Ownership structure pre- and post-IPOs and the

operating performance of JASDAQ companies

Kenji Kutsuna
a,
*
, Hideo Okamura
b
, Marc Cowling
c
a
Institute for Economic Research, Osaka City University, Sumiyoshi, Osaka 558-8585, Japan
b
School of Business Administration, Kwansei Gakuin University, Nishinomiya, Hyogo 662-8501, Japan
c
Research Centre for Industrial Strategy, Department of Commerce, University of Birmingham,
Birmingham B15 2TT, UK
Received 21 April 2000; accepted 14 November 2001
Abstract
This paper considers how the operating performance of JASDAQ companies is affected by the
ownership structure pre- and post-IPOs. We document that operating performance varies according
to managerial ownership in addition to the age and size of the firm. Our results on JASDAQ contrast
with evidence from Cai and Wei [Pacific-Basin Finance Journal 5 (1997) 389], who analyze the
operating performance of companies newly listed on the Tokyo Stock Exchange (TSE). They
indicate the post-IPO deterioration in operating performance cannot be attributed to the reduced
managerial ownership. D 2002 Elsevier Science B.V. All rights reserved.
JEL classification: G15; G32; G38; F21
Keywords: Initial public offerings; Bank monitoring; Venture capital investment; Managers incentive;
Operating performance; Ownership structure
1. Introduction
There is a long tradition of research concerning the relationship between ownership
structure and company performance. First, the conflict of interest between managers and
shareholders has been discussed in various studies (McConnell and Servaes, 1990;
Craswell et al., 1997; Short and Keasey, 1999; Palia and Lichtenberg, 1999). Jensen
0927-538X/02/$ - see front matter D 2002 Elsevier Science B.V. All rights reserved.
PII: S0927- 538X( 01) 00041- 5
*
Corresponding author. Tel.: +81-6-6605-2471; fax: +81-6-6605-2475.
E-mail address: kutsuna@eri.osaka-cu.ac.jp (K. Kutsuna).
www.elsevier.com/locate/econbase
Pacific-Basin Finance Journal 10 (2002) 163181
and Meckling (1976) point out that the interest of managers and shareholders diverge as
managers stakes decrease and ownership is dispersed. This implies that the firms
operating performance will decline after an initial public offering (IPO). Regarding the
relationship between changes in ownership structure and operating performance of
companies that go public, Jain and Kini (1994) report a significant decline in operating
performance post-IPO and argue that this is partly explained by a decrease in the
managers incentives. In a similar vein, Cai and Wei (1997) and Cai and Laughran
(1998) analyze the subsequent performance of seasoned and unseasoned equity offerings
on the Tokyo Stock Exchange, but argue that the post-issue deterioration in operating
performance cannot be attributed to reduced managerial ownership. Yet, the evidence is
not conclusive. For example, Mikkelson et al. (1997) find no relationship between
operating performance and ownership of officers and directors in IPO companies. This
result is confirmed by Hirota (1996). By contrast, Yonezawa and Miyazaki (1996) find that
the performance of Japanese firms rises as the ownership structure becomes concentrated
and the managers stake increases.
Second, in relation to monitoring, venture capital firms (VCs) are expected to play an
important role in adding value to investee companies, thus producing high growth
companies (Gorman and Sahlman, 1989; Sapienza, 1992; Lerner, 1994; Sapienza et al.,
1996). Jain and Kini (1995) considered the relationship between venture capitalist
participation and the post-issue operating performance of IPO firms, and found that VC-
backed IPO firms showed superior post-issue operating performance compared to non-
VC-backed IPO firms. Concerning stock price performance, Brav and Gompers (1997)
investigated the long-run underperformance of IPOs documented by Ritter (1991) and
Loughran and Ritter (1995). They found that VC-backed IPOs out-performed non-VC-
backed IPOs and that the overall underperformance of IPOs is driven by small, non-VC-
backed IPOs. Empirical results from Barry et al. (1990) and Megginson and Weiss
(1991) also show that venture capital backing results in significantly lower initial
returns.
In contrast to prior research in the US, investment from venture capital firms in
Japanese firms did not favorably influence short-run stock price performance after
flotation. For example, Kutsuna et al. (2000) find that companies in which venture capital
firms were involved before flotation have lower stock prices than those with no VC
involvement. Furthermore, companies in which venture capital firms sold their equity
stakes shortly after flotation underperform compared to companies in which VCs did not
invest or maintain their equity stakes after flotation.
Third, bankfirm relationships, in particular the Japanese banking system, have been a
focal point for research (see example, Prowse, 1992; Aoki and Patrick, 1994; Kang and
Shivdasani, 1995, 1999). Here, the focus is on the effectiveness of bank monitoring via
shareholding, lending, and the appointment of directors. Yonezawa and Miyazaki (1996)
report a significant and positive relationship between bank shareholding and firms
productivity. Moreover, Packer (1995) investigates whether bank shareholding affects
the degree of underpricing of initial public offerings in Japan, and finds that either direct
bank shareholding or through venture capital subsidiaries reduces underpricing. In
addition, Packer (1995) concludes that bank shareholding reduces agency costs associated
with asymmetric information. In contrast, Hirota (1996) reports that bank shareholding is
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 164
unrelated to managerial effectiveness. Weinstein and Yafeh (1998) also point out that in
Japan, main banks client firms report lower profitability.
The explicit aim of this paper is to examine the relationship between the ownership
structure pre- and post-IPOs, and the operating performance of JASDAQ companies. The
rest of the paper is organized as follows. First, we discuss the data source and descriptive
statistics of our sample firms. Second, we analyze ownership structure in the pre- and
post-flotation period. Third, we examine the operating performance of JASDAQ
companies using a number of measures. These include net sales, ordinary profits, and
net profits. Fourth, the relationship between ownership structure and the operating
performance of JASDAQ companies is analyzed by estimating a series of cross-sectional
OLS regressions. Last, we summarize our findings and present some suggestions for
further research.
2. Data and descriptive statistics of sample firms
The total number on the Japanese OTC market (JASDAQ) increased eight-fold over the
15-year period to 2000. The total figure is currently in excess of 850 companies. The
number of JASDAQ IPOs in 1995 and 1996 was 137 and 110, respectively. In this section,
we will present our data sources and some descriptive statistics from the 247 JASDAQ
registered companies, and compare them with the 27 IPO firms on the Tokyo Stock
Exchange (TSE) in 19951996.
This paper uses three main sources of data on the 247 JASDAQ companies.
(1) Research Group for Disclosure (1996, 1997) provides detailed financial data for
the 247 JASDAQ companies, together with issue data. The financial data includes net
sales, ordinary profits and net profits for only 1 year prior to flotation. The issue data
includes the date, amount raised, usage of raised capital, the issue price and amount of
issued stock.
(2) Annual reports of each IPO company provide the financial and ownership structure
data after flotation.
(3) Japan Securities Dealers Association (JSDA) provides the ownership structure data
just prior to the IPO and the financial data covering the five fiscal years before flotation for
each company.
The descriptive statistics of the 247 JASDAQ companies are shown in Table 1.
JASDAQ companies are substantially different in terms of size, age, industrial sector, and
profitability from their NASDAQ and EASDAQ counterparts
1
(Kutsuna, 1997; Kutsuna et
al., 2000). They tend to be both older and larger. The characteristics of the sample firms
are as follows:
Agethe mean age of firms is 31 years (founded in 1965), although the range is from 5
years, early-stage small firms, to over 70 years, established firms. Employment the sample
1
In terms of average net sales growth, in a comparative study of the top 20 high growth JASDAQ and
NASDAQ companies, Sano and Kitachi (1994) found that JASDAQ companies averaged growth rates of 32.9%,
compared to rates of 182.5% for their NASDAQ counterparts.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 165
mean is 475 employees, and ranges from 25 to 4150. Type of businessJASDAQ IPO
firms by industrial sector tend to be concentrated in mature industries. As shown in Table
2, 35.2% are in manufacturing and 30.0% in wholesale and retail trade (others are services
19.0%, finance and insurance 5.3%, transport and communication 4.9%, construction
4.5%, and real estate 1.2%).
Total capital raised (public offering and offer for sale) A unique feature of JASDAQ,
which sets it apart from its American counterpart NASDAQ and EASDAQ in Europe, is
that it is dominated by relatively old, established firms. The average capital raised by
public offering, and offer for sale by owners, is w1.9 billion and w1.0 billion, respectively.
Here we observe that an average 34.4% of the total capital raised by JASDAQ companies
is through owners sale of shares. Offer for sale indicates secondary share offerings that do
not raise any money for the issuing companies. The money is simply passed on to the
issuing shareholders.
Net salesthe mean net sales is w18.5 billion, and ranges from w2 billion to w246
billion. Ordinary profitsthe sample mean is w1.4 billion. The smallest firm to achieve
Table 1
Descriptive statistics of JASDAQ and TSE IPO firms in 19951996
JASDAQ Tokyo Stock Exchange (TSE) MW-test
Mean Median Min Max Mean Median Min Max Z-statistic p-value
Years of operating
history
31 32 5 78 39 40 7 72 2.516 0.012**
Number of
employees
475 325 25 4,150 1,374 735 211 9,572 4.763 0.000***
Issued stocks
outstanding
7,671 5,566 2,200 108,304 27,471 14,960 6,000 200,000 6.843 0.000***
Total offered stocks
(thousand)
1,232 1,000 550 5,000 7,196 3,550 1,600 67,000 7.915 0.000***
(Public offering) 746 600 200 5,000 3,581 2,000 800 20,000 7.461 0.000***
(Offer for sale) 486 410 0 2,400 3,615 1,750 0 47,000 5.005 0.000***
Total capital raised
(million yen)
2,941 2,002 439 48,453 15,301 3,857 923 188,811 5.236 0.000***
(Public offering) 1,928 1,146 180 48,453 9,323 2,565 703 140,511 4.739 0.000***
(Offer for sale) 1,012 754 0 6,790 5,978 1,806 0 50,323 3.238 0.001***
Net sales
(million yen)
18,546 12,224 2,021 246,223 104,765 55,428 11,166 538,612 6.483 0.000***
Ordinary profits
(million yen)
1,430 701 171 110,772 3,842 1,739 900 28,076 6.287 0.000***
Net profits
(million yen)
662 332 41 48,004 1,790 879 291 14,690 6.038 0.000***
The sample in our analysis is 247 IPO firms in JASDAQ in 1995 (137 firms) and 1996 (110 firms). The number
of IPOs that are directly listed on the Tokyo Stock Exchange is 27 in 19951996 (excluding JR-West). This table
provides summary statistics for Japanese IPOs and compares the characteristics of JASDAQ and TSE IPO firms.
The results of MannWhitney test are indicated in the last two columns of the table. Offer for Sale indicates
secondary share offerings that do not raise any money for the issuing companies. The money is simply passed on
to the issuing shareholders. Data are based on Research Group for Disclosure (1996, 1997).
** 5% significance level.
*** 1% significance level.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 166
flotation has w171 million ordinary profits. Net profitsthe sample mean net profits is
w662 million, although the range is from w41 million to w48 billion.
Furthermore, Table 1 demonstrates that there are large differences between the
JASDAQ and TSE offerings, regarding firm size and profitability. Analyzed by firm
and issue characteristics of JASDAQ and TSE IPOs, using a MannWhitney test, there
are statistically significant differences at the 1% or 5% level, for all the measures presented
in Table 1.
3. Ownership structure of JASDAQ companies before and after IPOs
In this section, we document the changes of ownership structure before and after IPOs.
Data on the ownership structure just prior to the IPO are obtained from the Japan
Securities Dealers Association (JSDA). Data after the IPO are based on the financial
statement of each company.
Table 2
Distribution of JASDAQ IPO companies by industry
Industry
classification
JASDAQ IPO
companies in
19951996
Percentage
(%)
All JASDAQ
companies
(based on Nikkei
Needs Corporate
Financial Data)
Percentage
(%)
Manufacturing 87 35.2 353 40.3
Foodstuffs 5 2.0 33 3.8
Textile products 5 2.0 14 1.6
Chemicals 20 8.1 51 5.8
Rubber and ceramics 9 3.6 23 2.6
Steel and metal 9 3.6 37 4.2
Machinery 7 2.8 48 5.5
Electrical machinery 15 6.1 72 8.2
Transportation equipment 5 2.0 23 2.6
Precision instruments 4 1.6 13 1.5
Other manufacturing 8 3.2 39 4.5
Construction 11 4.5 58 6.6
Transport 12 4.9 23 2.6
Wholesale and retail trade 74 30.0 242 27.6
Finance and insurance 13 5.3 12 1.4
Real estate 3 1.2 15 1.7
Services 47 19.0 173 19.7
Total 247 100.0 876 100
This table shows the distribution of 247 JASDAQ IPO companies by industry. Industry classification is based on
Nikkei Shimbun. In addition, the distribution of all JASDAQ-registered companies in June 2000 is also indicated
in the last two columns. However, Bank of Japan and Japan Air System (JAS) are not included. In our following
analysis, we examine both raw and industry-median-adjusted operating performance, based on Nikkei Needs
Annual Corporate Financial Data.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 167
We categorize ownership stakes of IPO firms into six groups
2
: (1) top shareholders
stake, (2) top 10 shareholders total stakes, (3) top banks stake (defined as the share-
holdings by the bank that has the largest share among banks on the top 10 Shareholders
List), (4) banks total stakes on the top 10 Shareholders List, (5) venture capital firms
stake (defined as the shareholdings by the venture capital firm that has the largest share
among VCs on the List), (6) venture capital firms total stakes on the List. Furthermore,
the results of the Wilcoxon Matched-Pairs Signed-Ranks Test are presented in the last
column of Table 3. Statistically significant differences between the ownership structure
before and after IPOs can be confirmed.
The first row of Table 3 shows the ownership of the top shareholder. The median stake
of the top shareholder is 29.82% before the offering, and falls by 6.95% to 22.87% 1 year
after the offering. This result implies, in many cases, that firms owners realize capital
gains but still hold relatively large stakes. Although the total stakes of the top 10
shareholders show a significant decline 1 year after the offering, ownership is still
concentrated among the top 10 shareholders, as shown in row 2 of Table 3. The median
stake of the top 10 shareholders decreases by 16.84%, from 80.54% before the offering, to
63.70%, 1 year after the offering.
Contrary to the decrease in the top 10 shareholders stakes, banks increase their
shareholding after the offering. In row 3 of Table 3, the median stake of the top bank
before the offering is 2.79%, and it rises by 0.62% to 3.41%, 1 year after the offering.
Banks total stakes, the collective stakes of banks on the top 10 Shareholders List, also
increase 1 year after the offering, as described in row 4 of Table 3. The median stake of
banks rises from 4.29% before IPO to 6.66% after IPO. Among 247 total sample firms,
194 firms have one or more bank shareholders on their top 10 Shareholders List; 113 out
of 194 firms (58%) experience an increase in their top banks shareholdings, and 145 of
194 firms (75%), experience an increase in banks total stakes.
In contrast to banks, most of the venture capital firms decrease their stakes after IPO.
We report the equity stake of the top venture capital firm in row 5 of Table 3, defined as
the shareholding by the venture capital firm, which has the largest share among VCs on the
top 10 Shareholders List. The median stake of the top venture capital firm declines from
2.73% before IPO to 0.77% after the offering. In addition, we document venture capital
firms total stakes in row 6 of Table 3. The median stake of all VCs on the List is 4.69%
before the offering but decreases dramatically to 0.66%. In fact, while venture capital firms
are on the top 10 Shareholders List of 123 IPO firms before the offering, only four IPO
firms experience an increase in the top VCs shareholdings, while three firms experience
an increase in VCs total stakes. Furthermore, in 61 IPO firms (50%), venture capital firms
sell off their stakes to zero to realize capital gains. On the contrary, US venture capital
firms maintain their holdings after the IPO (Megginson and Weiss, 1991). According to
2
In addition, we can get the data on equity ownership of directors and the employee stock ownership plan
(ESOP) before IPO from the Research Group for Disclosure (1996, 1997). However, these data are not available
after the IPO. The median stake of directors before the offering is 32.1%. This is considerably lower than found
by Mikkelson et al. (1997). They report that the median stake of officers and directors as a group is 67.9% before
the offering, and 43.7% after the offering. In addition, the median stake of the ESOP before the offering is 4.30%,
although it ranges from 0% to 29.8%.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 168
Mikkelson et al. (1997), the median stake of venture capital firms after the offering is
12.5%, while it is 20% before the offering.
Our evidence also shows that the top 10 shareholders decrease their shareholdings 1
year after the offering, but retain more than 60% of the stake so that ownership is still
concentrated. Banks increase their holdings after the offering, while venture capital firms
decrease theirs. It is worth noting that venture capital firms immediately sold out in half of
the companies.
4. Operating performance of IPO firms
In this section, we analyze the operating performance from five fiscal years before
IPO (Year 5, 4, 3, 2, and 1) to four fiscal years after IPO (Year 0, + 1, + 2
and + 3). We use three measures of operating performance. First is net sales, ordinary
profits, and net profits for each fiscal year. Secondly, we examine ordinary profits and
net profits divided by end-of-year net sales to control for variation in sales revenue.
Thirdly, the growth rates of net sales, ordinary profits, and net profits are explored. The
operating performance is adjusted by the industry median as in Jain and Kini (1994),
Mikkelson et al. (1997), and Cai and Wei (1997). In our analysis, we examine both raw
Table 3
Ownership structure of JASDAQ firms before and after IPO: Shareholdings of top shareholder, top 10
shareholders, banks and VCs
Sample
size
Before
IPO
After
IPO
Changes in
shareholdings
Wilcoxon-tests
Z-statistic
(1) Top shareholders 247 Median 29.82 22.87 6.95 13.563***
stake (a) Mean 34.44 27.13 7.31
(2) Top 10 shareholders 247 Median 80.54 63.7 16.84 13.624***
stakes (b) Mean 78.89 63.45 15.44
(3) Top banks stake (c) 194 Median 2.79 3.41 0.62 8.695***
Mean 2.83 3.29 0.46
(4) Banks total stakes (d) 194 Median 4.29 6.66 2.37 10.415***
Mean 5.23 7.39 2.16
(5) Top VCs stake (e) 123 Median 2.73 0.77 1.96 9.258***
Mean 4.08 1.58 2.5
(6) VCs total stakes (f) 123 Median 4.69 0.66 4.03 9.533***
Mean 6.72 1.91 4.81
(a) Shareholdings by top shareholder on the top 10 Shareholders List. (b) Shareholdings by top 10 shareholders
on the top 10 Shareholders List. (c) Shareholdings by the bank that has the largest share among banks on the top
10 Shareholders List. (d) Shareholdings by all banks on the top 10 Shareholders List. (e) Shareholdings by the
venture capital firm (VC) that has the largest share among VCs on the List. (f) Shareholdings by all VCs on the
List.
Data before IPO are obtained from Japan Securities Dealers Association (JSDA), and data after IPO are based on
financial statements of each firm. The results of the Wilcoxon Matched-Pairs Signed-Ranks Test are presented at
the last column of this table. Statistically significant differences between the ownership structure before and after
IPOs can be confirmed.
*** 1% significance level.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 169
Table 4
Operating performance of JASDAQ IPO companies (net sales, ordinary profits, and net profits before and after IPO)
Operating performance Before IPO After IPO
Year 5 Year 4 Year 3 Year 2 Year 1 Year 0 Year + 1 Year +2 Year + 3
Net sales Mean (million yen) 14,736 16,034 16,190 17,547 18,569 20,286 21,927 22,430 22,747
Median (million yen) 9,792 10,467 11,588 11,651 12,224 13,463 14,450 14,344 13,857
S.D. (million yen) 14,870 15,544 14,641 19,800 21,592 23,994 27,396 30,098 33,840
Ordinary profits Mean (million yen) 785 748 740 1,083 1,430 1,655 1,688 1,836 2,073
Median (million yen) 456 452 505 567 701 769 770 690 732
S.D. (million yen) 1,154 978 840 4,527 7,039 7,794 9,496 11,772 13,513
Negative ordinary profits
(number of companies)
5 6 4 0 0 1 13 18 17
Percent to sample size (%) 2.7 2.9 1.7 0.0 0.0 0.4 5.4 7.7 7.4
Net profits Mean (million yen) 358 313 305 489 663 776 764 820 973
Median (million yen) 205 201 202 239 333 384 374 304 316
S.D. (million yen) 562 430 413 2,658 3,052 3,590 4,357 5,576 7,544
Negative net profits
(number of companies)
8 7 5 5 0 1 14 30 27
Percent to sample size (%) 4.3 3.3 2.2 2.0 0.0 0.4 5.8 12.8 11.7
Sample size 188 209 230 246 247 247 241 235 230
This table summarizes the operating performance for JASDAQ IPO firms for 5 years before IPO and 4 years after IPO. Year 1 indicates the fiscal year just prior to the
offering. Operating performance includes net sales, ordinary profits, and net profits for each year. In addition, the numbers of companies with negative ordinary profits and
net profits for each year are indicated. There are no companies with negative ordinary profits and net profits in Year 1.
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and industry-median-adjusted operating performance, based on Nikkei Needs Annual
Corporate Financial Data (see Table 2).
Table 4 presents the operating performance of IPO firms for 9 years before and after
flotation (Year 1 indicates the fiscal year just prior to the offering). As shown in Table
4, operating performance tends to decrease after flotation. For example, the median net
profits increased from w205 million for Year 5 to w384 for Year 0, and decreased to
w316 for Year + 3. These results are consistent with Jinza (1995), who analyzed the
operating performance of JASDAQ companies registered between 1990 and 1994
3
.
Moreover, we observed that the number of JASDAQ companies with negative ordinary
profits and net profits decreased from Year 5 to Year 1, and then sharply increased
after IPO. Minimum ordinary profits and net profits for Year 1 are w171 million and
w41 million, respectively, while most figures besides Year 1 are negative. For
example, in terms of net profits, the percentage of companies with negative net profits
for Year + 3 was more than 10%. This result hints at the possibility of owner managers,
venture capitalists, underwriters, banks and auditors attempting to Window-dress prior
3
Regarding the profitability of JASDAQ companies, Jinza (1995), analyzing newly registered JASDAQ
companies between 1990 and 1994, found that net profits peaked 1 year prior to flotation and subsequently
decreased. Furthermore, average 5-year growth rates of profits post-flotation for 132 newly registered JASDAQ
companies in 1988/1989 are comparatively lower than for companies listed on the first division of the Tokyo
Stock Exchange. The average growth rates were 9.5% and 8.3%, respectively.
Fig. 1. Ratio of ordinary profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes
vary due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both
raw and industry-median-adjusted operating performance. The industry-median-adjusted operating performance
is calculated as the difference between its raw ratio of ordinary profits to net sales and the median ratio of all
JASDAQ-registered firms in its industry.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 171
to going public (DeGeorge and Zeckhauser, 1993; Jain and Kini, 1994; Teoh et al.,
1998a,b).
Figs. 1 and 2 present the ratio of ordinary profits and net profits to net sales for 9
years. The median raw ratio of ordinary profits to net sales increased from 4.65% for
Year 5 to 6.25% for Year 1, and decreased to 4.50% for Year + 3. The median
industry-median-adjusted ratio of ordinary profits to net sales also increased from
0.06% for Year 5 to 1.21% for Year 1, and decreased to 0.53% for Year + 3. The
industry-median-adjusted operating performance is calculated as the difference between
its raw ratio of ordinary profits to net sales and the median ratio of all JASDAQ-
registered firms in its industry. In addition, the median raw ratio of net profits to net
sales increased from 2.00% for Year 5 to 2.99% for Year 0, and decreased to 1.90%
for Year + 3. The median industry-median-adjusted ratio of net profits to net sales also
increased from 0.16% for Year 5 to 0.72% for Year 1, and decreased to 0.21%
for Year + 3.
Fig. 3 and Table 5 show the raw and industry-median-adjusted changes in the growth
rates of net sales, ordinary profits and net profits for 9 years before and after flotation
4
. The
industry-median-adjusted operating performance is calculated as the difference between its
Fig. 2. Ratio of net profits to net sales of IPO firms for 9 years. Sample sizes are in parentheses. Sample sizes vary
due to missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and
industry-median-adjusted operating performance. The industry-median-adjusted operating performance is
calculated as the difference between its raw ratio of net profits to net sales and the median ratio of all
JASDAQ-registered firms in its industry.
4
As shown in Table 4, there are no companies with negative ordinary profits and net profits in Year 1.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 172
change in operating performance and the median change in operating performance of all
JASDAQ-registered firms in its industry. In Fig. 3, the change in growth rate is calculated
to the prior year. The average growth rates for four periods before and after IPO are
compared in Panel A of Table 5. The pre-IPO growth rate indicates the average of four
periods; Year 5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1. The
post-IPO growth rate means the average rate of Year 1 to 0, Year 0 to + 1, Year + 1 to
+ 2, and Year + 2 to + 3.
Again, we find a significant decline in the post-issue operating performance. As shown
in Fig. 3, industry-median-adjusted growth rate of net sales increases from 5.29% in the
Year 5 to 4, to 6.84% in the Year 2 to 1, and declines to 0.24% in the Year
+ 2 to + 3. Furthermore, Panel A of Table 5 confirms that industry-median-adjusted
growth rate of net sales for four periods after IPO is 0.96%, compared to 7.39% for four
periods before IPO. The trend is confirmed by the Wilcoxon Matched-Pairs Signed-Ranks
Test as described in the last column of Table 5. The Z-statistics are calculated to be
7.580, implying significant differences at the 1% level before and after flotation.
In addition, growth rates of ordinary profits and net profits tend to decrease after
flotation. According to Panel B of Table 5, industry-median-adjusted growth rates of
ordinary profits and net profits in Year 1 to + 1 are 4.17% and 3.58%, respectively.
However, industry-median-adjusted growth rates of ordinary profits and net profits sharply
declined to 0.18% and 9.16%, respectively, in Year 1 to + 3.
Fig. 3. Growth rates of net sales before and after IPO. Sample sizes are in parentheses. Sample sizes vary due to
missing data from the change of accounting period for IPO firms. In our analysis, we examine both raw and
industry-median-adjusted operating performance. The industry-median-adjusted operating performance is
calculated as the difference between its raw change in growth rate of net sales and the median change in
operating performance of all JASDAQ-registered firms in its industry.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 173
Table 5
A comparison of the operating performance before and after IPO
Panel A: The ratio of ordinary profits to net sales,
and growth rates of net sales before and after IPO
Sample
size
Mean
(%)
Median
(%)
Wilcoxon
Z-statistic
Ordinary profits/net sales
(average for 5 years before IPO): raw
247 6.78 5.38 0.929
Ordinary profits/net sales
(average for 4 years after IPO): raw
247 6.49 5.14
Ordinary profits/net sales
(average for 5 years before IPO):
industry-median-adjusted
247 1.83 0.62 0.930
Ordinary profits/net sales
(average for 4 years after IPO):
industry-median-adjusted
247 1.75 0.42
Sales growth
(average for four periods before IPO): raw
246 8.87 5.65 3.739***
Sales growth
(average for four periods after IPO): raw
247 5.23 3.10
Sales growth
(average for four periods before IPO):
industry-median-adjusted
246 9.69 7.39 7.580***
Sales growth
(average for four periods after IPO):
industry-median-adjusted
247 2.44 0.96
Panel B: Growth rates of net sales,
ordinary profits, and net profits after IPO
Sample
size
Mean
(%)
Median
(%)
S.D.
(%)
Sales growth
(average from Year 1 to Year +1): raw
241 18.08 12.85 34.32
Sales growth
(average from Year 1 to Year +3): raw
230 26.81 8.88 82.40
Sales growth
(average from Year 1 to Year +1):
industry-median-adjusted
241 11.43 5.05 36.09
Sales growth
(average from Year 1 to Year +3):
industry-median-adjusted
230 16.42 2.04 84.08
Ordinary profits growth
(average from Year 1 to Year +1): raw
241 8.33 12.12 77.18
Ordinary profits growth
(average from Year 1 to Year +3): raw
230 21.37 5.90 144.88
Ordinary profits growth
(average from Year 1 to Year +1):
industry-median-adjusted
241 0.52 4.17 77.87
Ordinary profits growth
(average from Year 1 to Year +3):
industry-median-adjusted
230 15.53 0.18 146.19
Net profits growth
(average from Year 1 to Year +1): raw
241 2.56 15.48 122.56
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 174
Thus, we found evidence that JASDAQ companies showed sharply decreasing
operating performance after flotation.
5. Cross-sectional OLS regressions: On the relationship between ownership structure
and operating performance
In this section, we analyze the relationship between the ownership structure and
operating performance before and after IPO by estimating cross-sectional OLS regres-
sions. Operating performance before IPO is measured first in terms of the average
industry-median-adjusted growth rates of net sales for four periods before IPO (Year
5 to 4, Year 4 to 3, Year 3 to 2 and Year 2 to 1). In addition, average
industry-median-adjusted ratios of ordinary profits to net sales for five years before IPO
(Year 5, Year 4, Year 3, Year 2 and Year 1) are also used. Operating
performance after IPO is measured in terms of the average industry-median-adjusted
growth rates of net sales for four periods (Year 1 to 0, Year 0 to + 1, Year + 1 to + 2,
and Year + 2 to +3). Average industry-median-adjusted ratios of ordinary profits to net
sales for 4 years after IPO (Year 0, Year + 1, Year + 2, and Year + 3) are also explored. In
addition, industry-median-adjusted growth rates of net sales and ordinary profits from
Year 1 to Year + 3 are examined.
Firstly, we analyze the relationship between operating performance before IPO and
ownership structure just prior to IPO by using the following eight independent variables.
T1BF and T10BF indicate the ownership stake before IPO by top shareholder and top 10
shareholders, respectively. VCBF
_
D and BKBF
_
D are dummy variables taking on the
value 1 if venture capital firm and bank invested before IPO and 0 otherwise. MANU
_
D is
a dummy variable taking on the value 1 if the company is manufacturing and 0 otherwise.
Panel B: Growth rates of net sales,
ordinary profits, and net profits after IPO
Sample
size
Mean
(%)
Median
(%)
S.D.
(%)
Net profits growth
(average from Year 1 to Year + 3): raw
230 3.94 9.14 189.27
Net profits growth
(average from Year 1 to Year + 1):
industry-median-adjusted
241 10.49 3.58 123.60
Net profits growth
(average from Year 1 to Year + 3):
industry-median-adjusted
230 5.93 9.16 190.20
This table summarizes the raw and industry-median-adjusted operating performance before and after IPO.
Operating performance includes the ratio of ordinary profits to net sales, and growth rates of net sales, ordinary
profits, and net profits. First, operating performance before and after IPO is compared in Panel A. Five years
before IPO mean from Year 5 to Year 1. Four years after IPO mean from Year 0 to Year + 3. The pre-IPO
growth rate indicates the average of four periods for Year 5 to 4, Year 4 to 3, Year 3 to 2, and
Year 2 to 1. The post-IPO growth rate means the average of four periods for Year 1 to 0, Year 0 to + 1,
Year + 1 to + 2, and Year + 2 to + 3. The Z-statistics is based on the Wilcoxon signed rank test. Second, growth
rates of net sales, ordinary profits, and net profits after IPO are examined in Panel B.
*** 1% significance level.
Table 5 (continued)
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 175
Table 6
Cross-sectional OLS regressions of operating performance before and after IPO on ownership structure and firm characteristics
Dependent variables Independent variables
Panel A: Before IPO Intercept T1BF T10BF VCBF
_
D BKBF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 11.31 0.07 2.69 1.28 1.33 1.92 11.99 0.42 14.17*** 0.27 246
(average for four periods 0.59 1.63 1.63 0.67 0.79 1.74 * 6.76*** 0.38
before IPO): 8.10 0.05 2.71 1.45 1.41 2.02 12.23 0.57 13.77*** 0.27 246
industry-median-adjusted 0.39 0.83 1.64 0.76 0.84 1.83 * 6.76*** 0.52
Ordinary profits/net sales 38.57 0.02 0.35 0.85 0.65 3.11 0.55 1.91 12.44*** 0.25 247
(average for 5 years before IPO): 5.97*** 1.57 0.63 1.32 1.16 8.40*** 0.93 5.21***
industry-median-adjusted 40.12 0.01 0.36 0.91 0.61 3.10 0.82 1.96 11.98*** 0.24 247
5.82*** 0.30 0.66 1.41 1.08 8.31*** 1.35 5.34***
Panel B: After IPO (1) Intercept T1AF T10AF VCAF
_
D BKAF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 8.72 0.03 1.03 2.08 1.65 2.30 8.85 0.15 10.66*** 0.22 247
(average for four periods 0.53 0.74 0.66 0.87 1.17 2.48** 5.96*** 0.16
after IPO): 6.03 0.02 1.11 2.14 1.70 2.30 9.23 0.25 10.58*** 0.21 247
industry-median-adjusted 0.35 0.36 0.71 0.90 1.21 2.48** 6.15*** 0.27
Ordinary profits/net sales 60.74 0.00 2.33 0.96 0.09 4.23 1.10 1.81 9.24*** 0.19 247
(average for 4 years after IPO): 6.00*** 0.11 2.40** 0.66 0.10 7.38*** 1.20 3.19***
industry-median-adjusted 67.15 0.07 2.47 0.88 0.16 4.31 1.56 1.92 9.99*** 0.20 247
6.40*** 2.04** 2.56** 0.60 0.19 7.57*** 1.70 * 3.42***
Sales growth 128.08 0.72 10.56 17.04 8.68 18.12 50.01 2.86 8.03*** 0.18 230
(average from Year 1 to 1.00 2.10** 0.86 0.93 0.79 2.52** 4.35*** 0.40
Year +3): 134.33 0.28 10.97 18.92 9.68 18.80 53.20 1.82 7.34*** 0.16 230
industry-median-adjusted 0.99 0.67 0.89 1.02 0.87 2.58*** 4.54*** 0.25
K
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t
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P
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-
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a
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0
(
2
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0
2
)
1
6
3

1
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1
1
7
6
Ordinary profits growth 439.26 1.58 9.30 42.67 0.37 34.96 54.11 3.32 5.23*** 0.11 230
(average from Year 1 to 1.90 * 2.55** 0.42 1.29 0.02 2.69*** 2.61*** 0.26
Year +3): 521.07 1.31 9.31 48.00 1.11 37.24 56.29 2.15 4.67*** 0.10 230
industry-median-adjusted 2.14** 1.73 * 0.42 1.44 0.06 2.84*** 2.67*** 0.17
Panel C: After IPO (2) Intercept T1CHG T10CHG VCAF
_
D BKAF
_
D MANU
_
D Ln(MCAP) Ln(AGE) Ln(EMP) F-statistic Adj-R
2
Sample
Sales growth 8.92 0.13 1.18 1.98 1.65 2.29 8.81 0.19 10.78*** 0.22 247
(average for four periods
after IPO): 0.55 1.08 0.75 0.83 1.18 2.48** 6.00*** 0.20
industry-median-adjusted 7.47 0.02 1.03 2.15 1.67 2.32 9.11 0.19 10.57*** 0.21 247
0.45 0.16 0.64 0.91 1.19 2.51** 6.24*** 0.20
Ordinary profits/net sales 59.26 0.18 2.48 0.70 0.04 4.27 0.70 1.76 10.30*** 0.21 247
(average for 4 years after IPO): 5.93*** 2.42** 2.58** 0.48 0.04 7.55*** 0.78 3.16***
industry-median-adjusted 59.04 0.06 2.49 1.00 0.11 4.24 0.98 1.90 9.41*** 0.19 247
5.78*** 0.98 2.53** 0.68 0.12 7.42*** 1.09 3.32***
This table shows cross-sectional OLS regressions of industry-median-adjusted operating performance on ownership structure and firm characteristics. In Panel A,
operating performance before IPO is measured first in terms of the average industry-median-adjusted growth rates of net sales for four periods before IPO (Year 5 to
4, Year 4 to 3, Year 3 to 2 and Year 2 to 1). In addition, average industry-median-adjusted ratios of ordinary profits to net sales for 5 years before IPO
(Year 5, Year 4, Year 3, Year 2 and Year 1) are also used. In Panels B and C, operating performance after IPO is measured in terms of the average industry-
median-adjusted growth rates of net sales for four periods (Year 1 to 0, Year 0 to + 1, Year + 1 to +2, and Year +2 to + 3). Average industry-median-adjusted ratios of
ordinary profits to net sales for 4 years after IPO (Year 0, Year + 1, Year + 2, and Year + 3) are also explored. In addition, industry-median-adjusted growth rates of net
sales and ordinary profits from Year 1 to Year + 3 are examined. T1BF and T10BF indicate the ownership stake before IPO by top shareholder and top 10 shareholders,
respectively. VCBF
_
D and BKBF
_
D are dummy variables taking on the value 1 if venture capital firm and bank invested before IPO and 0 otherwise. T1AF and T10AF
indicate the ownership stake after IPO by top shareholder and top 10 shareholders, respectively. T1CHG and T10CHG indicate the change in shareholdings before and
after IPO (i.e. percentage of shareholdings after IPO minus before IPO). VCAF
_
D and BKAF
_
D are dummy variables taking on the value 1 if venture capital firm and
bank have invested 1 year after IPO and 0 otherwise. MANU
_
D is a dummy variable taking on the value 1 if the company is manufacturing and 0 otherwise. Ln(MCAP),
Ln(AGE), and Ln(EMP) indicate the natural logarithms of market capitalization at the date of IPO, years of operating history, and number of employees before IPO. In
each regression, statistics are indicated below the estimates.
* 10% significance level.
** 5% significance level.
*** 1% significance level.
K
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a
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o
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r
n
a
l
1
0
(
2
0
0
2
)
1
6
3

1
8
1
1
7
7
Ln(MCAP), Ln(AGE), and Ln(EMP) indicate the natural logarithms of market capital-
ization at the date of IPO, years of operating history, and number of employees before IPO.
Secondly, the following 10 variables are used to explore the relationship between post-
IPO operating performance and the change in ownership structure. T1AF and T10AF
indicate the ownership stake after IPO by top shareholder and top 10 shareholders,
respectively. T1CHG and T10CHG indicate the change in shareholdings before and after
IPO (i.e. percentage of shareholdings after IPO minus before IPO). VCAF
_
D and
BKAF
_
D are dummy variables taking on the value 1 if venture capital firm and bank
have invested 1 year after IPO and 0 otherwise. The definition of MANU
_
D, Ln(MCAP),
Ln(AGE), and Ln(EMP) is the same as before.
The results in Panel A of Table 6 suggest that sales growth before IPO is significantly
and positively related to market capitalization (Ln(MCAP)) and negatively related to years
of operating history (Ln(AGE)). The ratios of ordinary profits to net sales before IPO are
significantly and positively related to market capitalization (Ln(MCAP)) and negatively
related to number of employees (Ln(EMP)). We do not observe a statistically significant
relationship between ownership structure and operating performance before IPO.
The results in Panels B and C of Table 6 suggest that operating performance after IPO
is significantly and positively related to Ln(MCAP), and negatively related to Ln(AGE)
and Ln(EMP). In addition, operating performance after IPO is significantly positive
related to top shareholders stake after IPO(T1AF). The change in top shareholders stake
(T1CHG) is positively related to the ratio of ordinary profits to net sales. Also, venture
capital investments (VCAF
_
D) are positively related to the ratio of ordinary profits to net
sales.
6. Conclusion and further research
In this paper, we considered how the operating performance of JASDAQ companies is
affected by the ownership structure in the pre- and post-flotation period.
Our evidence shows that the top 10 shareholders decrease their stakes after IPO, but
retain more than 60%, so that ownership is still concentrated. Banks increase their stakes
after the offering, in contrast to venture capital firms.
Regarding operating performance measured pre-flotation and post-flotation, we find a
number of interesting results. We found evidence that JASDAQ companies showed
sharply decreasing sales, ordinary profits and net profits growth after flotation. Our results
are consistent with Matsuda et al. (1994), Jinza (1995) and Kutsuna et al. (2000).
On the relationship between ownership structure and operating performance, a further
set of interesting results occurs. Firstly, the percentage held by the top shareholder is
closely related to post-IPO operating performance. Top shareholders stake positively
influences the growth rates of net sales and ordinary profits. Also, on changes in
ownership structure after IPO, the coefficient on T1CHG is significantly and positively
related to post-IPO operating performance (ordinary profits/net sales). Firms in which the
top shareholder decreased ownership stakes after IPO show poorer performance. Fur-
thermore, top 10 shareholders stakes after IPO are positively related to the ratio of
ordinary profits to net sales, and ordinary profits growth rates. Our evidence supports the
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 178
view that the post-IPO deterioration in operating performance is partly attributable to the
reduced managerial ownership. Although we are not using identical performance measures
as Cai and Wei (1997)
5
, our results on JASDAQ broadly contrast with theirs, which
analyze the operating performance of companies newly listed on the Tokyo Stock
Exchange. They indicated that the deterioration of post-IPO profitability cannot be
associated with the reduced managerial shareholdings.
Secondly, on the role of banks shareholdings, all coefficients (BKBF
_
D and
BKAF
_
D) are statistically insignificant. On the role of VC investment, the coefficient
on VCAF
_
D is statistically significant. Our evidence is partially in accord with Jain and
Kini (1995), who found that VC backing resulted in relatively superior operating perfor-
mance through a monitoring process. However, the coefficient on VCBF
_
D is not sta-
tistically significant. In this respect, further research concerning the Japanese VC invest-
ment would seem to be appropriate.
Thirdly, market capitalization is positively related to pre-IPO operating performance
while the size (number of employees) and the firms age (years of operating history) is
negatively related. Furthermore, age of firm and number of employees negatively
influence the aftermarket operating performance, while market capitalization exerts a
positive influence. Our regression analysis shows that poor operating performance before
and after IPO is associated with large and established companies.
Finally, in as much as we have established a series of important and interesting findings
concerning the operating performance of Japanese IPO companies and ownership
structure, there are many unanswered questions. Another potentially interesting avenue
of research is the comparison of operating performance of new or existing listed
companies on stock exchanges to distinguish whether these trends are peculiar to newly
registered OTC companies (Hebner and Hiraki, 1993; Cai and Wei, 1997). Also, we may
need further analysis using another performance measure, for example, operating perform-
ance per capita or per assets, or stock price performance.
Acknowledgements
We are grateful to Professor S. Ghon Rhee and anonymous referees for valuable
comments and suggestions. This paper was presented for the International Conference held
in Osaka City University at 79 August 1999. We thank Richard Smith (Claremont
Graduate School) and Leslie Marx (University of Rochester) for helpful comments. We are
grateful to the Zengin Foundation for Studies on Economics and Finance, and the Ministry
of Education for providing financial support. A part of this research is financially
supported by Japan Society for the Promotion of Science Grant-in-Aid for Encouragement
of Young Scientists.
5
Cai and Wei (1997) use six operating performance measures of (1) ordinary income/total assets, (2)
operating income/total assets, (3) operating cash flow/total assets, (4) growth rate of capital expenditure, (5)
growth rate of net sales, and (6) growth rate of operating income. Also, in their regression analysis, the changes in
ordinary income relative to total assets from Year 1 to +1, + 3, and +5 are used as the independent variables.
K. Kutsuna et al. / Pacific-Basin Finance Journal 10 (2002) 163181 179
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