Public Entrants, Public Equity Finance, and Creative Destruction

39 Pages Posted: 30 Oct 2010

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Bruce C. Petersen

Washington University in St. Louis - Department of Economics

Date Written: November 3, 2009

Abstract

We explore the importance of new public firms and public equity finance for R&D and creative destruction in the U.S. high-tech sector. Between 1970 and 2004 over 1900 new public firms enter a small number of high-tech industries, substantially altering the focus of U.S. manufacturing and dramatically changing the composition of publicly listed firms. These public entrants are increasingly R&D intensive and rely extensively on external equity finance in the 1980s and 1990s. We estimate dynamic R&D models and find a strong link between public equity finance and R&D for new entrants, but not established entrants or incumbents. Further, later cohorts of public entrants rapidly acquire market share from existing incumbents and have a substantial aggregate economic impact: by 2000, recent public entrants account for almost half of high-tech sales and more than half of R&D. Variation in the availability of public equity finance has a marked impact on entrant R&D and the rate at which entrants take market share from incumbents. Our findings identify a key channel through which public equity markets facilitate the process of creative destruction.

Keywords: IPO, Stock markets, Finance and growth, Creative destruction, Innovation, R&D

JEL Classification: D92, G10, G32, O30

Suggested Citation

Brown, James R. and Petersen, Bruce Clayton, Public Entrants, Public Equity Finance, and Creative Destruction (November 3, 2009). Journal of Banking and Finance, Vol. 34, No. 5, pp. 1077-1088, 2010. Available at SSRN: https://ssrn.com/abstract=1699795

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Bruce Clayton Petersen

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5643 (Phone)

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