Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

75 Pages Posted: 12 Oct 2020 Last revised: 25 May 2021

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Mark (Shuai) Ma

University of Pittsburgh - Accounting Group

Xiaoyun Yu

Indiana University Kelley School of Business; European Corporate Governance Institute (ECGI); China Academy of Financial Research (CAFR)

Date Written: May 11, 2021

Abstract

A firm’s initial public offering (IPO) generates negative externalities for industry competitors. To mitigate this threat, incumbent firms manage their earnings downwards, issue more negative management forecasts, and use a more negative disclosure tone when industry peers file for an IPO. Negative accruals reverse when the threat subsides. Incumbents manage earnings more aggressively when costs are small and benefits are large. Such strategic disclosure lowers incumbent firm valuation multiples and associates with more negative IPO firm media sentiment. IPO firms obtain lower offer prices, raise less capital, and are more likely to withdraw from the offering. They also invest less, hoard more cash, and experience lower profitability post IPO, while incumbents experience higher profitability and market share growth. Our results highlight the role of strategic reporting on product market competition and identify a new cost of going public.

Keywords: Initial public offerings, product market competition, strategic reporting

JEL Classification: G3

Suggested Citation

Billett, Matthew T. and Ma, Mark (Shuai) and Yu, Xiaoyun, Torpedo Your Competition: Strategic Reporting and Peer Firm IPO (May 11, 2021). European Corporate Governance Institute – Finance Working Paper No. 732/2021, Available at SSRN: https://ssrn.com/abstract=3682867 or http://dx.doi.org/10.2139/ssrn.3682867

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Mark (Shuai) Ma

University of Pittsburgh - Accounting Group ( email )

United States

Xiaoyun Yu (Contact Author)

Indiana University Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
161
Abstract Views
935
rank
228,201
PlumX Metrics