Why Does an IPO Impact Rival Firms?

Abstract

IPO firms’ rivals tend to experience performance declines following an IPO in the industry. Why? We estimate a dynamic structural oligopoly model to distinguish among alternative theories that can explain an industry’s evolution post-IPO. We find that most changes in rivals’ performance are due to industry trends that also drive IPOs. However, there are also some “competitive” IPOs where the IPO enhances the IPO firm’s performance, at the expense of competitors. These findings help reconcile prior evidence of average performance reductions of both IPO firms and their rivals with well-known cases in which firms have benefited from going public.

Keywords: initial public offerings, dynamic corporate finance models, finance and product market competition

JEL Classification: G00, G30