Cognitive mapping the topic of initial public offering

Cognitive mapping the topic of initial public offering

Joseph Kim-keung Ho

Independent Trainer

Hong Kong, China

Abstract: The topic of initial public offering (IPO) in the subject of financial management is complex. By making use of the cognitive mapping technique to conduct a brief literature review on the initial public offering topic, the writer renders a systemic image on the topic of initial public offering. The result of the study, in the form of a cognitive map on initial public offering, should be useful to those who are interested in the topics of cognitive mapping, literature review and initial public offering.

Key words: initial public offering (IPO), cognitive mapping, literature review

Introduction

As a topic in financial management, initial public offering (IPO) is complex. It is thus useful to employ some learning tool to conduct its study, notably for literature review purpose. For a teacher in research methods, systems thinking and management, the writer is specifically interested in finding out how the cognitive mapping technique can be employed to go through a literature review on  initial public offering. This literature review exercise is taken up and reported in this article.

On the cognitive mapping exercise for literature review

Literature review is an important intellectual learning exercise, and not just for doing final year dissertation projects for tertiary education students. On these two topics of intellectual learning and literature review, the writer has compiled some e-learning resources. They are the Managerial intellectual learning Facebook page and the Literature on literature review Facebook page. Conducting literature review with the cognitive mapping technique is not novel in the cognitive mapping literature, see Eden and Simpson (1989), Eden, Jones and Sims (1983), Open University (n.d) and the Literature on cognitive mapping Facebook page. In this article, the specific steps involved in the cognitive mapping exercise are as follows:

Step 1: gather some main points from a number of academic journal articles on initial public offering. This result in the production of a table (Table 1) with the main points and associated references.

Step 2: consolidate  the main points from Table 1 to come up with a table listing the cognitive map variables (re: Table 2).

Step 3: link up the cognitive  map variables in a plausible way to produce a cognitive map (re: Figure 1) on the topic under review.

The next section applies these three steps to produce a cognitive map on initial public offering.

Descriptions of cognitive map variables on the initial public offering (IPO) topic

From the reading of some academic articles on initial public offering, a number of main points (e.g., viewpoints, concepts and empirical findings) were gathered by the  writer. They are shown in Table 1 with explicit referencing on the points.

Table 1: Main points from the initial public offering literature and referencing

Main points from the initial public offering literature	Referencing
Point 1: "IPO firms face more difficulties in identifying outside directors able to provide the required support, expertise, and independence that are critical factors for their success. Hence, social ties may be beneficial as they grant access to a pool of candidates for the top management jobs in the firm".	Chahine, S. and M. Goergen. 2013. "The effects  of management-board ties on IPO performance" Journal of Corporate Finance 21, Elsevier: 153-179.
Point 2: "...although executive ties may compromise arm's-length contracting, they may also improve cooperative exchanges between those involved..., encourage friendly advice-seeking, and decrease the fear of compromising social status and disclosing information to board members".	Chahine, S. and M. Goergen. 2013. "The effects  of management-board ties on IPO performance" Journal of Corporate Finance 21, Elsevier: 153-179.
Point 3: "...financial communication from the organization-stakeholders perspective  is the process of communicating risk signals between an organization and its stakeholders in the financial market. Such process takes place in specific risk events in the financial context. Initial public offerings (IPOs) is a kind of risk events in which organizations  "whose shares were admitted to listing during the period through an offer of subscription and/or sales of shares".	Tong, S.C. 2015. "Financial communication in initial public offerings" Corporate Communications 20(1), Emerald: 30-47.
Point 4: "IPO market  timing has been mostly associated with a varying number of IPOs in certain periods of "hot" and "cold" issue markets".	Plotnicki, M. and A. Szyyszka. 2014. "IPO market timing. The evidence of the disposition effect among corporate managers" Global Finance Journal 25, Elsevier: 48-55.
Point 5: "in "hot market" managers  will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon".	Plotnicki, M. and A. Szyyszka. 2014. "IPO market timing. The evidence of the disposition effect among corporate managers" Global Finance Journal 25, Elsevier: 48-55.
Point 6: "While the existing listed companies also resort to earnings management, the practice is more rampant in the case  of companies coming out with their initial public offerings (IPOs). This is largely due to the fact that not much  information on the financial health and performance of the company is available in the public domain prior to the public issue".	Maheshwari, Y. and K. Agrawal. 2015. "Impact of IPO grading on earnings management"  Journal of Financial Reporting and Accounting 13(2), Emerald: 142-158.
Point 7: "..the prices at which shares can be issued is predominantly a function of the perceived value of the shares of the company.... this results into information asymmetry between the IPO firms and the potential investors. The companies therefore have the motivation to engage in income-increasing earnings management to raise the proceeds from the offering".	Maheshwari, Y. and K. Agrawal. 2015. "Impact of IPO grading on earnings management"  Journal of Financial Reporting and Accounting 13(2), Emerald: 142-158.
Point 8: IPO grading is an initiative "where an external credit rating agency analyses the financial statements and other relevant data of an issuer company and assigns a grade to the IPO of equity shares or any other security that may be converted into equity shares at a later date. The grade indicates a relative assessment of the fundamentals of an offering".	Maheshwari, Y. and K. Agrawal. 2015. "Impact of IPO grading on earnings management"  Journal of Financial Reporting and Accounting 13(2), Emerald: 142-158.
Point 9: "While a large body of research examines different aspects of the post-initial public offering (IPO) stock return performance.... and failure of new listings..., little has been documented regarding the impact of corporate governance mechanisms of IPO firms on their likelihood of involuntary delisting from the stock exchange".	Djerbi, C. and J. Anis. 2015. "Boards, retained ownership and failure risk of French IPO firms" Corporate Governance 15(1), Emerald: 108-121.
Point 10: "Understanding the factors associated with post-IPO failure becomes an important issue, especially with the high cost associated with delisting from the stock exchange".	Djerbi, C. and J. Anis. 2015. "Boards, retained ownership and failure risk of French IPO firms" Corporate Governance 15(1), Emerald: 108-121.
Point 11: "Concerning the IPO context, Balatbat et al.... find that board composition of Australian PO firms (i.e. outsider versus insider control) is not associated with operating performance, although there is some evidence that independent board leadership is associated with better operating performance".	Djerbi, C. and J. Anis. 2015. "Boards, retained ownership and failure risk of French IPO firms" Corporate Governance 15(1), Emerald: 108-121.
Point 12: "IPO is a strategic financing decision made by firms. The planning, application process, promotion and sale of stocks can take a year or longer. During this process, private firms sell part or all of their stocks to the public, and from then on these stocks are publicly tradable on securities exchanges. Firms collect substantial amounts of funds by selling new stocks".	Luo, Y., X. Qian and J. Ren. 2015. "Initial public offerings and air pollution: evidence from China" Journal of Asia Business Studies (1), Emerald: 99-114.
Point 13: "... firm IPOs affect their ambient environment through at least three channels: production scale, technical reform and corporate governance effects".	Luo, Y., X. Qian and J. Ren. 2015. "Initial public offerings and air pollution: evidence from China" Journal of Asia Business Studies (1), Emerald: 99-114.
Point 14: "After IPOs, originally private firms are exposed to public monitoring, which require them to submit extensive filings to regulatory bodies, satisfy stringent corporate governance requirements, accept external monitoring and report on the CSR activities regularly. The increased disclosure requirement and extensive public monitoring after IPOs.... promote the firms' corporate governance standard".	Luo, Y., X. Qian and J. Ren. 2015. "Initial public offerings and air pollution: evidence from China" Journal of Asia Business Studies (1), Emerald: 99-114.
Point 15: "Because most IPOs are over-subscribed, the investment bank must allocate the  IPO on a pro-rata basis.... these traditional allocation practices favor institutional investors. Because a large portion of the IPO shares are then  held by the institutional investors, after-market trading is also affected by their presence.... Henceforth, we refer to this manual distribution method as traditional IPOs".	Piwowar, M.S., T.J. Strader and R.B. Carter. 2004. "Traditional and Online IPO Processes: Are there Differences in after-Market Trading and Market Making?" Electronic Commerce Research 4, Kluwer Academic Publishers: 373-391.
Point 16: "Since 1998, there has been a fundamental change in how IPOs can be distributed. Many firms are electing to issue a portion of their shares online through the Internet to a wider range of smaller investors".	Piwowar, M.S., T.J. Strader and R.B. Carter. 2004. "Traditional and Online IPO Processes: Are there Differences in after-Market Trading and Market Making?" Electronic Commerce Research 4, Kluwer Academic Publishers: 373-391.
Point 17: "...use of the Internet in the IPO process has not led to improved overall performance.... a study of online IPOs priced in 1998 found that after-market  stock performance of online IPOs are not significantly different from traditional IPOs".	Piwowar, M.S., T.J. Strader and R.B. Carter. 2004. "Traditional and Online IPO Processes: Are there Differences in after-Market Trading and Market Making?" Electronic Commerce Research 4, Kluwer Academic Publishers: 373-391.
Point 18: "It is well documented that the Initial Public Offerings (IPOs) are underpriced on average around the world. The initial underpricing is more pronounced in the developing countries than in the developed countries and Chinese IPOs initial returns are at the very high end of the underpricing spectrum".	Deng, Q. and Z.G. Zhou. 2015. "Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs Initial Underpricing" The Chinese Economy 48, Routledge: 114-129.
Point 19: "Chen and Gao (2000) document five ownership characteristics unique to Chinese IPOs: separated A- and B-shares, a long time interval between pricing and listing dates, segmented ownership structure  (state-owned, legal entity, and publicly-tradable shares), a big percentage owned by the state before and after listing, and an insignificant percentage of management ownership".	Deng, Q. and Z.G. Zhou. 2015. "Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs Initial Underpricing" The Chinese Economy 48, Routledge: 114-129.
Point 20: "Given the fact that Chinese laws provided relatively weaker private property protection in the past, issuers with a majority government ownership are, more or less, concerned about being ensnared. Therefore, the external investors usually demand a discounted  offer price, which causes the initial underpricing".	Deng, Q. and Z.G. Zhou. 2015. "Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs Initial Underpricing" The Chinese Economy 48, Routledge: 114-129.
Point 21: "Although a few recent studies have investigated the effect of political connection on post-IPO performance, the value of political capital in the process of firms going public, particularly whether political capital create value in the form of probability of IPO approval, has never been investigated".	Liu, G., J. Tang and G.G. Tian. 2013."Does political capital create value in the IPO  market? Evidence from China" Journal of Corporate Finance 23, Elsevier: 395-413.

With a set of main points collected, the writer produces a set of cognitive map variables. These variables are informed by the set of main points from Table 1. These variables are presented in Table 2.

Table 2: Cognitive map variables based on Table 1

Cognitive map variables	Literature review points
Variable 1: Challenges on effective IPO practices	Point 1: "IPO firms face more difficulties in identifying outside directors able to provide the required support, expertise, and independence that are critical factors for their success. Hence, social ties may be beneficial as they grant access to a pool of candidates for the top management jobs in the firm".
Variable 2: More knowledge on existing IPO practices	Point 4: "IPO market  timing has been mostly associated with a varying number of IPOs in certain periods of "hot" and "cold" issue markets". Point 5: "in "hot market" managers  will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon". Point 6: "While the existing listed companies also resort to earnings management, the practice is more rampant in the case  of companies coming out with their initial public offerings (IPOs). This is largely due to the fact that not much  information on the financial health and performance of the company is available in the public domain prior to the public issue". Point 7: "..the prices at which shares can be issued is predominantly a function of the perceived value of the shares of the company.... this results into information asymmetry between the IPO firms and the potential investors. The companies therefore have the motivation to engage in income-increasing earnings management to raise the proceeds from the offering". Point 12: "IPO is a strategic financing decision made by firms. The planning, application process, promotion and sale of stocks can take a year or longer. During this process, private firms sell part or all of their stocks to the public, and from then on these stocks are publicly tradable on securities exchanges. Firms collect substantial amounts of funds by selling new stocks". Point 13: "... firm IPOs affect their ambient environment through at least three channels: production scale, technical reform and corporate governance effects". Point 15: "Because most IPOs are over-subscribed, the investment bank must allocate the  IPO on a pro-rata basis.... these traditional allocation practices favor institutional investors. Because a large portion of the IPO shares are then  held by the institutional investors, after-market trading is also affected by their presence.... Henceforth, we refer to this manual distribution method as traditional IPOs". Point 19: "Chen and Gao (2000) document five ownership characteristics unique to Chinese IPOs: separated A- and B-shares, a long time interval between pricing and listing dates, segmented ownership structure  (state-owned, legal entity, and publicly-tradable shares), a big percentage owned by the state before and after listing, and an insignificant percentage of management ownership". Point 20: "Given the fact that Chinese laws provided relatively weaker private property protection in the past, issuers with a majority government ownership are, more or less, concerned about being ensnared. Therefore, the external investors usually demand a discounted  offer price, which causes the initial underpricing".
Variable 3: Effective IPO practices	Point 2: "...although executive ties may compromise arm's-length contracting, they may also improve cooperative exchanges between those involved..., encourage friendly advice-seeking, and decrease the fear of compromising social status and disclosing information to board members". Point 3: "...financial communication from the organization-stakeholders perspective  is the process of communicating risk signals between an organization and its stakeholders in the financial market. Such process takes place in specific risk events in the financial context. Initial public offerings (IPOs) is a kind of risk events in which organizations  "whose shares were admitted to listing during the period through an offer of subscription and/or sales of shares". Point 8: IPO grading is an initiative "where an external credit rating agency analyses the financial statements and other relevant data of an issuer company and assigns a grade to the IPO of equity shares or any other security that may be converted into equity shares at a later date. The grade indicates a relative assessment of the fundamentals of an offering". Point 11: "Concerning the IPO context, Balatbat et al.... find that board composition of Australian PO firms (i.e. outsider versus insider control) is not associated with operating performance, although there is some evidence that independent board leadership is associated with better operating performance". Point 16: "Since 1998, there has been a fundamental change in how IPOs can be distributed. Many firms are electing to issue a portion of their shares online through the Internet to a wider range of smaller investors".
Variable 4: Positive outcomes of IPO practices	Point 10: "Understanding the factors associated with post-IPO failure becomes an important issue, especially with the high cost associated with delisting from the stock exchange". Point 14: "After IPOs, originally private firms are exposed to public monitoring, which require them to submit extensive filings to regulatory bodies, satisfy stringent corporate governance requirements, accept external monitoring and report on the CSR activities regularly. The increased disclosure requirement and extensive public monitoring after IPOs.... promote the firms' corporate governance standard". Point 18: "It is well documented that the Initial Public Offerings (IPOs) are underpriced on average around the world. The initial underpricing is more pronounced in the developing countries than in the developed countries and Chinese IPOs initial returns are at the very high end of the underpricing spectrum".
Variable 5: Learning from IPO practices	Point 9: "While a large body of research examines different aspects of the post-initial public offering (IPO) stock return performance.... and failure of new listings..., little has been documented regarding the impact of corporate governance mechanisms of IPO firms on their likelihood of involuntary delisting from the stock exchange". Point 17: "...use of the Internet in the IPO process has not led to improved overall performance.... a study of online IPOs priced in 1998 found that after-market  stock performance of online IPOs are not significantly different from traditional IPOs". Point 21: "Although a few recent studies have investigated the effect of political connection on post-IPO performance, the value of political capital in the process of firms going public, particularly whether political capital create value in the form of probability of IPO approval, has never been investigated".

The next step is to relate the cognitive map variables to make up a cognitive map on initial public offering. The cognitive map and its explanation are presented in the next section.

A cognitive map on initial public offering and its interpretation

By relating the five variables identified in Table 2, the writer comes up with a cognitive map on initial public offering, as shown in Figure 1.

These cognitive  map variables, five of them altogether, are related to constitute a systemic image of initial public offering. The links in the cognitive map (re: Figure 1) indicate direction of influences between variables. The + sign shows that an increase in one variable leads to an increase in another variable while a -ve sign tells us that in increase in one variable leads to a decrease in another variable.  If there no signs shown on the arrows, that means the influences can be positive or negative. Readers are referred to the Literature on initial public offering Facebook page for more  information on the topic.

Concluding remarks

The cognitive mapping exercise captures in one diagram some of the main variables involved in initial public offering (IPO). The resultant cognitive map promotes an exploratory way to study initial public offering in a holistic tone. The experience of the cognitive mapping exercise is that it can be a quick, efficient and entertaining way to explore a complex topic such as initial public offering in financial management. Finally, readers who are interested in cognitive mapping should also find the article informative on this mapping topic.

Bibliography

1.      Chahine, S. and M. Goergen. 2013. "The effects  of management-board ties on IPO performance" Journal of Corporate Finance 21, Elsevier: 153-179.

2.      Deng, Q. and Z.G. Zhou. 2015. "Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs Initial Underpricing" The Chinese Economy 48, Routledge: 114-129.

3.      Djerbi, C. and J. Anis. 2015. "Boards, retained ownership and failure risk of French IPO firms" Corporate Governance 15(1), Emerald: 108-121.

4.      Eden, C. and P. Simpson. 1989. "SODA and cognitive mapping in practice", pp. 43-70, in Rosenhead, J. (editor) Rational Analysis for a Problematic World, Wiley, Chichester.

5.      Eden, C., C. Jones and D. Sims. 1983. Messing about in Problems: An informal structured approach to their identification and management, Pergamon Press, Oxford.

6.      Literature on cognitive mapping Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/Literature-on-cognitive-mapping-800894476751355/).

7.      Literature on initial public offering Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/Literature-on-initial-public-offering-199324093917399/).

8.      Literature on literature review Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.literaturereview/).

9.      Liu, G., J. Tang and G.G. Tian. 2013."Does political capital create value in the IPO  market? Evidence from China" Journal of Corporate Finance 23, Elsevier: 395-413.

10. Luo, Y., X. Qian and J. Ren. 2015. "Initial public offerings and air pollution: evidence from China" Journal of Asia Business Studies (1), Emerald: 99-114.

11. Maheshwari, Y. and K. Agrawal. 2015. "Impact of IPO grading on earnings management"  Journal of Financial Reporting and Accounting 13(2), Emerald: 142-158.

12. Managerial intellectual learning Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/managerial.intellectual.learning/).

13. Open University. n.d. "Sign graph" Systems Thinking and Practice (T552): Diagramming, Open University, U.K. (url address: http://systems.open.ac.uk/materials/T552/) [visited at April 10, 2017].

14. Piwowar, M.S., T.J. Strader and R.B. Carter. 2004. "Traditional and Online IPO Processes: Are there Differences in after-Market Trading and Market Making?" Electronic Commerce Research 4, Kluwer Academic Publishers: 373-391.

15. Plotnicki, M. and A. Szyyszka. 2014. "IPO market timing. The evidence of the disposition effect among corporate managers" Global Finance Journal 25, Elsevier: 48-55.

16. Tong, S.C. 2015. "Financial communication in initial public offerings" Corporate Communications 20(1), Emerald: 30-47.