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

Management Science (Forthcoming)

56 Pages Posted: 13 Apr 2022

See all articles by Mary Brooke Billings

Mary Brooke Billings

New York University

Kevin Hsueh

New York University

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Gladriel Shobe

Brigham Young University - J. Reuben Clark Law School

Date Written: April 2, 2022

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 UpCs) 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 to 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, Up-C, Tax Receivable Agreements, TRAs, Dual Class

Suggested Citation

Billings, Mary Brooke and Hsueh, Kevin and Lewis-Western, Melissa Fay and Shobe, Gladriel, Innovations in IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders? (April 2, 2022). Management Science (Forthcoming) , Available at SSRN: https://ssrn.com/abstract=4073730

Mary Brooke Billings (Contact Author)

New York University ( email )

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Kevin Hsueh

New York University ( email )

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Melissa Fay Lewis-Western

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Gladriel Shobe

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

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