Innovations in IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders?

Mary Brooke Billings (), Kevin Hsueh (), Melissa F. Lewis-Western () and Gladriel Shobe ()
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Mary Brooke Billings: New York University, Leonard N. Stern School of Business, New York, New York 10012
Kevin Hsueh: New York University, Leonard N. Stern School of Business, New York, New York 10012
Melissa F. Lewis-Western: Brigham Young University, Provo, Utah 84602
Gladriel Shobe: Brigham Young University, Provo, Utah 84602

Management Science, 2023, vol. 69, issue 5, 3048-3079

Abstract: This paper examines an innovation in capital formation that has spurred contentious debate: the Umbrella Partnership Corporation (“Up-C”) IPO. Advisors and underwriters argue that the Up-C deal structure is a driver of post-IPO value and, thus, is a value-enhancing means of raising capital that may be one solution to concerns regarding the drop in the number of publicly traded companies. Consistent with these claims, recent research suggests that organizing soon-to-be public businesses as pass-through entities (as is the case for Up-Cs) leads to superior future performance. Yet, broadening the analysis to consider abnormal stock performance and post-IPO litigation of a larger and more recent sample of exclusively Up-C IPOs, we conclude just the opposite. While the Up-C deal structure increases IPO valuations and predicts positive post-IPO operating performance, the return performance of Up-C IPOs indicates that Up-C deals harm public shareholders. Further, despite their superior earnings performance, Up-C IPOs face a significantly higher rate of post-IPO litigation as compared with non-Up-C IPOs. Because IPO investors seemingly do not anticipate the myriad ways in which the Up-C deal structure might facilitate opportunism by pre-IPO owners, they frequently turn to litigation as an ex-post settling-up mechanism. Consequently, our paper offers the first empirical evidence of downsides associated with the Up-C deal structure for public shareholders and, in so doing, affords the rarity of having academic evidence lead (as opposed to respond to) a controversial debate.

Keywords: IPO; regulation; deal structure; IPO litigation; dual-class; Up-C IPO (search for similar items in EconPapers)
Date: 2023
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