IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence
March 2012
Working Paper Number:
CES-12-07
Abstract
We develop a new rationale for IPO waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.
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profitability,
investment,
market,
investing,
investor,
shareholder,
competitiveness,
stock,
competitor,
incentive,
spillover,
equilibrium,
prospect,
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Longitudinal Research Database,
Center for Economic Studies,
Total Factor Productivity,
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Center for Research in Security Prices,
Initial Public Offering,
Securities Data Company,
Boston Research Data Center,
Boston College,
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