The Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms

63 Pages Posted: 26 Mar 2020 Last revised: 31 Mar 2020

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Jie He

University of Georgia - Department of Finance

Xiao Ren

University of Georgia - Department of Finance

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: March 18, 2020

Abstract

The U.S. equity markets have experienced a remarkable decline in IPOs since 2000, both in terms of smaller IPO volume and entrepreneurial firms’ greater tendency to exit through acquisitions rather than IPOs. Using proprietary U.S. Census data on private firms, we conduct a comprehensive analysis of the above two notable trends and provide several new insights. First, we find that the dramatic reduction in U.S. IPOs is not due to a weaker economy that is unable to produce enough “exit-eligible” private firms: in fact, the average total factor productivity (TFP) of private firms is slightly higher post-2000 compared to pre-2000. Second, we do not find evidence supporting the conventional wisdom that the disappearing IPO puzzle is mainly driven by the decline in IPO propensity among small private firms. Third, we do not find a significant change in the characteristics of private firms exiting through acquisitions from pre- to post-2000. Fourth, the decline in IPO propensity persists even after we account for the changing characteristics of private firms over time. Fifth, we show that the difference in TFP between IPO firms and acquired firms (and between IPO firms and firms remaining private) went up considerably post-2000 compared to pre-2000. Finally, venture-capital-backed (VC-backed) IPO firms have significantly lower post-exit long-term TFP than matched VC-backed private firms in the post-2000 era relative to the pre-2000 era, while this pattern is absent among IPO and matched private firms without VC backing. Overall, our results strongly support the explanations based on standalone public firms’ greater sensitivity to product market competition and entrepreneurial firms’ access to more abundant private equity financing in the post-2000 era. We find mixed evidence regarding the explanations based on the smaller net financial benefits of being standalone public firms or the increased need for confidentiality after 2000.

Keywords: IPOs, Exit Choices, Disappearing IPOs, Private Equity, Weak Economy, Product Market Competition

JEL Classification: G32, G34, G24

Suggested Citation

Chemmanur, Thomas J. and He, Jie and Ren, Xiao and Shu, Tao, The Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=3556993 or http://dx.doi.org/10.2139/ssrn.3556993

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Xiao Ren

University of Georgia - Department of Finance ( email )

B354 Amos Hall
Athens, GA 30602
United States

Tao Shu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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