage (%) 16.2 0.0 28.2 33.4 26.7 32.3 −17.2*** −26.7***
Offer size (€m) 23.4 7.0 59.0 124.2 12.9 890.0 −100.8*** −5.9***
Dilution (%) 57.6 51.3 44.4 44.8 40.9 34.2 12.8*** 10.4***
VC backing (%) 27.9 0.0 44.9 24.4 0.0 43.0 3.5 –
Underwriter reputation (%) 0.6 0.3 1.1 1.2 0.5 2.0 −0.6*** −0.2***
Market momentum (%) 4.7 5.9 10.1 4.8 5.8 10.0 −0.1 0.1
Second-tier market (%) 91.5 100.0 27.9 61.8 100.0 48.6 29.7*** –
Regulatory environment (%) 85.9 88.0 6.1 78.0 86.0 14.7 7.9*** 2.0***

Fig. 1. Evolution of zero-revenue firms over the first three years post-IPO. Quarterly distribution of zero-revenue firms across the possible scenarios up to three years after the IPO. At the
IPO, zero-revenue firms represent 100%. From quarter 1 onwards, a zero-revenue firm can be categorized as: still zero-revenue (white), positive revenues (light grey), acquired by another
firm (dark grey), or delisted (black).

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 3
Behavior of zero-revenue firms by IPO motivation declared in prospectus. Descriptive statistics of zero-revenue firms divided according to the IPO motivation cited in the official
prospectus. Panel A shows post-IPO investment variables, Panel B shows IPO outcomes variables, defined as in Table 2. ***, **, and * indicate significance at the 1, 5, and 10% levels,
respectively, of the t-test and Wilcoxon signed-rank test on the difference between the corresponding group and the rest of the sample of zero-revenue firms (z-test of difference in
proportions in case of binary variables).

Speed products to market Cash out Retire debt

(303 IPOs) (27 IPOs) (36 IPOs)

Mean Median Std dev Mean Median Std dev Mean Median Std dev

Panel A. Post-IPO investments and M&A

Capital expenditure (%) 10.6 3.1 16.5 12.4 7.6 11.7 11.5 2.8 17.9
R&D expenses (%) 5.5 0.0 15.3 4.9 0.0 9.4 1.4 0.0 5.4
Acquirer (%) 32.7** 0.0** 47.0 22.2 0.0 42.4 13.8** 0.0** 35.1
Target (%) 11.6 0.0 32.0 14.8 0.0 36.2 13.9 0.0 35.1

Panel B. IPO outcomes

Underpricing (%) 19.6** 10.8* 30.7 7.8* 6.5* 11.5 13.6 8.2 25.8
Bid-ask spread (%) 9.4 7.6 7.0 8.0 5.3 6.8 8.6 7.0 6.4
Illiquidity (%) 8.6 3.7 10.2 7.0 4.0 13.0 8.6 4.3 11.5
Zero return days (%) 60.9 66.9 24.4 63.6 66.9 22.5 56.3 64.7 28.9
Stock return volatility (%) 2.4 2.2 1.8 1.8* 1.6* 1.5 2.4 2.0 2.0
Delisting (%) 5.6*** 0.0*** 22.6 11.1 0.0 32.0 25.0*** 0.0*** 43.9

use of proceeds is either to fund new investments or to support working population of IPOs and a matched sample of revenue-generating issuers.
capital required to sustain ongoing investments aimed at generating Standard errors are double clustered by year and country of listing in all
revenues. There are, however, firms that mention other reasons, namely regressions.
the repayment of existing debt and the owners' decision to sell (part of)
their equity stakes. One may expect both the post-IPO behavior of is-
suers and the outcomes of the listing decision to vary according to the 4.1. IPO motivations
above mentioned motivations. For instance, going public to retire debt
or to provide insiders with the possibility to cash out even before suc- 4.1.1. Investments
ceeding in bringing products to the market may raise concerns among The growth opportunities explanation predicts that zero-revenue
investors and therefore result in disappointing IPO outcomes. Table 3 IPOs are conducted in an attempt to fund value-enhancing projects that
addresses this concern by reporting descriptive statistics of the three would be missed if these firms remained private. If this is the case, then
subsamples of zero-revenue IPOs based on the motivation declared in we should observe zero-revenue firms investing more than other firms
prospectus, that is, whether speeding products to the market was cited after the IPO. In particular, given the nature of these firms, investments
as the only motivation (303 IPOs) or it was accompanied by the cashing should largely consist of R&D expenses. Table 4 tests this prediction.
out (27 IPOs) or debt retirement (36 IPOs) reasons. Models 1 and 2 are estimated on the entire population of IPOs and the
In terms of post-IPO investments, capital expenditure does not vary matched samples, respectively. The dependent variable in both models
according to prospectus declarations, while the amount of R&D ex- is the average ratio of capital expenditure to total assets over the first
penses undertaken by zero-revenue firms citing debt retirement as IPO three years post-IPO. In Models 3 and 4, the dependent variable is the
motivation is sensibly lower, on average, than that of other firms (1.4% average ratio of R&D expenses to total assets over the same period.
of total assets vs. 5.5% and 4.9%). This suggests that the need to repay The evidence in Models 1 and 2 reveals that zero-revenue firms
debt may restrain the firm's commitment in R&D. In terms of M&A invest significantly less in capital expenditure than other firms after
activity, there are significant differences in the behavior of firms across going public, both with respect to the full sample and the matched
the various IPO motivations. In particular, firms going public to retire sample of IPOs. In particular, the magnitude of the coefficient of the
debt exhibit the lowest propensity to make acquisitions within three zero-revenue dummy documents that the average capital expenditure is
years (13.8%), while those going public exclusively to speed their approximately 2.7 points lower than that of ordinary IPOs (2.4 relative
products to market show the highest propensity to acquire (32.7%). to the matched sample). This result seems to contradict the prediction
Together with the previous evidence on R&D investments, this indicates of the growth opportunities hypothesis by showing that zero-revenue
that both internal and external growth are more constrained for more firms undertake fewer investments after going public. However, Models
indebted firms. As for the IPO outcomes, significant differences stand 3 and 4 document that these firms invest significantly more in R&D
out in terms of underpricing and likelihood of post-IPO delisting. IPOs than other issuers, with an average difference of 2.3 percentage points
whose proceeds are entirely allocated to bring the issuer's products to (2.4 relative to the matched sample). Thus, zero-revenue firms invest
market are more underpriced (19.6%, on average) and less likely to be significantly less in capital expenditure and more in R&D than both the
delisted within three years of the IPO (5.6%). At the same time, one- rest of the population of IPOs and the sample of revenue-generating
fourth of the zero-revenue firms going public to retire debt ends up peers. This is in line with the predictions of the growth opportunities
being delisted. This provides further evidence that zero-revenue firms hypothesis conditioned on the characteristics of zero-revenue firms.
going public in an attempt to rebalance their capital structure perform Given their small size and young age, the growth opportunities to which
worse than other revenue-less issuers after the IPO. these firms allocate IPO proceeds are mostly early-stage investments
aimed at speeding products to the market, as typically are R&D projects.
Among the control variables, the coefficient of firm size is negatively
4. Empirical tests and results correlated with both capital expenditure and R&D investments, in-
dicating that the extent of growth opportunities faced by already es-
This section presents the results of the multivariate analyses aimed tablished firms tends to be smaller. Better regulatory environments are
at testing the predictions of the zero-revenue status on IPO motivations associated with fewer investments in capital expenditure and more R&D
and outcomes. In each table, the behavior of zero-revenue IPOs is expenses, consistent with a more effective enforcement of intellectual
benchmarked against that of two different samples, namely the entire property protection.

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 4 Table 5
Regressions on post-IPO investments. OLS regression on capital expenditures (Models Regressions on post-IPO M&A activity. Probit regressions modeling the likelihood of
1–2) and R&D expenses (Models 3–4). Capital expenditure is the average ratio of capital becoming acquirer (Models 1–2) and target (Models 3–4) in an M&A transaction within
expenditure to beginning-of-year total assets across the three years post-IPO. R&D ex- three years of the IPO. The dependent variable equals 1 if the firm has completed an M&A
penses is the average ratio of R&D expenses (set to zero if missing) to beginning-of-year as acquirer (target) within three years of the IPO. Marginal effects are reported. Firm size,
total assets across the three years post-IPO. Firm size, firm age, and offer size are the firm age, and offer size are the natural logarithms of the variables. Other independent
natural logarithms of the variables. Other independent variables are the same as defined variables are the same as defined in Table 2. Standard errors in brackets are double
in Table 2. Standard errors in brackets are double clustered by country of listing and year. clustered by country of listing and year. ***, **, and * indicate significance of the coef-
***, **, and * indicate significance of the coefficients at the 1, 5, and 10% levels, re- ficients at the 1, 5, and 10% levels, respectively.
spectively.
Acquirer Target
Capital expenditure R&D expenses
Full sample (1) Matched Full sample (3) Matched
Full sample (1) Matched Full sample (3) Matched sample (2) sample (4)
sample (2) sample (4)
Zero-revenue −0.048*** −0.108*** 0.007 0.039*
Zero-revenue −2.673*** −2.449*** 2.276*** 2.379*** [0.017] [0.016] [0.017] [0.021]
[0.978] [0.722] [0.701] [0.771] Firm size 0.020*** 0.023*** 0.009*** 0.010
Firm size −0.782*** −0.116 −0.487*** −0.225* [0.006] [0.007] [0.004] [0.006]
[0.135] [0.146] [0.055] [0.129] Firm age −0.017*** −0.044*** −0.004 −0.001
Firm age −0.049 1.845* 0.205** 0.312 [0.005] [0.010] [0.006] [0.004]
[0.438] [0.957] [0.095] [0.359] Leverage 0.031 −0.047 0.076*** 0.097***
Leverage 1.892** 5.977* −1.142** −0.897 [0.027] [0.065] [0.029] [0.023]
[0.763] [3.554] [0.509] [2.037] Offer size 0.034*** 0.011*** 0.004 0.002
Offer size 1.039** 0.888* 0.382* 0.535 [0.009] [0.003] [0.007] [0.007]
[0.494] [0.448] [0.197] [0.378] Dilution 0.050** 0.072*** 0.068*** 0.052*
Dilution 1.375* 1.673* −0.705 −0.593* [0.021] [0.026] [0.016] [0.027]
[0.742] [0.941] [0.524] [0.330] VC backing 0.068*** 0.074*** 0.032*** 0.021*
VC backing −0.249 1.036 0.904* 1.014* [0.012] [0.024] [0.011] [0.012]
[0.621] [0.744] [0.460] [0.525] Underwriter 0.004 −0.010 0.001 −0.007
Underwriter −0.063 0.425 0.174 0.698** reputation [0.003] [0.017] [0.003] [0.006]
reputation [0.076] [0.419] [0.144] [0.270] Market 0.268** 0.130 0.014 −0.033
Market 1.133 −5.557 3.726*** 9.891** momentum [0.109] [0.127] [0.118] [0.114]
momentum [1.716] [6.082] [1.135] [4.858] Second-tier −0.129 −0.090 −0.072*** −0.091***
Second-tier 6.415 1.402 0.053 1.200 market [0.171] [0.111] [0.027] [0.029]
market [5.991] [4.102] [0.735] [2.059] Regulatory −0.001 −0.003 −0.001 0.000
Regulatory −0.100** −0.565*** 0.114** 0.131** environ- [0.001] [0.002] [0.001] [0.001]
environment [0.048] [0.208] [0.057] [0.061] ment
Constant 14.695*** 27.785*** −3.562 −6.423 Year fixed Yes Yes Yes Yes
[5.825] [7.886] [3.018] [6.611] effects
Year fixed effects Yes Yes Yes Yes Country fixed Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes effects
effects Industry fixed Yes Yes Yes Yes
Industry fixed Yes Yes Yes Yes effects
effects Pseudo R- 0.044 0.059 0.073 0.085
Adjusted R- 0.064 0.039 0.118 0.110 squared
squared Observations 2432 732 2432 732
Observations 2432 732 2432 732

a larger fraction of IPO proceeds raised by the firm increases its pro-
pensity to acquire.
4.1.2. M&A activity Concerning zero-revenue firms' propensity to be targeted post-IPO,
Another possible reason pushing zero-revenue firms to go public is Models 3 and 4 document that this likelihood is not statistically dif-
to facilitate their involvement in the market for corporate control. In ferent from that of other issuers. Thus, zero-revenue firms are not ac-
particular, some of the growth opportunities faced by these firms may quired at a higher rate than other newly listed firms. As for the control
be pursued through external acquisitions, although their inability to variables, more indebted firms are more likely to be targeted, arguably
bring products to the market before the IPO may decrease this like- due to the need of financial support by an incumbent that may help to
lihood. Alternatively, the IPO can be used as an intermediate step aimed lower the risk of distress. Dilution is also significant, suggesting that
at removing market inefficiency before selling out to an acquirer. The cash-rich firms may be more attractive towards potential acquirers. A
estimates (marginal effects) reported in Table 5 test these predictions. similar argument may apply to the evidence on VC backing. Although
Models 1 and 2 are probit regressions where the dependent variable the VC market in Europe is characterized by a higher degree of het-
equals one if the firm has completed an M&A transaction as acquirer erogeneity compared to the U.S. (Groh, von Liechtenstein, & Lieser,
within three years of the IPO. In Models 3 and 4, the dependent variable 2010), there is evidence of a positive effect of both the presence of a VC
equals one if the firm has been targeted in an M&A transaction during (Bessler & Kurth, 2007) and its reputation (Pommet, 2017) on IPO
the same time window. performance, which may raise the profile of the issuing firm in the eye
Models 1 and 2 document that zero-revenue firms are significantly of potential acquirers. Finally, firms going public on second-tier mar-
less likely to become acquirers shortly after the IPO relative to both the kets are significantly less likely to be acquired.
full and the matched samples of IPOs. The marginal effect of the zero-
revenue dummy documents a 4.8% lower likelihood relative to the rest
of the population of IPOs, and a 10.8% lower likelihood relative to the 4.2. IPO outcomes
control sample of revenue-generating issuers. This documents that zero-
revenue firms are less active than other firms as acquirers. Among the 4.2.1. Underpricing
control variables, firm size, age, and offer size are strong predictors of a If the absence of revenues contributes to increase the level of in-
newly listed firm's propensity to acquire. Also, the issuance of new formation asymmetry between firm insiders and outsiders, then the
shares (as proxied by dilution) is associated with a higher likelihood, as shares of zero-revenue issuers should be more underpriced than those of

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Table 6 less status. Since liquidity is measured till the minimum between thir-
Regressions on IPO underpricing. OLS regression with IPO underpricing as dependent teen months after the IPO date and one month before any truncation
variable, defined as the difference between the first day closing price and the offer price
event, firms that still lack revenues at the 1-year IPO anniversary are
divided by the offer price. Firm size, firm age, and offer size are the natural logarithms of
the variables. Other independent variables are the same as defined in Table 2. Standard distinguished from those that have generated revenues within one year.
errors in brackets are double clustered by country of listing and year. ***, **, and * If the absence of revenues is what keeps investors away from these
indicate significance of the coefficients at the 1, 5, and 10% levels, respectively. stocks, then issuers that are still without revenues after one year, which
are identified by the persistent zero-revenue dummy, should exhibit less
Underpricing
liquid trading than those that started to generate revenues in the
Full sample (1) Matched sample (2) meantime, which are identified by the positive revenues dummy.
Table 7 reports the estimates of the regressions on three stock liquidity
Zero-revenue 2.294*** 2.280** proxies, namely bid-ask spread (Models 1–4), Amihud's illiquidity ratio
[0.806] [0.918]
(Models 5–8), and the fraction of zero-return days (Models 9–12). The
Firm size −1.169*** −0.802***
[0.434] [0.182] significance levels of the tests of the difference between the coefficients
Firm age −0.783*** −1.641* of the persistent zero-revenue and positive revenues dummy variables
[0.297] [0.845] are also reported at the bottom of the table.
Leverage −0.755 −1.930**
The coefficient of the zero-revenue dummy is positive and sig-
[1.311] [0.919]
Offer size −2.174*** −4.315*** nificant across all the three liquidity proxies, both in the full and
[0.721] [1.000] matched sample estimation, documenting that zero-revenue IPOs de-
Dilution 3.900*** 6.551*** velop on average less liquid trading than other IPOs in the aftermarket.
[1.265] [0.727] This is consistent with the effect of increased information asymmetry,
VC backing 0.204 1.397
leading to lower participation by investors in aftermarket trading due to
[1.110] [1.832]
Underwriter reputation −1.390*** −2.753*** the higher risk of being unable to swiftly liquidate their positions.
[0.287] [0.398] Furthermore, the coefficients of the persistent zero-revenue and posi-
Market momentum 18.872*** 18.147** tive revenues variables document that this effect is primarily driven by
[6.546] [8.209]
firms whose revenue-less status is more prolonged after the IPO. The
Second-tier market 3.108 4.733
[2.832] [4.858]
tests on the difference between the two coefficients are always statis-
Regulatory environment −0.077 0.176 tically significant, except for the matched sample estimations of the
[0.218] [0.358] illiquidity and zero-return days models. This provides further support to
Constant 35.966* 10.115** the view that the inability to generate revenues and the consequent
[18.407] [4.691]
absence of the firm from the product market significantly contributes to
Year fixed effects Yes Yes
Country fixed effects Yes Yes increase information asymmetry, leading to less liquid aftermarket
Industry fixed effects Yes Yes trading. This effect becomes more pronounced the more persistent is
Adjusted R-squared 0.147 0.152 the firm's inability to bring its products to the market.
Observations 2432 732
The coefficients of the control variables all have the expected signs.
In particular, the aftermarket liquidity improves with firm size, in the
presence of reputable third-party agents such as VCs and prestigious
revenue-generating issuers at the IPO. The evidence reported in Table 6
underwriters, and during favorable market conditions. On the other
tests this prediction. The coefficient of the zero-revenue dummy is
hand, second-tier market IPOs develop less liquid trading, in line with
positive and significant both in the full and matched sample estimation,
prior literature (Gerakos, Lang, & Maffett, 2013).
documenting that zero-revenue IPOs exhibit higher underpricing. The
magnitude of the coefficients reveals an average difference of ap-
proximately 2.3 percentage points. This is consistent with the view that 4.2.3. Stock return volatility
the firm's inability to bring products to the market significantly in- Increased information asymmetry associated with the absence of
creases the level of information asymmetry faced by IPO investors, who revenues also predicts a higher degree of volatility in the aftermarket of
require a remuneration in the form of underpricing as a compensation zero-revenue stocks. The evidence reported in Table 8 addresses this
for their increased risk taking. From the issuer's perspective, this im- point. Again, the sample of zero-revenue issuers is divided between
plies that zero-revenue firms have to leave a larger amount of money on those that generate revenues within one year of the IPO (positive rev-
the table. enues dummy) and those that do not (persistent zero-revenue). In
Among the control variables, underpricing decreases with firm size Models 1 and 3, the coefficients of the zero-revenue dummy are positive
and age, consistent with an information asymmetry-based explanation, and statistically significant. This documents that, on average, zero-
and increases with dilution, consistent with the weak incentive of firm revenue firms are associated with a higher level of volatility than both
owners to minimize underpricing when they sell very few shares (Habib the rest of the population of IPOs and the matched sample of revenue-
& Ljungqvist, 2001). Prestigious underwriters are also associated generating peers. The magnitude of the coefficients reveals a sizeable
with lower underpricing, in line with previous European evidence effect, as the standard deviation of daily stock returns is 30.7% and
(Migliorati & Vismara, 2014). Predictably, underpricing is higher 19.1% higher, respectively, than that of other IPOs and the matched
during hot market periods. Although prior studies document differences sample. This evidence provides further support to the prediction gen-
between main and second-tier markets (Giudici & Roosenboom, 2004), erated by the information asymmetry argument, as the absence of
the coefficient of the second-tier market dummy is not significant. revenues is associated not only to less liquid but also more volatile
trading. The coefficients of the persistent zero-revenue and positive
revenues dummy variables in Models 2 and 4 document that the sta-
4.2.2. Stock liquidity
tistical significance of the aggregate evidence is mainly ascribed to
If the absence of revenues increases the degree of information
persistent zero-revenue firms.12 Overall, the combined evidence on
asymmetry, this should reflect in a lower level of stock liquidity in the
stock liquidity and volatility provides support to the view that the zero-
aftermarket trading of zero-revenue IPOs relative to revenue-generating
issuers. In order to further investigate whether information asymmetry
is actually caused by the firm's inability to bring products to the market, 12
Unreported tests document that the difference in magnitude between the two
firms are split according to the degree of persistence of their revenue- coefficients is not significant.

115
A. Signori

Table 7
Regressions on stock liquidity. Bid-ask spread (Models 1–2), illiquidity ratio (Models 3–4), and zero-return days (Models 5–6) are the dependent variables. Bid-ask spread is the average ratio of the bid-ask spread divided by the midpoint of the bid
and ask prices. Illiquidity is the average ratio of the daily absolute stock return to the monetary trading volume on that day. Zero-return days is the fraction of trading days with zero return. Dependent variables are measured from 1 month after the
IPO date till the minimum between 13 months after the IPO and 1 month before any truncation event. Persistent zero-revenue equals 1 if the firm is still revenue-less at the one-year IPO anniversary. Positive revenues equals 1 if the firm has
generated revenues within one year of the IPO. “Diff. persistent-positive” reports the significance of the test of the difference between the two coefficients. Firm size, firm age, and offer size are the natural logarithms of the variables. Other
independent variables are the same as defined in Table 2. Standard errors in brackets are double clustered by country of listing and year. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10% levels, respectively.

Bid-ask spread Illiquidity ratio Zero-return days

Full sample Matched sample Full sample Matched sample Full sample Matched sample

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Zero-revenue 0.860*** 1.542*** 2.167** 2.576** 1.427*** 2.342**

[0.259] [0.369] [0.906] [1.298] [0.163] [1.028]
Persistent zero-revenue 1.436*** 1.991*** 2.247*** 2.378** 2.437*** 2.571*
[0.387] [0.733] [0.797] [1.002] [0.826] [1.377]
Positive revenues −0.989 −0.018 1.938 3.184 −1.489 1.636*
[0.793] [0.779] [1.391] [2.145] [1.073] [0.901]
Firm size −0.730*** −0.731*** −0.713*** −0.707*** −0.377 −0.377 −0.231 −0.232 −2.360*** −2.360*** −1.931*** −1.929***
[0.149] [0.149] [0.165] [0.162] [0.328] [0.327] [0.193] [0.194] [0.049] [0.056] [0.339] [0.338]
Firm age −0.192 −0.187 −0.075 −0.075 0.391 0.391 0.528 0.529 −0.128 −0.129 −0.184 −0.185
[0.134] [0.132] [0.128] [0.121] [0.285] [0.285] [0.343] [0.341] [0.279] [0.280] [0.334] [0.335]
Leverage 0.295 0.365 0.129 0.236 1.592 1.600 1.396 1.357 2.989 3.090* 2.993* 3.039*

116
[0.734] [0.720] [1.071] [1.099] [1.567] [1.560] [0.962] [0.935] [1.807] [1.780] [1.572] [1.540]
Offer size −1.492*** −1.485*** −1.518*** −1.515*** −1.188** −1.189** −1.577*** −1.585*** −4.539*** −4.524*** −4.252*** −4.254***
[0.117] [0.118] [0.163] [0.167] [0.569] [0.571] [0.597] [0.595] [0.713] [0.728] [0.604] [0.614]
Dilution −0.765 −0.805 −0.186 −0.249 −0.439 −0.446 −0.18 −0.143 0.189 0.103 0.582 0.572
[0.799] [0.800] [0.920] [0.962] [0.725] [0.721] [1.155] [1.137] [0.444] [0.420] [0.369] [0.376]
VC backing −0.281* −0.252 −0.100 −0.049 −2.846*** −2.841*** −3.355*** −3.389*** −1.221 −1.153 0.309 0.348
[0.161] [0.158] [0.086] [0.097] [0.518] [0.525] [0.300] [0.360] [1.240] [1.203] [1.238] [1.280]
Underwriter reputation −0.203*** −0.205*** −0.185** −0.184** −0.361*** −0.361*** −0.584*** −0.586*** −1.716*** −1.718*** −1.742*** −1.739***
[0.047] [0.051] [0.073] [0.081] [0.082] [0.082] [0.132] [0.136] [0.213] [0.212] [0.127] [0.136]
Market momentum −8.808*** −8.870*** −4.329 −4.553 −9.583** −9.585** −11.346*** −11.270*** −27.680*** −27.716*** −22.874*** −22.068**
[3.080] [3.022] [3.418] [3.413] [3.932] [3.927] [4.155] [4.187] [3.938] [3.948] [0.714] [8.899]
Second-tier market 2.809*** 2.778*** 2.719*** 2.710*** 2.323** 2.323** 2.331* 2.319 19.963*** 19.966*** 19.908*** 19.922***
[0.396] [0.407] [0.481] [0.477] [1.132] [1.131] [1.301] [1.526] [2.019] [1.970] [1.369] [1.357]
Regulatory environment 0.020 0.021 −0.025 −0.025* −0.486* −0.486* −0.549** −0.551** −0.638*** −0.639*** −0.609** −0.611**
[0.013] [0.014] [0.016] [0.015] [0.266] [0.266] [0.268] [0.267] [0.153] [0.151] [0.243] [0.240]
Constant 16.010*** 16.000*** 14.571*** 14.444*** 5.386*** 5.386*** 5.599*** 5.615*** 44.902** 44.871** 58.194*** 58.004***
[2.476] [2.450] [3.432] [3.361] [1.606] [1.606] [1.863] [1.851] [21.593] [21.531] [20.662] [20.527]
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Diff. persistent-positive *** *** ** **
Adjusted R-squared 0.315 0.317 0.327 0.330 0.206 0.206 0.225 0.225 0.581 0.581 0.550 0.550
Observations 2432 2432 732 732 2432 2432 732 732 2432 2432 732 732
International Review of Financial Analysis 57 (2018) 106–121
A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 8 Table 9
Regressions on stock return volatility. OLS regressions with stock return volatility as Regressions on the likelihood of being delisted. Probit regressions modeling the likelihood
dependent variable, defined as the standard deviation of daily stock returns minus the of being delisted within three years of the IPO (Models 1–2) and Cox proportional hazard
standard deviation of the returns of the primary equity index of the stock exchange where models on the likelihood of being delisted (Models 3–4). Firm size, firm age, and offer size
the firm goes public, computed from 1 month after the IPO date till the minimum between are the natural logarithms of the variables. Other independent variables are the same as
13 months after the IPO date and 1 month before any truncation event. Persistent zero- defined in Table 2. Standard errors in brackets are double clustered by country of listing
revenue equals 1 if the firm is still revenue-less at the one-year IPO anniversary. Positive and year. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10%
revenues equals 1 if the firm has generated revenues within one year of the IPO. Firm size, levels, respectively.
firm age, and offer size are the natural logarithms of the variables. Other independent
variables are the same as defined in Table 2. Standard errors in brackets are double Likelihood of delisting Hazard rate of delisting
clustered by country of listing and year. ***, **, and * indicate significance of the coef-
ficients at the 1, 5, and 10% levels, respectively. Full sample (1) Matched Full sample (3) Matched
sample (2) sample (4)
Full sample Matched sample
Zero-revenue 0.032*** 0.038*** 0.161** 0.131**
(1) (2) (3) (4) [0.007] [0.008] [0.075] [0.065]
Firm size −0.003** −0.003 −0.032** −0.056***
Zero-revenue 0.307*** 0.191** [0.002] [0.002] [0.014] [0.020]
[0.052] [0.087] Firm age −0.006** −0.003* −0.125*** −0.114***
Persistent zero-revenue 0.307*** 0.175* [0.002] [0.002] [0.026] [0.033]
[0.049] [0.098] Leverage 0.018** 0.021* 0.359*** 0.183**
Positive revenues 0.307* 0.244 [0.009] [0.012] [0.105] [0.093]
[0.162] [0.155] Offer size −0.008*** −0.010*** −0.011 −0.015
Firm size −0.135*** −0.135*** −0.205*** −0.210*** [0.003] [0.003] [0.033] [0.041]
[0.030] [0.030] [0.071] [0.068] Dilution −0.001 −0.009 0.048 0.039
Firm age −0.012 −0.012 0.013 0.009 [0.009] [0.006] [0.055] [0.056]
[0.064] [0.064] [0.039] [0.039] VC backing −0.006 −0.003 0.139* 0.156
Leverage −0.167* −0.167* −0.293 −0.297 [0.010] [0.010] [0.078] [0.104]
[0.097] [0.100] [0.279] [0.284] Underwriter −0.004* −0.019** −0.031 −0.020
Offer size −0.270*** −0.270*** −0.339*** −0.341*** reputation [0.002] [0.009] [0.027] [0.038]
[0.013] [0.014] [0.065] [0.068] Market −0.049** 0.015 −0.103 −0.263
Dilution −0.157* −0.157* −0.133 −0.131 momentum [0.024] [0.058] [0.430] [0.504]
[0.089] [0.087] [0.276] [0.272] Second-tier 0.049** 0.041* 0.299** 0.239*
VC backing −0.214*** −0.214*** −0.428*** −0.432*** market [0.024] [0.022] [0.139] [0.127]
[0.076] [0.079] [0.131] [0.144] Regulatory −0.001* −0.001 −0.019** −0.008
Underwriter reputation 0.011 0.011 −0.105* −0.105* environ- [0.001] [0.001] [0.008] [0.009]
[0.015] [0.014] [0.062] [0.062] ment
Market momentum −0.219 −0.219 −2.001** −2.002** Year fixed Yes Yes Yes Yes
[0.531] [0.534] [0.837] [0.839] effects
Second-tier market 0.295 0.295 −0.050 −0.047 Country fixed Yes Yes Yes Yes
[0.487] [0.487] [0.350] [0.352] effects
Regulatory environment −0.002 −0.002 0.002 0.002 Industry fixed Yes Yes Yes Yes
[0.013] [0.013] [0.036] [0.036] effects
Constant 5.078*** 5.078*** −2.172 −0.780 Pseudo R- 0.076 0.097 0.057 0.061
[1.647] [1.648] [3.186] [1.259] squared
Year fixed effects Yes Yes Yes Yes Observations 2432 732 2432 732
Country fixed effects Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes
Adjusted R-squared 0.155 0.155 0.144 0.143
Observations 2432 2432 732 732 proportional hazard models that allow to assess the conditional prob-
ability of delisting given that it has not occurred up to the current time
(i.e., the hazard rate). The positive (negative) effect of an independent
variable is interpreted as an accelerator (decelerator) of the time to
revenue status exposes issuers to increased liquidity and volatility risk delisting and, therefore, increasing (decreasing) its probability.
in the aftermarket. The marginal effects of the zero-revenue dummy in Models 1 and 2
The coefficients of the control variables are coherent with their are positive and significant, documenting that the average delisting rate
expected effects on the volatility of stock returns. In particular, the of zero-revenue IPOs is higher than that of other IPOs. In particular,
coefficients of firm and offer sizes are negative and significant, as in- revenue-less issuers are 3.2% and 3.8% more likely to be delisted re-
vestments in larger firms tend to have a lower risk profile, and so is the lative to the population and the matched sample of IPOs, respectively.
coefficient of the VC backing dummy, in line with the above-docu- Results are confirmed by accounting for the time dimension in the es-
mented evidence on aftermarket liquidity. Tykvová and Walz (2007), timation of the hazard ratios in Models 3 and 4, although statistical
who assume that VCs have an information advantage over investors, significance decreases to the 5% level. Overall, the evidence is con-
document a risk-reduction effect associated with reputable VCs, as stock sistent with the previously documented results on stock liquidity and
returns of issuers backed by this type of investors are less volatile than volatility, which suggest that zero-revenue firms suffer from a larger
those of non-VC-backed firms in the aftermarket. extent of information asymmetry and develop less liquid and more
volatile trading, which contributes to expose them to a higher risk of
4.2.4. Survival rate delisting.
The presence of increased information asymmetry implies that zero- Among the control variables, larger and older issuers are less likely
revenue IPOs are less able to satisfy ongoing listing requirements and to be delisted in line with previous literature, while the opposite is true
therefore face a higher likelihood of being delisted shortly after the IPO for more levered firms, arguably due to the greater risk of financial
than revenue-generating issuers. Table 9 reports estimates of the re- distress. Contrary to prior studies (e.g., Pommet, 2017), VC backing
gressions on the likelihood and the hazard rate of delisting. Models 1–2 does not play a significant effect on the survival rate of IPO firms.
are probit regressions on the likelihood of being delisted within three Second-tier market IPOs are also more likely to be delisted, coherent
years of the IPO, with the dependent variable being equal to 1 if de- with Vismara et al. (2012).
listing occurs. Marginal effects are reported. Models 3–4 are Cox

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 10
Natural resources industry and VC backing. The table reports the coefficients and standard errors of the zero-revenue dummy and of its interaction with the X variable (as indicated in the
header of the column), in each of the regressions where the dependent variable is reported in the corresponding row. All regressions have the same set of control variables employed in the
previous models (not reported for brevity), including industry, year, and country fixed effects. Marginal effects are reported in the acquirer, target, and delisting models. Standard errors
in brackets are double clustered by country of listing and year. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10% levels, respectively.

X = Natural resources dummy X = VC backing dummy

Dependent variable Explanatory variable Full sample (1) Matched sample (2) Full sample (3) Matched sample (4)

Panel A. Post-IPO investments and M&A

Capital expenditure Zero-revenue −0.977 −1.564 −2.189* −1.951*
[0.838] [1.603] [1.301] [1.136]
Zero revenue * X −4.670** −1.861 −1.737 −2.349
[1.804] [2.017] [1.231] [1.684]
R&D expenses Zero-revenue 3.422*** 4.272*** 1.818** 1.624**
[0.948] [0.877] [0.716] [0.710]
Zero revenue * X −3.382*** −3.704*** 1.778*** 2.854***
[1.154] [0.410] [0.171] [0.175]
Acquirer Zero-revenue −0.045** −0.097** −0.063*** −0.151***
[0.018] [0.046] [0.016] [0.040]
Zero revenue * X −0.008 −0.027 0.054 0.154
[0.023] [0.093] [0.039] [0.102]
Target Zero-revenue 0.003 0.053** 0.021 0.041**
[0.025] [0.022] [0.018] [0.017]
Zero revenue * X 0.003 −0.026 −0.037* −0.009
[0.040] [0.048] [0.021] [0.017]

Panel B. Post-IPO outcomes

Underpricing Zero-revenue 3.396** 4.987* 1.747*** 3.153**
[1.474] [2.757] [0.516] [1.442]
Zero revenue * X −3.362 −5.188 1.961 0.326
[2.293] [4.133] [1.816] [0.942]
Bid-ask spread Zero-revenue 0.852* 2.097* 0.857** 1.404***
[0.484] [1.263] [0.385] [0.454]
Zero revenue * X 0.165 −0.618 0.287 0.966
[0.226] [1.528] [0.794] [1.091]
Illiquidity ratio Zero-revenue 2.653*** 3.889*** 2.417*** 3.518***
[0.836] [1.255] [0.825] [1.284]
Zero revenue * X −1.396 −1.696* −0.840 −3.001***
[1.179] [0.988] [0.844] [0.837]
Zero-return days Zero-revenue 3.022** 6.602*** 1.503*** 2.948
[1.119] [1.766] [0.156] [1.824]
Zero revenue * X −4.905*** −8.031*** −0.391 −4.380*
[1.400] [1.847] [1.344] [2.355]
Stock return volatility Zero-revenue −0.166 −0.224 0.300*** 0.301**
[0.152] [0.177] [0.100] [0.133]
Zero revenue * X 0.946*** 0.841*** 0.024 −0.042
[0.222] [0.240] [0.147] [0.065]
Delisting Zero-revenue 0.035*** 0.045*** 0.048*** 0.048***
[0.008] [0.014] [0.007] [0.009]
Zero revenue * X −0.005 −0.018 −0.067** −0.073***
[0.013] [0.020] [0.033] [0.017]

5. Additional tests zero-revenue IPOs from the mining and oil and gas industries (Fama-
French 17 classification). The coefficient of this variable indicates
5.1. Natural resources firms whether the behavior of natural resources firms is different from that of
other firms within the zero-revenue group. Models 1 and 2 of Table 10
Nearly half of the zero-revenue IPOs are conducted by firms oper- report the coefficients and standard errors of the zero-revenue dummy
ating in the mining and oil and gas industries. These are typically ex- and of the interaction term for each regression. The dependent variable
ploration-stage firms that hold licenses over reserves of natural re- is reported in the left-hand side of the corresponding row. All regres-
sources and therefore acquire the traits of real options.13 This sions have the same set of control variables employed in the previous
peculiarity differentiates them from other zero-revenue firms because models (not reported for brevity), including industry, year, and country
the absence of revenues does not necessarily reflect their inability to fixed effects.
bring products to the market, but indicates that the payoff on extraction In Panel A, the coefficient of the zero-revenue dummy in the capital
has not yet exceeded the costs associated with developing the resource. expenditure model is not statistically different from zero, as opposed to
In light of this peculiarity, this section replicates the analyses on IPO the full sample estimates where it was negative and significant. The
motivations and outcomes by adding an interaction term that identifies coefficient of the interaction term is instead significant at the 5% level,
indicating that the lower investment rate of the average zero-revenue
firm is mainly driven by natural resources issuers. The results on R&D
13
An example is the IPO by Hurricane Energy, an oil and gas UK-based company gone expenses also reveal a certain degree of heterogeneity, as natural re-
public in 2014. The company, focused on the exploration and exploitation of fractured sources firms invest significantly less, on average, than other zero-
basement reservoirs, was holding exploration-stage offshore licenses at the time of the revenue firms. Overall, growth opportunities seem to be less relevant
IPO. Its only activity as of the IPO date consisted in exploration drilling and testing.
According to the official prospectus, the intended use of proceeds was to fund a new
for natural resources firms, arguable due to the fact that they already
drilling program and other operating and resourcing costs. hold licenses over reserves of natural resources, and IPO proceeds are

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

Table 11
Evidence by geographic region and legal origin. The table reports the coefficients and standard errors of the zero-revenue dummy in each of the regressions estimated on the full sample
with the dependent variables reported in rows. Western Europe includes: Austria, Belgium, France, Germany, Iceland, Ireland, Italy, Malta, the Netherlands, Portugal, Spain, Switzerland,
UK. Eastern Europe includes: Cyprus, Czech Republic, Greece, Hungary, Poland, Romania, Slovenia, Turkey. Scandinavia and Baltic includes: Denmark, Estonia, Finland, Latvia,
Lithuania, Norway, Sweden. Common Law includes the UK only, while Civil Law includes all other countries. All regressions have the same set of control variables employed in the
previous models (not reported for brevity), including industry, year, and country fixed effects (not included in Model 4). Marginal effects are reported in the acquirer, target, and delisting
models. ***, **, and * indicate significance of the coefficients at the 1, 5, and 10% levels, respectively.

Geographic region Legal origin

Dependent variable Western Europe Eastern Europe Scandinavia and Baltic Common Law Civil Law

(1) (2) (3) (4) (5)

Panel A. Post-IPO investments and M&A

Capital expenditure −3.179*** 1.239 −1.098* −3.766*** −1.694**
[0.838] [1.664] [0.613] [1.355] [0.803]
R&D expenses 2.190*** 0.654 2.568** 1.664** 4.769***
[0.565] [0.433] [1.082] [0.735] [1.494]
Acquirer −0.029** −0.124 −0.210*** −0.053* −0.094**
[0.012] [0.252] [0.065] [0.030] [0.044]
Target 0.005 −0.033 0.034 0.010 0.007
[0.011] [0.218] [0.083] [0.025] [0.060]

Panel B. Post-IPO outcomes

Underpricing 2.434*** 2.664** 1.363* 2.556** 1.788*
[0.876] [1.236] [0.772] [1.214] [0.994]
Bid-ask spread 0.901*** 0.433 0.766** 0.761** 0.853**
[0.286] [1.367] [0.361] [0.351] [0.365]
Illiquidity ratio 1.610** 2.603 6.352*** 1.140* 3.697***
[0.737] [2.963] [1.911] [0.648] [1.011]
Zero-return days 1.653*** 2.120* 1.056** 1.053** 1.709**
[0.564] [1.221] [0.482] [0.429] [0.741]
Stock return volatility 0.362*** 0.126 0.159** 0.434*** 0.159*
[0.065] [0.120] [0.072] [0.121] [0.084]
Delisting 0.029*** 0.037*** 0.068*** 0.023** 0.036**
[0.005] [0.012] [0.014] [0.011] [0.015]
Observations 1936 225 271 1193 1239

likely to be used to maintain existing licenses, acquire new ones, and Panel A shows that zero-revenue issuers backed by a VC invest on
fund operating costs. As for M&A activity, there is no difference relative average 1.8 percentage points more in R&D than other zero-revenue
to other zero-revenue issuers. Panel B reveals that the higher level of firms (2.9 compared to the matched sample) after going public. In Panel
volatility associated with zero-revenue issuers is entirely ascribed to B, the results reveal that zero-revenue issuers backed by a VC face a
natural resources firms, as the coefficient of the zero-revenue dummy 6.7% lower likelihood of being delisted relative to zero-revenue issuers
becomes insignificant. The strong dependence of these firms' value on that are not backed by a VC (7.3% relative to the matched sample).
industry-specific factors, such as the variation in the price of natural Overall, the above evidence is consistent with the view that VC backing
resources and the technological advancement in the exploration and is associated with superior quality within zero-revenue firms.
extraction processes may explain the higher volatility of their stocks.
Also, firms operating in these industries are characterized by high levels
5.3. Geographic region and legal origin
of capital intensity and incidence of fixed costs, which contribute to
increase their systematic risk.
The international sample used in the paper offers the opportunity to
investigate whether the behavior of zero-revenue firms varies across
5.2. Venture capital backing countries. This section addresses the above issue by focusing on two
factors that may act as sources of heterogeneity in firm behavior,
Among zero-revenue firms that decide to go public, 27.9% have namely geographic region and legal origin. To this end, Table 11 pre-
obtained prior VC financing. VCs play an important third-party certi- sents the evidence of the multivariate analyses on IPO motivations and
fication role in the IPO market (Megginson and Weiss, 1991) due to the outcomes after splitting the sample into countries belonging to three
selection effect associated with their ability to pick promising firms different regions (Western Europe, Eastern Europe, Scandinavian and
(e.g., Chan, 1983), and the treatment effect arising from the provision Baltic) and those having different legal origins (Common Law, which
of financing and other value-enhancing services (e.g., Casamatta, includes the UK only, and Civil Law). The table reports the coefficients
2003). The magnitude of these effects increases with the level of re- and standard errors of the zero-revenue dummy for each regression
putation of the VC (Nahata, 2008). Prior literature has documented that with the dependent variable reported in the left-hand side of the cor-
VCs take public the most successful firms of their portfolio and are able responding row.
to effectively time their exit via IPO (Lerner, 1994). In the context of Concerning differences across geographic regions, the evidence re-
zero-revenue firms, it is reasonable to expect VCs not to take a revenue- ported in Models 1–3 of Panel A reveals a certain degree of hetero-
less firm public unless it faces a promising growth potential. This leads geneity in the IPO motivations of zero-revenue firms. In particular, the
to the prediction that, within zero-revenue IPOs, those that are backed aggregate results in terms of capital expenditure, R&D, and acquisition
by a VC may face even greater growth opportunities than other, non-VC activity are mainly driven by issuers based in Western Europe and
backed issuers. Thus, this section replicates the analyses on IPO moti- Scandinavia. The coefficient of the zero-revenue dummy in the Eastern
vations and outcomes by adding an interaction term that identifies European subsample is indeed never significant. Panel B documents a
zero-revenue IPOs backed by a VC. Models 3 and 4 of Table 10 report similar situation in terms of IPO outcomes, as the differences between
the results. zero-revenue and other issuers is mainly ascribed to Western European

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A. Signori International Review of Financial Analysis 57 (2018) 106–121

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