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Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm ProfitabilityLubos PastorUniversity of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) Pietro VeronesiUniversity of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) Lucian TaylorUniversity of Pennsylvania - The Wharton School December 15, 2006 Abstract: We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. 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 7,183 IPOs in the U.S. between 1975 and 2004.
Number of Pages in PDF File: 46 Keywords: learning, IPO, diversification, profitability JEL Classification: G1, G3 working papers seriesDate posted: December 17, 2006Suggested CitationContact Information
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