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Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality

50 Pages Posted: 12 Dec 2017  

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Gordon M. Phillips

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Liu Yang

University of Maryland, R. H. Smith School of Business

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Date Written: December 2017

Abstract

Using U.S. Census data, we track firms at birth and compare the growth pattern of IPO firms and their matched always-private counterparts over their life cycle. Firms that are larger at birth with faster initial growth are more likely to attain a larger size and to subsequently go public. We estimate a model to predict the propensity to become public (“public quality”) using initial conditions. Firms in the top percentile of public quality grow 29 times larger than the remaining firms fifteen years later if they actually become public and 14 times larger if they stay private, showing a large selection effect for IPO status. Public firms respond more to demand shocks after their IPO and are more productive than their matched private counterparts. This effect is stronger in industries that are capital intensive and dependent on external financing. Overall, initial conditions predict firm growth trajectories, selection into public status and responsiveness to demand shocks. We find no evidence of public market myopia when matching by initial conditions.

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Suggested Citation

Maksimovic, Vojislav and Phillips, Gordon M. and Yang, Liu, Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality (December 2017). NBER Working Paper No. w24104. Available at SSRN: https://ssrn.com/abstract=3085718

Vojislav Maksimovic (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://scholar.rhsmith.umd.edu/vmax/home

Gordon M. Phillips

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liu A. Yang

University of Maryland, R. H. Smith School of Business ( email )

4420 Van Munching Hall
R.H.Smith School of Business
College Park, MD 20742
United States
3014058794 (Phone)

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