IPOs and the Growth of Firms
Gian Luca Clementi
New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); University of Bologna - Rimini Center for Economic Analysis (RCEA)
April 3, 2002
NYU Stern 2004 Working Paper No. 04-23
Recent years have witnessed a rapid accumulation of empirical evidence documenting firm dynamics around the IPO date. A particularly striking finding is that operating performance, as measured by Returns on Assets for example, peaks in the fiscal year preceding the offering, worsens on impact at the IPO date, and keeps on declining for a few more years. In this paper, I provide a novel rationalization of this evidence. To this end, I construct a simple dynamic stochastic model of firm behavior in which the decision to go public is modelled explicitly. The model predicts that the operating performance reaches its peak in the period before the offering and experiences a sudden decline at the IPO date. The comparative advantage of my approach is that it produces further implications that are in line with the data. Most importantly, the model predicts that the IPO coincides with an increase in sales and capital expenditures. Consistently with evidence pointed out by the Industrial Organization literature, the firm growth rate is shown to be decreasing in age and size.
Number of Pages in PDF File: 47
JEL Classification: D21, D92, G32
Date posted: June 9, 2002
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