Entrepreneurial Learning, the IPO Decision, and the Post-Ipo Drop in Firm Profitability
affiliation not provided to SSRN
Lucian A. Taylor
University of Pennsylvania - The Wharton School
University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
The Review of Financial Studies, Vol. 22, Issue 8, pp. 3005-3046, 2009
We develop a model of the optimal initial public offering (IPO) decision in the presence of learning about the average profitability of a private firm. The entrepreneur trades off diversification benefits of going public against benefits of private control. Going public is optimal when the firm's expected future profitability is sufficiently high. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7183 IPOs in the United States between 1975 and 2004.
Keywords: D83, G32, L26
Date posted: August 5, 2009
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