Initial Public Offerings and the Local Economy: Evidence of Crowding Out

We test the effect of going public on economic growth in the areas surrounding IPO firms. We focus on IPO-filing firms, thus ensuring that both treatment and control firms are at similar life cycle stages, and use post-filing stock market fluctuations as an instrument for IPO completion. We show that IPOs that are large relative to the size of their counties lead to a 1.1 percentage point relative reduction in annual county-level establishment growth, with similar effects for employment and population growth. There are no corresponding effects for relatively small IPOs. These negative effects appear to be driven by a crowding out of local sector peers, but the crowding out also disrupts local agglomerations and slows down growth among other businesses that rely on local demand. Overall, our results indicate that macroeconomic gains from IPOs trade off against disruptions in local agglomeration economies where public firms originate.

Keywords: IPO, Economic Growth, Crowding Out, Concentration

JEL Classification: G32, J21, O47, R11

Suggested Citation: Suggested Citation

Cornaggia, Jess and Gustafson, Matthew and Kotter, Jason D. and Pisciotta, Kevin, Initial Public Offerings and the Local Economy: Evidence of Crowding Out (December 14, 2023). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3036176 or http://dx.doi.org/10.2139/ssrn.3036176