Underpricing, wealth loss for pre-existing shareholders and the cost of going public: the role of private equity backing in Italian IPOs

This study analyses the role of private equity investors in solving asymmetric information problems and the relationship to underpricing, wealth loss for pre-existing shareholders and the cost of going public. According to certification theory, companies backed by private equity investors are expected to have lower underpricing at the moment of an initial public offering, as they have fewer adverse selection problems, and there is less ex-ante uncertainty. However, the relationship between private equity backing and the cost of going public to issuers is less clear. We use a data set of 66 private equity-backed and 94 non-private equity-backed companies that went public on the Milan Stock Exchange between January 1998 and June 2008. Our findings provide evidence that out of the PE-backed firms, only those backed by private equity syndication show lower initial-day returns and indirect issuance opportunity cost, while there is no difference in the certification role between bank-related and non bank-related private equity investors. We also find that the benefits persist for IPOs backed by private equity syndication, although to a lesser extent, even after adjusting for direct costs (gross spreads) the opportunity cost of issuance.