IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence

73 Pages Posted: 22 Sep 2008 Last revised: 27 Nov 2012

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Jie He

University of Georgia - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2010

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.

Keywords: IPO waves, going public, product market competition

Suggested Citation

Chemmanur, Thomas J. and He, Jie, IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence (November 20, 2010). Journal of Financial Economics (JFE), Volume 101, Issue 2, August 2011, Pages 382–412, Available at SSRN: https://ssrn.com/abstract=1270985

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

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