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  October 29, 2001

Accounting Professor's Research Draws
Attention of Wall Street Journal

When it comes to Wall Street, Mike Willenborg has had a lucky streak. His luck has nothing to do with picking the right stocks in a turbulent market, but everything to do with picking the right research topics.

Last year. a working paper by the associate professor of accounting on initial public offerings or IPOs - when a company sells stock and goes public for the first time - landed on the desk of a Wall Street Journal reporter.

The reporter, Jonathan Weil, was working on an article on what's known as the "going concern clause" involving IPOs. The clause or statement provided by auditors serves as an indicator as to whether or not a company is going to stay in business for a while, usually another year.

In doing research for the article, Weil came across an auditing-related IPO paper co-authored by Willenborg and a colleague, James McKeown, an accounting professor with the Smeal College of Business Administration at Penn State University.

The two professors' joint research provided valuable insight into the rise and fall of 270 small companies that had IPOs - some with going concern statements - and were trading on the NASDAQ exchange.

Weil did what any good reporter would do. He picked up the phone and called the source.

Weil interviewed Willenborg over the phone on several occasions and quoted him extensively in an article written for "Heard on the Street," a popular daily column in The Wall Street Journal. For most in the business world, a mere mention in the column is better than a stock tip.

"Getting mentioned in The Wall Street Journal's "Heard on the Street" is about as good as it gets," says Peter Murphy, director of worldwide public relations for Hartford-based United Technologies. "It pays dividends not only to the individual mentioned, but also to the institution he or she represents," says Murphy, who directs UTC's media relations.

The column established Willenborg as an expert on IPOs and going concern statements. So it wasn't surprising that a few months later, when two other Wall Street Journal reporters were covering a separate story about a small business that had just gone public, Willenborg was interviewed again.

"I've always been interested in economic-based accounting research and the IPOs were something I enjoyed looking into," says Willenborg who joined the University's accounting department in 1996. Last spring, he was promoted to associate professor with tenure.

Willenborg came to UConn from a corporate career as a senior audit manager with KPMG Peat Marwick in New Jersey and New York, now one of the world's "Big 5" accounting firms. He holds a Ph.D. in accounting and economics from Penn State and a B.S. in accounting from Bucknell.

His sought-after and soon-to-be published research paper on IPOs delves into the relationship between an auditor's report and the capital-raising activities of small companies.

"The paper found that the presence of an opinion that raises substantial doubt about the ability of an issuer to continue as a 'going concern' is both associated with IPO underpricing and is positively related to whether or not the company's stock will delist within two years of its IPO," says Willenborg, referring to whether or not the company is gone and no longer trading on the stock exchange.

He compares an auditor's opinion on companies to a Good Housekeeping seal of approval.

"In financial accounting, we assume that a company is going to stick around unless we suspect otherwise," says Willenborg. "If an auditor has serious doubts that a company will stick around, the auditor will issue a 'going concern' opinion."

Yet his research identified an unexpected "phenomenon" on going concern opinions, and his findings surprised people tracking IPOs.

"The phenomenon is that companies are successfully able to do an IPO, even when an auditor's going concern statement flags the company as being in dire straits," he says.

Why would an investor want to put money behind such a company?

According to Ben Holmes, president of, a firm in Boulder, Colo., that follows the IPO market, it's because most investors just don't pay attention.

"When the IPO market is hot, people don't care about fundamentals," says Holmes, who was quoted in the same column in The Wall Street Journal.

The statement is borne out by Willenborg's research, in a review of the 270 companies that went public in 1993 and 1994.

"We studied the bottom of the barrel, the smallest of the small, and found that 25 percent of these companies had a going concern opinion," he says. "An auditor might say that the company is on its death bed, but it's able to go public within a very short time after the going concern opinion."

He says the information auditors provide in the going concern opinion appears to offer a "very useful" piece of information to investors.

"What we also found was that the presence of an IPO opinion also conveyed better information on the opening price of the stock," says Willenborg. "If the price jumps up less on the first day of the stock offering, one way of interpreting that is the opening price is more accurate."

Of the companies studied, 69 had going concern statements. "We were surprised that there were so many of them," Willenborg says.

Still, while many of the companies turned out to be poor investments, a few have become real success stories.

"They're like a lottery ticket," he says. "You hit one like a Microsoft and you make a lot of money."

One such IPO success story, he notes, is Green Mountain Coffee. The company's chief financial officer is UConn alumnus Robert Britt, '77.

A separate but related IPO paper published in the Journal of Financial Economics by Willenborg and David Guenther of the University of Colorado reports that a capital gains tax law change enacted by Congress in the early days of the first Clinton administration was associated with higher IPO prices for small companies going public for the first time.

"The paper contributes to public policy research in taxation by providing evidence that a tax law change targeted at achieving a specific public policy objective - in this case reducing the cost of capital for small businesses - can achieve its stated purpose," says Willenborg.

The paper is based on a study of companies before and after the tax law change on Aug. 11, 1993.

"We found that former President Clinton's tax law change had a dramatic effect on pricing the IPOs," says Willenborg.

The paper earned him the UConn School of Business Best Article Award for 1999-2000 and the American Tax Association Manuscript Award in 1999.

Asked what investment tips he might have to offer, Willenborg dodges the question: "I'm very conservative financially," he says.

Claudia G. Chamberlain

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