The Going Public Decision and Firm Risk
57 Pages Posted: 27 Dec 2019 Last revised: 21 May 2020
Date Written: December 6, 2019
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
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