Entrepreneurial Learning, the IPO Decision, and the Post-Ipo Drop in Firm Profitability

Posted: 5 Aug 2009

See all articles by Ľuboš Pástor

Ľuboš Pástor

affiliation not provided to SSRN

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: August 2009

Abstract

We develop a model of the optimal initial public offering (IPO) decision in the presence of learning about the average profitability of a private firm. The entrepreneur trades off diversification benefits of going public against benefits of private control. Going public is optimal when the firm's expected future profitability is sufficiently high. 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 7183 IPOs in the United States between 1975 and 2004.

Keywords: D83, G32, L26

Suggested Citation

Pástor, Ľuboš and Taylor, Lucian A. and Veronesi, Pietro, Entrepreneurial Learning, the IPO Decision, and the Post-Ipo Drop in Firm Profitability (August 2009). The Review of Financial Studies, Vol. 22, Issue 8, pp. 3005-3046, 2009. Available at SSRN: https://ssrn.com/abstract=1443057 or http://dx.doi.org/hhn082

Ľuboš Pástor (Contact Author)

affiliation not provided to SSRN

No Address Available

Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

Pietro Veronesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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