An empirical analysis of hospital public equity financing

Abstract

The US hospital industry provides a unique context to examine the well-documented initial public offering (IPO) and seasoned equity offering (SEO) patterns of issuance cycles, underpricing and long-run underperformance. Hospitals have the financing alternative to be not-for-profit or even owned by local governments. As such, choosing to issue public equity for a hospital is a managerial decision under fewer financing constraints than what a typical operating company faces. Using a sample of 173 US issuances (61 IPOs and 112 SEOs) from 1970 to 2016, we find evidence for issuing cycles, with volume spikes around 1983, 1991 and 2001. We also find evidence for initial underpricing. Hospital IPOs experience an initial underpricing of 7.9 per cent (p = 0.013), with SEOs exhibiting an average underpricing of 2.7 per cent (p = 0.2040). Finally, we did not find the typical negative long-run average abnormal returns that have been documented in previous literature for other types of firms. In long-run analyses, six-month average abnormal returns for hospital IPOs are 5.3 per cent (p = 0.092) and one-year abnormal returns are 6.0 per cent (p = 0.214). SEOs experience six-month average abnormal returns of 0.6 per cent (p = 0.907) and one-year abnormal returns of 5.15 per cent (p = 0.615). In multivariate tests, the presence of a venture capitalist (VC) has the largest impact on the initial underpricing of new issues (coef = −0.145, p = 0.000). In tests of long-run returns, the age of the firm (coef = −0.022, p = 0.042), VC backing (coef = 0.798, p = 0.028) and dual share class offering (coef = −0.438, p = 0.026) are correlated in the six-month aftermarket period, and VC backing (coef = 1.824, p = 0.003) and market demand (coef = 1.751, p = 0.006) are the primary correlates with one-year returns.