The Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms
June 2020
Working Paper Number:
CES-20-20
Abstract
The U.S. equity markets have experienced a remarkable decline in IPOs since 2000, both in terms of smaller IPO volume and entrepreneurial firms' greater tendency to exit through acquisitions rather than IPOs. Using proprietary U.S. Census data on private firms, we conduct a comprehensive analysis of the above two notable trends and provide several new insights. First, we find that the dramatic reduction in U.S. IPOs is not due to a weaker economy that is unable to produce enough 'exit eligible' private firms: in fact, the average total factor productivity (TFP) of private firms is slightly higher post-2000 compared to pre-2000. Second, we do not find evidence supporting the conventional wisdom that the disappearing IPO puzzle is mainly driven by the decline in IPO propensity among small private firms. Third, we do not find a significant change in the characteristics of private firms exiting through acquisitions from pre- to post-2000. Fourth, the decline in IPO propensity persists even after we account for the changing characteristics of private firms over time. Fifth, we show that the difference in TFP between IPO firms and acquired firms (and between IPO firms and firms remaining private) went up considerably post-2000 compared to pre-2000. Finally, venture-capital-backed (VC-backed) IPO firms have significantly lower postexit long-term TFP than matched VC-backed private firms in the post-2000 era relative to the pre- 2000 era, while this pattern is absent among IPO and matched private firms without VC backing. Overall, our results strongly support the explanations based on standalone public firms' greater sensitivity to product market competition and entrepreneurial firms' access to more abundant private equity financing in the post-2000 era. We find mixed evidence regarding the explanations based on the smaller net financial benefits of being standalone public firms or the increased need for confidentiality after 2000.
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:
investment,
market,
enterprise,
sale,
company,
takeover,
merger,
acquisition,
entrepreneurial,
venture,
entrepreneur,
investor,
firms size,
firms grow,
acquirer,
profit,
stock,
equity,
security
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Census of Manufactures,
Annual Survey of Manufactures,
Standard Statistical Establishment List,
Longitudinal Research Database,
Center for Economic Studies,
Ordinary Least Squares,
Total Factor Productivity,
Securities and Exchange Commission,
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Longitudinal Business Database,
Initial Public Offering,
Securities Data Company,
Census of Manufacturing Firms,
North American Industry Classification System,
Business Register,
Herfindahl Hirschman Index,
Herfindahl-Hirschman
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