The Supercharged IPO

55 Pages Posted: 21 Mar 2013 Last revised: 4 Apr 2013

See all articles by Victor Fleischer

Victor Fleischer

UC-Irvine School of Law

Nancy C. Staudt

Washington University Law School

Date Written: March 26, 2013

Abstract

A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-founders to extract billions of dollars from newly-public companies. These IPOs — labeled supercharged IPOs — have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and Members of Congress have all weighed in on the topic. Some have argued that supercharged IPOs are a “brilliant, just brilliant,” while others have argued they are “underhanded” and “bizarre.”

In this article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial innovation and note that the extant literature provides useful explanations for why supercharged IPOs emerged and spread so quickly across industries and geographic areas. The literature also provides support for both legitimate and opportunistic uses of the supercharged IPO.

With the help of a large-N quantitative study — the first of its kind — we investigate the adoption and diffusion of this new innovation. We find that the reason parties have begun to supercharge their IPO is not linked to a desire to steal from naïve investors, but rather for tax planning purposes. Supercharged IPOs enable both owner-founders and public investors to save substantial amounts of money in federal and state taxes. With respect to the spread of the innovation, we find that elite lawyers, especially those located in New York City, are largely responsible for the changes that we observe on the IPO landscape. We conclude our study by demonstrating how our empirical findings can be used to 1) advance the literature on innovation, 2) assist firms going public in the future, and 3) shape legal reform down the road.

Keywords: financial innovation, tax, innovation, IPO

Suggested Citation

Fleischer, Victor and Staudt, Nancy Christine, The Supercharged IPO (March 26, 2013). Vanderbilt Law Review, Forthcoming, USC CLEO Research Paper No. C13-6, USC Law Legal Studies Paper No. 13-6, Available at SSRN: https://ssrn.com/abstract=2236592

Victor Fleischer (Contact Author)

UC-Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

Nancy Christine Staudt

Washington University Law School ( email )

Campus Box 1120
St. Louis, MO 63130
United States

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