Information Externalities Among Listed Firms

Abstract

We show that private firms that go public in the U.S. create positive information externalities for their already-listed peers: their IPO filings improve their peers’ trading liquidity directly, by reducing information asymmetry, and indirectly, by crowding in both voluntary disclosure and analyst information production at peer firms. Positive information externalities, and the complementarities they operate through, support regulators’ claim that mandatory disclosure requirements improve the market-wide information environment. Startups that choose to stay private, as more and more have done since 1997, deprive investors of the benefit of positive information spillovers, contributing to a sub-optimally small stock market.

Keywords: IPOs, mandatory disclosure, voluntary disclosure, information externalities, information environments, strategic interaction, liquidity, analyst coverage, information demand

JEL Classification: G14, M41, G38, D82