Spillover Effect of IPOs on the Investment Activity of their Supply Chains

Abstract

Using a dataset that enables the identification of the supply chain of small-and medium-sized enterprises (SMEs) in Japan, this paper examines the impact of business partners’ initial public offerings (IPOs) on the growth of investment activity. Empirical evidence suggests that IPOs of business partners facilitate growth in sales, cash and cash equivalents, and accounts receivable. Furthermore, the IPOs of business partners and cash holdings stimulate investment activities, especially when these firms, whose business partners go public, are financially constrained. These results indicate that positive liquidity shock in any firm propagates through the network of firms and stimulates investment activity, especially when these firms are financially constrained.

Keywords: Firm network, Financial constraint, Investment

JEL Classification: D22, G30