Strategic IPOs and Product Market Competition

37 Pages Posted: 17 Feb 2009 Last revised: 25 Sep 2013

Date Written: 2011

Abstract

We examine firms' incentives to go public in the presence of product market competition. As a result of their greater ability to diversify idiosyncratic risk in the capital market, public firms' owners tolerate higher profit variability than owners of private firms. Consequently, public firms adopt riskier and more aggressive output market strategies than private firms, which improves the competitive position of the former vis-à-vis the latter. This strategic benefit of being public, and thus, the proportion of public rms in an industry are shown to be positively related to the degree of competitive interaction among firms in the output market, to demand uncertainty, and to the idiosyncratic portion of this uncertainty. Additional empirical predictions concern the effect of a firm's initial public o¤ering on its market share and on its rivals' valuations, as well as the effects of product market competition on expected returns to public and private equity and on the timing of going public and private.

Keywords: IPOs, product market, competition, hedging

JEL Classification: G32, L22

Suggested Citation

Chod, Jiri and Lyandres, Evgeny, Strategic IPOs and Product Market Competition (2011). Journal of Financial Economics (JFE), Vol. 100, pp. 45-67, 2011, Available at SSRN: https://ssrn.com/abstract=1343697 or http://dx.doi.org/10.2139/ssrn.1343697

Jiri Chod

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

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