The Pricing and Performance of Supercharged IPOs

64 Pages Posted: 2 Feb 2016 Last revised: 25 Oct 2018

See all articles by Alexander Edwards

Alexander Edwards

University of Toronto - Rotman School of Management

Michelle Hutchens

University of Illinois

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 12, 2018

Abstract

This study examines a new form of initial public offerings, “supercharged” IPOs, where a firm organized pre-IPO as a pass-through entity undergoes a series of transactions that steps-up the adjusted tax basis of the IPO firm’s assets. This step-up imposes tax liabilities on pre-IPO owners but also creates significant future tax benefits for the firm; the average anticipated deferred tax asset is $486 million ($13 per share) for our sample of supercharged IPO firms. Pursuant to tax receivable agreements, supercharged IPO firms pay a large portion of these tax benefits to pre-IPO owners as they are realized in the future. Future firm performance must be sufficiently strong for the IPO firm and the pre-IPO owners to realize the future tax benefits created by the supercharged transaction structure. We hypothesize and provide evidence of higher IPO offer prices and stronger future performance for supercharged IPO firms relative to traditional IPO firms.

Keywords: supercharged IPO, deferred tax assets, up-C, tax receivable agreement

JEL Classification: G14, G32, G34, H25

Suggested Citation

Edwards, Alexander S. and Hutchens, Michelle and Rego, Sonja O., The Pricing and Performance of Supercharged IPOs (October 12, 2018). The Accounting Review, Forthcoming, DOI: org/10.2308/accr-52304, Available at SSRN: https://ssrn.com/abstract=2725531 or http://dx.doi.org/10.2139/ssrn.2725531

Alexander S. Edwards

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Michelle Hutchens

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

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