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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3 Houston innovators who made headlines in May 2025

Innovators to Know

Editor's note: Houston innovators are making waves this month with revolutionary VC funding, big steps towards humanoid robotics, and software that is impacting the agriculture sector. Here are three Houston innovators to know right now.

Zach Ellis, founder and partner of South Loop Ventures

Zach Ellis. Photo via LinkedIn

Zach Ellis Jr., founder and general partner of South Loop Ventures, says the firm wants to address the "billion-dollar blind spot" of inequitable distribution of venture capital to underrepresented founders of color. The Houston-based firm recently closed its debut fund for more than $21 million. Learn more.

Ty Audronis, CEO and founder of Tempest Droneworx

Ty Audronis, CEO and founder of Tempest Droneworx

Ty Audronis, center. Photo via LinkedIn.

Ty Audronis and his company, Tempest Droneworx, made a splash at SXSW Interactive 2025, winning the Best Speed Pitch award at the annual festival. The company is known for it flagship product, Harbinger, a software solution that agnostically gathers data at virtually any scale and presents that data in easy-to-understand visualizations using a video game engine. Audronis says his company won based on its merits and the impact it’s making and will make on the world, beginning with agriculture. Learn more.

Nicolaus Radford, CEO of Persona AI

Nicolaus Radford, founder and CEO of Nauticus RoboticsNicolaus Radford. Image via LinkedIn

Houston-based Persona AI and CEO Nicolaus Radford continue to make steps toward deploying a rugged humanoid robot, and with that comes the expansion of its operations at Houston's Ion. Radford and company will establish a state-of-the-art development center in the prominent corner suite on the first floor of the building, with the expansion slated to begin in June. “We chose the Ion because it’s more than just a building — it’s a thriving innovation ecosystem,” Radford says. Learn more.

Pharmaceutical giant plans $5.9B Houston facility and more news to know

Trending News

Editor's note: It's time to look back at the top Houston innovation news from the second half of May 2025. From exciting VC raises to major manufacturing facilities in the works, here are the most-read InnovationMap stories from May 16-30.

1. Pharmaceutical giant looks to bring $5.9 billion facility to Houston

Eli Lilly is looking to build an active pharmaceutical ingredient manufacturing facility at Generation Park. Rendering courtesy of McCord

Pharmaceutical company Eli Lilly and Company is looking to build a $5.9 billion active pharmaceutical ingredient (API) manufacturing facility in Houston, according to a recent filing with the state of Texas.

The proposal states that the project plans to employ 604 full-time direct employees at the site upon ramp-up completion. Construction is projected to begin in 2026, with a completion target of 2030 and commercial operations beginning in 2031. Continue reading.

2. Houston VC firm closes $21M fund for underrepresented founders

Zach Ellis, founder and general partner of South Loop Ventures, which recently closed its debut fund. Photo via LinkedIn

Houston-based South Loop Ventures recently closed its debut fund for more than $21 million, led by investments from Rice Management Company and Chevron Technology Ventures.

The funds will go toward teams with at least one underrepresented founder of color working in the energy, health, space, sports and fintech sectors. Additional investments came from The Great Commission Foundation of the Episcopal Diocese of Texas, Texas CapitalBank and others organizations. Continue reading.

3. Houston-founded startup raises $1.2M and moves headquarters to Detroit

ChurchSpace, founded in Houston by Day Edwards and Emmanuel Brown, is moving to Detroit. Photo courtesy ChurchSpace.

Houston-founded ChurchSpace, known as the Airbnb for churches, has formed an official partnership with the City of Detroit and will relocate its headquarters.

The announcements come as the company successfully closed a $1.2 million oversubscribed funding round. The round was led by California-based Black Ops Ventures, with participation from Michigan Rise and Dug Song of Minor Capital, who is also the founder of the Song Foundation, another Michigan-based organization. Continue reading.

4. Houston aerospace co. soars with first U.S. test flight of hypersonic engine

Venus Aerospace successfully completed the flight test of its hypersonic engine, the first of an American-developed engine of its kind. Photo courtesy Venus Aerospace

Houston-based Venus Aerospace successfully completed the first U.S. flight test of its proprietary engine at a demonstration at Spaceport America in New Mexico.

Venus’ next-generation rotating detonation rocket engine (RDRE) is supported by a $155,908 federal Small Business Innovation Research (SBIR) grant from NASA and aims to enable vehicles to travel four to six times the speed of sound from a conventional runway. The recent flight test was the first of an American-developed engine of its kind. Continue reading.

5. Houston regenerative medicine company expands lab for future trials

FibroBiologics has opened a new 10,000-square-foot Houston lab to scale up research efforts and pave the way for in-house manufacturing. Photo via Fibrobiologics.com

A Houston regenerative medicine company has unveiled new laboratory space with the goal of expanding its pioneering science.

FibroBiologics uses fibroblasts, the body’s most common type of cell, rather than stem cells, to help grow new cells. With its new space, the publicly traded company, which has more than 240 patents issued or pending, will be even better equipped to power forward with its research. Continue reading.

Houston university to launch artificial intelligence major, one of first in nation

BS in AI

Rice University announced this month that it plans to introduce a Bachelor of Science in AI in the fall 2025 semester.

The new degree program will be part of the university's department of computer science in the George R. Brown School of Engineering and Computing and is one of only a few like it in the country. It aims to focus on "responsible and interdisciplinary approaches to AI," according to a news release from the university.

“We are in a moment of rapid transformation driven by AI, and Rice is committed to preparing students not just to participate in that future but to shape it responsibly,” Amy Dittmar, the Howard R. Hughes Provost and executive vice president for academic affairs, said in the release. “This new major builds on our strengths in computing and education and is a vital part of our broader vision to lead in ethical AI and deliver real-world solutions across health, sustainability and resilient communities.”

John Greiner, an assistant teaching professor of computer science in Rice's online Master of Computer Science program, will serve as the new program's director. Vicente Ordóñez-Román, an associate professor of computer science, was also instrumental in developing and approving the new major.

Until now, Rice students could study AI through elective courses and an advanced degree. The new bachelor's degree program opens up deeper learning opportunities to undergrads by blending traditional engineering and math requirements with other courses on ethics and philosophy as they relate to AI.

“With the major, we’re really setting out a curriculum that makes sense as a whole,” Greiner said in the release. “We are not simply taking a collection of courses that have been created already and putting a new wrapper around them. We’re actually creating a brand new curriculum. Most of the required courses are brand new courses designed for this major.”

Students in the program will also benefit from resources through Rice’s growing AI ecosystem, like the Ken Kennedy Institute, which focuses on AI solutions and ethical AI. The university also opened its new AI-focused "innovation factory," Rice Nexus, earlier this year.

“We have been building expertise in artificial intelligence,” Ordóñez-Román added in the release. “There are people working here on natural language processing, information retrieval systems for machine learning, more theoretical machine learning, quantum machine learning. We have a lot of expertise in these areas, and I think we’re trying to leverage that strength we’re building.”

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