What determines the survival of internet IPOs?

Abstract

This article examines whether the variables that are significant in noninternet initial public offering (IPOs) play a similar role for internet IPOs. To this end, we analyse the determinants of survival of internet firms that have gone public at the NASDAQ stock exchange from December 1996 through February 2001. Financial and nonfinancial data published in the IPO prospectuses are examined. For our analysis, we use the semiparametric Cox proportional hazard model and estimate the effect of these variables on the trading (survival) time using the parametric Log-logistic survival model. It appears that the average operating history of internet IPOs is remarkably small compared to noninternet IPOs, namely 2.4 and 10 years, respectively. Furthermore, we find that the average number of risk factors for internet IPOs is four times higher than the number reported for noninternet IPOs. The results of the parametric analysis correspond to the semiparametric results. Our findings hold under a number of different model specifications and robustness checks. The sensitivity analysis in the Log-logistic model reveals that the greatest positive effect on the survival time comes from investor demand followed by operational cash flow over liabilities. The expected survival time is shortened mostly by IPO market level, followed by valuation uncertainty.

Acknowledgements

An earlier version of this paper has been designated for the outstanding Empirical Research award of the 2004 Southern Finance Association conference at Naples (Florida, USA). We would like to thank participants of the Southern Finance Association Meeting, in particular Bharat Jain to their helpful comments.

Notes

¹Left-censoring occurs when durations have started before the beginning of the measurement period, which is not applicable to our data.

²Note that this definition is slightly different from the ordinary statistical terminology, i.e. cumulative distribution function G(t) = Pr(T ≤ t).

³For instance, when looking at the Cox regression results, an increase of Firm risk with one risk factor affects the hazard rate with a factor 1.025 (or a 2.5% increase). Similarly, a one unit increase of investor demand affects the hazard rate with a factor 0.272 (equal to a decrease of 72.8%).

⁴All IPOs were classified into one of the following ten sectors: (i) internet service providers (ii) content/portals (iii) e-commerce – products (iv) e-commerce – services (v) IT-infrastructure – network (vi) IT-infrastructure – equipment (vii) internet software – licensed (viii) internet software – server (ix) professional internet services (x) internet advertising services.

⁵A tie is the occurrence of more than one event, in this case a delisting or acquisition, within a single time interval t.