The Going Public Decision and Firm Risk

57 Pages Posted: 27 Dec 2019 Last revised: 21 May 2020

See all articles by Antonio Meles

Antonio Meles

affiliation not provided to SSRN

Dario Salerno

University of Rome Tor Vergata

Gabriele Sampagnaro

University of Naples Parthenope

Date Written: December 6, 2019

Abstract

Using a unique dataset consisting of firms that went public on the European and Asian Stock Exchanges between 2007 and 2011, firms that remain private over the same period and companies which have been listed for at least 10 years, we investigate whether going public is riskier than remaining private. To achieve this goal, we disentangle the effect of equity issue from other IPO’s effect and control for endogeneity and survivorship bias. Our main results are as follows. First, we find that while controlling for selection bias and the effect of equity issue, the risk of financial distress of IPOs starts to increase significantly more than control privately held firms after the listing. This result is resilient to different estimation models (namely treatment effect model, IV approach and DID) and financial distress indicators and to splitting the sample into European and Asian IPOs subsamples. Second, we find that a firm’s risk increases progressively after the IPO year because of a remarkable decline in its liquidity, profitability and retaining earnings and due to a constant increase of its leverage. Third, we find that going public firms also exhibit in the post-IPO years higher risk and lower risk-adjusted performance than the sample of 10-years listed firms. We conclude that the increase of risk by IPO firms is temporary and not related to the public company status.

Keywords: IPOs, private firms, bankruptcy, selection bias, survivorship bias

JEL Classification: G30, G32, G33, L25

Suggested Citation

Meles, Antonio and Salerno, Dario and Sampagnaro, Gabriele, The Going Public Decision and Firm Risk (December 6, 2019). Available at SSRN: https://ssrn.com/abstract=3499506 or http://dx.doi.org/10.2139/ssrn.3499506

Antonio Meles

affiliation not provided to SSRN

Dario Salerno (Contact Author)

University of Rome Tor Vergata ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Gabriele Sampagnaro

University of Naples Parthenope ( email )

Via Ammiraglio Ferdinando Acton, 38
Via Generale Parisi, 13
Naples, 80133
Italy

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