The Going Public Decision and the Product Market

Review of Financial Studies (RFS), forthcoming 2010

US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-20

American Finance Association Meetings 2008 Paper

59 Pages Posted: 29 Jul 2009 Last revised: 14 Apr 2010

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Shan He

Oregon State University; Louisiana State University

Debarshi K. Nandy

Brandeis University - International Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2008

Abstract

At what point in a firm’s life should it go public? How do a firm’s ex ante product market characteristics relate to its going public decision? Further, what are the implications of a firm going public on its post-IPO operating and product market performance? In this paper, we answer the above questions by conducting the first large sample study of the going public decisions of U.S. firms in the literature. We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms. Our findings can be summarized as follows. First, a private firm’s product market characteristics (market share, competition, capital intensity, cash flow riskiness) significantly affect its likelihood of going public. Second, private firms facing less information asymmetry and those with projects that are cheaper for outsiders to evaluate are more likely to go public (consistent with Chemmanur and Fulghieri (1999)). Third, IPOs of firms occur at the peak of their productivity cycle (consistent with Clementi (2002)): the dynamics of total factor productivity (TFP) and sales growth exhibit an inverted U-shaped pattern. Finally, sales, capital expenditures, and other performance variables exhibit a consistently increasing pattern over the years before and after the IPO. The last two findings are consistent with the widely documented post-IPO operating underperformance of firms being due to the real investment effects of a firm going public, and inconsistent with underperformance being solely due to earnings management immediately prior to the IPO.

Suggested Citation

Chemmanur, Thomas J. and He, Shan and Nandy, Debarshi K., The Going Public Decision and the Product Market (July 1, 2008). Review of Financial Studies (RFS), forthcoming 2010; US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-20 ; American Finance Association Meetings 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1440930 or http://dx.doi.org/10.2139/ssrn.1440930

Thomas J. Chemmanur (Contact Author)

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/

Shan He

Oregon State University ( email )

Corvallis, OR 97331
United States

Louisiana State University ( email )

Baton Rouge, LA 70803
United States

Debarshi K. Nandy

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

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