How to evaluate an IPO, according to Houston researchers

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In emerging markets, pricing — not reputation — drives the partnership between underwriter and IPO. Photo via business.rice.edu

Many investors assume they can judge the strength of an IPO based on the reputation of the underwriter supporting it.

However, a recent study by Rice Business professors Anthea Zhang and Haiyang Li, along with Jin Chen (Nottingham University) and Jing Jin (University of International Business and Economics), proves this is only sometimes true — depending on how mature the stock exchange is.

Getting your company listed on the stock market is a big step. It opens new opportunities to raise money and grow the business. But it also means facing increased regulations, reporting requirements and public scrutiny.

To successfully launch an initial public offering (IPO), most companies hire “underwriters” — financial services firms — to guide them through the complex process. Because underwriters have expertise in valuations, filing paperwork and promoting to investors, they play a crucial role in ushering companies onto the market.

In well-established markets like the New York Stock Exchange (NYSE), an underwriter’s reputation carries immense weight with investors. Top-tier banks like Goldman Sachs have built their reputations by rigorously vetting and partnering with only the most promising companies. When Goldman Sachs takes on the role of underwriter, it sends a strong signal to potential investors that the IPO has met stringent standards. After all, a firm of Goldman’s caliber would not risk tarnishing its hard-earned reputation by associating with subpar companies.

Conversely, IPO firms recognize the value of having a prestigious underwriter. Such an association lends credibility and prestige, enhancing the company’s appeal. In a mature market environment, the underwriter’s reputation correlates to the IPO’s potential, benefiting both the investors who seek opportunities and the companies wanting to make a strong public debut.

However, assumptions about an underwriter’s reputation only hold true if the stock exchange is mature. In emerging or less developed markets, the reputation of an underwriter has no bearing on the quality or potential of the IPO it pairs with.

In an emerging market, the study finds, investors should pay attention to how much the underwriter charges a given IPO for their services. The higher the fee, the riskier it would be to invest in the IPO firm.

To arrive at their findings, the researchers leveraged a unique opportunity in China’s ChiNext Exchange. When ChiNext opened in 2009, regulations were low. Banks faced little consequence for underwriting a substandard IPO. Numerous IPOs on ChiNext were discovered to have engaged in accounting malpractice and inaccurate reporting, resulting in financial losses for investors and eroding confidence in the capital markets. So, for 18 months during 2012-2013, ChiNext closed. When it reopened, exchange reforms were stricter. And suddenly, underwriter reputation became a more reliable marker of IPO quality.

“Our research shows how priorities evolve as markets mature,” Zhang says. “In a new or developing exchange without established regulations, underwriter fees paid by IPO firms dictate the underwriter-company partnership. But as markets reform and mature, reputation and quality become the driving factors.”

The study makes a critical intervention in the understanding of market mechanisms. The findings matter for companies, investors and regulators across societies, highlighting how incentives shift, markets evolve and economic systems work.

The research opens the door to other areas of inquiry. For example, future studies could track relationships between underwriters and companies to reveal the long-term impacts of reputation, fees and rule changes. Research along these lines could help identify best practices benefiting all market participants.

“In the future, researchers could explore how cultural norms, regulations and investor behaviors influence IPO success,” says Li. “Long-term studies on specific underwriter-firm pairs could reveal insights into investor confidence and market stability. Understanding these dynamics can benefit companies, investors and policymakers alike.”

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This article originally ran on Rice Business Wisdom and was based on research from Yan “Anthea” Zhang, the Fayez Sarofim Vanguard Professor of Management – Strategic Management at Rice Business, and Haiyang Li, the H. Joe Nelson III Professor of Management – Strategic Management at Rice Business.

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People tend to have stronger reactions to unexpected news, so news that meets the public’s expectations of a company can go unnoticed. Photo via Getty Images

Houston research: How best to deliver unexpected news as a company

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According to Forbes, the volume of mergers and acquisitions in 2021 was the highest on record, and 2022 has already seen a number of major consolidation attempts. Microsoft’s acquisition of video game company Activision Blizzard was the biggest gaming industry deal in history, according to Reuters. JetBlue recently won the bid over Frontier Airlines to merge with Spirit Airlines. And, perhaps most notably, Elon Musk recently backed out of an attempt to acquire Twitter.

It can be hard to predict how markets will react to such high-profile deals (and, in Elon Musk and Twitter’s case, whether or not the deal will even pan out). But Rice Business Professor Haiyang Li and Professor Emeritus Robert Hoskisson, along with Jing Jin of the University of International Business and Economics in Beijing, have found that companies can take advantage of these deals to buffer the effects of other news.

The researchers looked at 7,575 mergers and acquisitions from 2001 to 2015, with a roughly half-and-half split between positive and negative stock market reactions. They found that when there’s a negative reaction to a deal, companies have two strategies for dealing with it. If it’s a small negative reaction, companies will release positive news announcements in an attempt to soften the blow. But when the reaction is really bad, companies actually tend to announce more negative news afterward. Specifically, companies released 18% less positive news and 52% more negative news after a bad market reaction.

This may seem counterintuitive, but there’s a method to the madness, and it all has to do with managing expectations. If people are lukewarm on a company due to a merger or acquisition, it’s possible to sway public opinion with unrelated good news. When the backlash is severe, though, a little bit of good PR won’t be enough to change people’s minds. In this case, companies release more bad news because it’s one of their best chances to do so without making waves in the future. If people already think poorly of a company due to a recent deal, more bad news isn’t great, but it doesn’t come as a surprise, either. Therefore, it’s easier to ignore.

It might make more sense to just keep quiet if the market reaction to a deal is bad, and this study found that most companies do. However, this only applies when releasing more news would make a mildly bad situation worse. If things are already bad enough that the company can’t recover with good news, it can still make the best out of a bad situation by offloading more bad news when the damage will be minimal. Companies are legally obligated to disclose business-related news or information with shareholders and with the public. If it’s bad news, they like to share it when the public is already upset about a deal, instead of releasing the negative news when there are no other distractions. In this case the additional negative news is likely to get more play in the media when disclosed by itself.

But what happens when people get excited about a merger or acquisition? In these cases, it also depends on how strong the sentiment is. If the public’s reaction is only minimally positive, companies may opt to release more good news in hopes of making the reaction stronger. When the market is already enthusiastic about the deal, though, companies won’t release more positive news. The researchers found that after an especially positive market reaction to a deal, companies indeed released 12% less positive news but 56% more negative news. Also, one could argue that the contrasting negative news makes the good news on the acquisition look even better. This may be important especially if the acquisition is a significant strategic move.

There are several reasons why a company wouldn’t continue to release positive news after a good press day and strong market reaction. First of all, they want to make sure that a rise in market price is attributed to the deal alone, and not any irrelevant news. A positive reaction to a deal also gives companies another opportunity to disclose bad news at a time when it will get less attention. If the bad news does get attention, the chances are better that stakeholders will go easy on them — a little bit of bad press is forgivable when the good news outshines it.

Companies may choose to release no news after a positive reaction to a merger or acquisition, the same way they might opt to stay quiet after backlash. They’re less likely to release positive news when stakeholders are already happy, preferring to save that news for the next time they need it, either to offset a negative reaction or strengthen a weak positive reaction.

Mergers and acquisitions can produce unpredictable market reactions, so it’s important for companies to be prepared for a variety of outcomes. In fact, Jin, Li and Hoskisson found that the steps taken by companies before deals were announced didn’t have much effect on the public’s reaction. They found that it’s more important for companies to make the best out of that reaction, whatever it turns out to be.

The researchers also found that, regardless of whether the market reaction was positive or negative, as long as the reaction was strong, companies could use the opportunity to hide smaller pieces of bad news in the shadow of a headline-making deal. Overall, the magnitude of the reaction mattered more than the type of reaction. People tend to have stronger reactions to unexpected news, though, so companies prefer to release negative news when market expectations are already low.

These findings are relevant beyond merger announcements, of course; they also point to strategies that could be useful in everyday communications. A key takeaway is that negative information is less upsetting when people already expect bad things — or when it comes after much bigger, and much better, news. Bad news is always hard to deliver, but this research gives us a few ways to soften the blow.

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This article originally ran on Rice Business Wisdom and was based on research from Jing Jin, Haiyang Li and Robert Hoskisson.

Firms looking to expand globally need to ensure that their organizational resources are adaptable to new markets. Getty Images

Houston startups planning to go global need to prioritize adaptability, researchers find

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When foreigners invest in emerging markets, the prospect for those markets' local businesses looks bright. The payoffs for a country's companies can range from injections of foreign capital to better managerial talent, technological sophistication and international know-how. But does foreign investment ever push local firms to venture into international projects of their own?

Rice Business professor Haiyang Li looked closely at the ripple effects of foreign investments, and concluded it all depends on the local businesses' adaptability. That — and their appetite for risk.

Together with Xiwei Yi of Peking University and Geng Cui of Lingan University, Hong Kong, Li launched a large-scale study of Chinese manufacturers to better understand how multinational investment in domestic companies influences the global market.

The subject was ripe for analysis. Over the past decade, more and more companies in China and other emerging markets have been testing the waters of direct investment in other countries in sectors as varied as food and beverages, apparel, electronics and transportation equipment.

Li's team hypothesized that these emerging market companies were leveraging benefits that foreign investment had ferried into their home markets. This investment, the researchers theorized, had brought in useful resources and skills, which helped ease the local companies into international business markets.

To confirm this, the team needed to test whether the converse was true: Might information gained from foreign investors actually dull a local firm's interest in branching out overseas? Maybe the risks of that type of venture — which are higher for firms in emerging markets — would seem too stark.

To find out, the researchers first vetted the literature on inward and outward investment activities. How, they wanted to know, did domestic firms interact with foreign players in the technology or product importing process? In equipment manufacturing? In franchising and licensing, mergers and acquisitions and activities such as setting up subsidiaries?

Working with a global research company, Li and his colleagues next surveyed 1,500 Chinese businesses in the food, clothing, electronics and vehicle industries. (Firms in finance, banking, natural resources and business services were ruled out because of their government ties, and also because such organizations usually use fewer resources, which made them harder to evaluate.)

Each company that took part in the survey rated how much they engaged with foreign investors in activities such as importing products and services or forming joint ventures. They also indicated if dealing with foreign direct investment had brought them foreign capital, advanced manufacturing know-how, managerial experience or competitive insight into overseas business.

The researchers also measured the "fungibility" of these firms' resources — in other words, how easily could their organizational, cultural and technological resources be adapted to various geographical settings?

Finally, managers rated how risk-prone they thought their firms were.

After Li and his coauthors processed the answers, they found several links between foreign investment in domestic firms and local companies' internationalization efforts.

First, there was a positive relationship between the local gains from foreign investment and a firm's interest in internationalization projects. While this effect was indirect, it was amplified when foreign investment gave a firm new capabilities that made it more adaptable. In other words, the Chinese companies whose contact with foreign multinationals made them more adaptable in general were better positioned to prosper in ventures abroad.

This stands to reason, the researchers note. That's because by its very nature foreign investment sparks awareness of new opportunities: every business trip, plant visit or negotiation with foreign partners is a hands-on lesson in international trade.

But the researchers also uncovered a significant downside to foreign investment for local Chinese firms. When a project was considered high-risk, such as a merger or establishment of a wholly owned subsidiary, the local firms were less prone to venture abroad. This adverse effect was worse for firms that labeled themselves risk-averse, probably because exposure to foreign investors only made the risks of internationalizing clearer.

These findings add important detail to the way foreign investment can affect their local partners' own international plans — for good and ill. Already, businesses in emerging markets are used to optimizing resources, wrangling diverse idioms and artisans and adapting logistically to get their products to market. That nimbleness, Li and his colleagues propose, should also be seen as a globalization tool. For businesses in emerging markets, the researchers conclude, day-to-day technical ability is actually less important than cultural and organizational flexibility — and applying lessons learned from foreign investors to their own projects abroad.

In other words, for firms in emerging markets, globalization is not just a path to new markets. It's a way to study interactions with foreign firms while on their home turf – and learn how to apply those lessons abroad.

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This story originally ran on Rice Business Wisdom.

Haiyang Li is Area Coordinator and Professor of Strategic Management at Jones Graduate School of Business at Rice University.

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Houston space tech co. revises timeline for commercial space station development with NASA partnership

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Houston-based Axiom Space is accelerating its development of a commercial space station.

NASA awarded Axiom a contract in January 2020 to develop a space station for commercial use. Initially, the station was supposed to be attached to the International Space Station. Later, it was supposed to become a free-flying space station in low-earth orbit before retirement of the current space station in 2030.

In coordination with NASA, Axiom Space has modified the plan.

Initially, Axiom planned to attach its first module, Habitat 1, to the space station, followed by three additional modules. Under the new scenario, the payload, power, and thermal modules will be launched first. This will enable the modules to join the current space station as early as 2028, becoming a free-flying station called Axiom Station.

“The International Space Station has provided a one-of-a-kind scientific platform for nearly 25 years,” says Dana Weigel, manager of the International Space Station program at NASA’s Johnson Space Center.

“As we approach the end of [the] space station’s operational life," she continues, "it’s critically important that we look to the future of [low-earth orbit] and support these follow-on destinations to ensure we continue NASA’s presence in microgravity, which began through the International Space Station.”

In free flight, Axiom will continue assembling the commercial destination, adding the Habitat 1 module, an airlock, the Habitat 2 module, and a research and manufacturing lab.

“We were ready to answer the call when NASA asked us to relook at our space station development plan,” Mark Greeley, Axiom Space COO and Axiom Station program manager, says in a statement from Axiom. “Our ongoing assessment of the assembly sequence revealed opportunities for flexibility and enhancements. With the International Space Station needing to protect for the ability to accommodate a deorbit vehicle on station, we were able to accelerate this work to support the program’s requirements.

“NASA has been extremely collaborative and supportive of the new plan as it addresses its deorbit operational concerns and preserves critical capabilities currently utilized on the International Space Station,” he adds. “This revised approach not only aligns with U.S. objectives but also delivers immediate value for our customers and investors.”

The Axiom's Payload Power Thermal Module primary structure is being constructed by Thales Alenia Space in Turin, Italy, and then moved to Houston by fall 2025, where the rest of the internal structure and systems will be integrated at Axiom Space facilities.

“Working with leading experts like Thales Alenia, who have a proven record in module development and a strong relationship with NASA, is integral to our operations and vision," Tejpaul Bhatia, Axiom Space chief revenue officer, says.

“By engaging and integrating with a network of partners from around the world, we access cutting-edge technologies and innovative solutions that enhance our capabilities and supply chain,” Bhatia adds. “Our customer base is truly global, including governments, private entities, and research institutions. This diversity enables us to meet a wide range of needs and reinforces our belief that space exploration is a collective endeavor for the benefit of all of humanity.”

Axiom has revised its plan for its commercial space station. Image via Axiom

Promising Houston sleep tech startup readies for big year of growth, work toward FDA clearance

HOUSTON INNOVATORS PODCAST EPISODE 268

There's a slew of treatment options for people living with sleep apnea. But, the bigger problem, as Meagan Pitcher realized during her time at the Texas Medical Center's Biodesign program, is that there's no easy way to reliably diagnose and determine a treatment plan for patients.

"We saw all of the companies trying to solve the problem of making the airway collapse less or make the air way wider — it might be surgery, might be medication, or nerve stimulation," Pitcher says on the Houston Innovators Podcast. "One of the things we found was that it was really hard to match a patient with sleep apnea with a good treatment for them. One of the reasons is it's hard to get an understanding of where the individual's site of collapse is as sleep medicine is currently practiced."

As Pitcher went through the TMC Biodesign program, she teamed up with her co-founders — CTO Onur Kilicand and CMO Britt Cross — to find a solution, and together they developed Bairitone Health. The company's technology provides at-home medical imaging using sonar sensing. The non-invasive device has the potential to replace the current standard of care, which is a surgical procedure.



This year, the company joined Activate Houston's inaugural cohort as the lone biotech company. Activate, which announced its expansion to Houston in 2023, helps hardtech founders develop and grow their companies from bench to commercialization, though it mostly focuses on industrial or climatetech innovators. In addition to this accomplishment, Bairitone Health was among the 2024 Houston Innovation Awards finalists.

While 2024 was successful for the company, next year should bring even more milestones for Bairitone, Pitcher says, including a seed round of funding that will support the growth of their team, fund early testing, and fuel Baritone's path toward FDA clearance.

"2025 is going to be a big year for Bairitone, especially around solidifying our regulatory plan. The device we're making is really low risk — we're not putting anything into the body, and we're potentially replacing a surgical procedure," Pitcher says. "We've always hypothesized that we'll have a 510(k) clearance with the FDA, but we're moving toward having our first meeting with the FDA to solidify those plans."

Bairitone's journey so far has been a uniquely Houston story, as Pitcher acknowledges.

"I really love Houston — especially for med tech. The medical center is just awesome, you have all these brilliant people coming in from the entire world to work at these institutions," Pitcher says. "It's kind of because of this atmosphere of excellence around health care, innovation, open mindedness, and collaboration — those are reasons why I really love working in Houston."

Top stories: Houston's most-read health tech news of 2024

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Editor's note: As the year comes to a close, InnovationMap is looking back at the year's top stories in Houston innovation. In the health tech category on InnovationMap, top stories included startup funding raised, IPO plans, FDA clearance, and more. Be sure to click through to read the full story.

New report ranks Houston top market for life sciences

Houston lands in the No. 7 spot for growth in the granting of degrees in biological and biomedical sciences. Photo by Natalie Harms/InnovationMap

Thanks in large part to producing hundreds of college-trained professionals, Houston’s life sciences industry ranks among the top U.S. markets for talent in 2024.

In a report published by commercial real estate services company CBRE, Houston lands in the No. 7 spot for growth in the granting of degrees in biological and biomedical sciences. From 2017 to 2022, Houston notched a growth rate of 32.4 percent in this category.

In 2022, the University of Houston led the higher education pack in the region, graduating 746 people with a bachelor’s degree or above in biological or biomedical sciences, according to the report. Continue reading.

Houston innovator raises pre-seed funding for health care staffing platform

Ayoade Joy Ademuyewo founded Lokum last year to create a solution to better connecting medical specialists with health care facilities nationwide. Photo courtesy of Lokum

A Houston health care innovator is celebrating an oversubscribed round of pre-seed funding to improve on her startup's unique staffing platform.

Ayoade Joy Ademuyewo founded Lokum last year to create a solution to better connecting medical specialists with health care facilities nationwide. The new platform, which cuts out the middleman and lowers staffing costs, raised $700,000 in pre-seed funding that will go toward further development of the technology.

"Healthcare organizations spend $26 billion annually to support a crippling dependence on third-party agencies for connecting with clinical staff," Ademuyewo says in a news release. "Technological solutions that are pointed precisely to streamline and strengthen the relationships between highly specialized clinicians and their future employers are vital to alleviating this detrimental dependance, and central to our mission." Continue reading.

Houston regenerative medicine company to IPO, move toward more human trials

FibroBiologics will IPO this week. Photo via Getty Images

Want a piece of one of Houston’s most promising biotech companies? On January 31, FibroBiologics will begin the trading of its common stock on the Nasdaq stock exchange.

While most labs in the realm of regenerative medicine are focused on stem cells, FibroBiologics has bet on fibroblasts as the secret to treating myriad ailments. Fibroblasts, the most common type of cell in the body, are the primary cells that compose connective tissue.

Interested investors can find a prospectus to peruse before taking the leap. FibroBiologics filed with the U.S. Securities & Exchange Commission (SEC) on November 7, 2023. In September, FibroBiologics CEO Pete O’Heeron told InnovationMap, “I think what we're going to see is that fibroblasts are going to end up winning... They're just a better overall cell than the stem cells.” Continue reading.

Houston organizations identify promising life science cos. at annual event

The Rice Alliance and BioHouston acknowledged innovations from a dozen promising health tech companies. Photo via Rice University

For the 13th year, the Texas Life Science Forum hosted by BioHouston and the Rice Alliance for Technology and Entrepreneurship celebrated innovative companies from around the world that are creating new treatments and solutions to today's biggest health care challenges.

This week, over 40 companies presenting their innovations across cancer, cardiovascular disease, biotechnology, and more. Nearly 700 venture capitalists, corporate innovation groups, angel networks, industry leaders, academics, service providers, and others attended the event on November 7 at Rice's BioScience Research Collaborative in the Texas Medical Center.

Just like in previous years, the event ended with the announcement of the 10 companies that were deemed "most promising" based on their pitches and technologies. Of the 10 companies named, six are headquartered in Houston and an additional two startups on the list have a presence here. Continue reading.

FDA greenlights Houston surgery robotics company's unique technology

EndoQuest Robotics secured an Investigational Device Exemption from the FDA for its clinical study. Photo via Getty Images

A Houston surgical robotics company has gotten a Investigational Device Exemption from the FDA to go forward with human trials.

This news allows EndoQuest Robotics to begin its Prospective Assessment of a Robotic-Assisted Device in Gastrointestinal Medicine (PARADIGM) study, which will be conducted at leading United States health care facilities, including Brigham and Women’s Hospital (Boston), Mayo Clinic (Scottsdale), Cleveland Clinic (Cleveland), AdventHealth (Orlando), and HCA Healthcare (Houston). The study will include surgeries on 50 subjects, who will hopefully begin to enroll in January.

“The foundational thesis is we're trying to make sure that the world's largest medical center is also the world's largest med tech innovation center,” Eduardo Fonseca, interim CEO of EndoQuest Robotics, tells InnovationMap. Continue reading.

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