What a Relief: How do Firms Respond to Competitors’ Listing Delays?

Abstract

We examine how existing public firms (“incumbent firms”) respond to the listing delays of their product market competitors. Using regulation-induced initial public offering (IPO) suspensions in China that expose firms already approved for an IPO to indeterminate listing delays, we show that incumbent firms reduce costly defensive moves in response to declining expectation of an imminent threat by tightening their working capital policy and reducing aggressive acquisition activities. The effects are stronger for incumbent firms that are subject to larger competitive pressure from other public rivals, face severer ex ante threats from the suspended rival firm, and are more financially constrained. Additional analyses show that incumbent firms disclose less competition related information after competitors’ IPO delays, and reductions in costly defensive moves lead to better overall financial performance. Our paper sheds new light on the IPO peer effect, especially on how incumbent firms dynamically and proactively respond to the product market competitor’s capital market entry.

Keywords: Product market competition; initial public offerings; defensive moves; working capital management; M&A