The Role of Product Life Cycle in the Benefits and Costs of IPO

62 Pages Posted: 3 Sep 2021 Last revised: 2 Jan 2023

See all articles by Tina Oreski

Tina Oreski

ESCP Business School

Jiajie Xu

University of Iowa - Henry B. Tippie College of Business

Date Written: December 15, 2020

Abstract

The paper examines how firms' product life cycle (PLC) influences their trade-off between benefits and costs of going public. We construct the PLC measure by performing a textual analysis on S-1 registration statements for initial public offerings (IPOs). We show that firms with a more product-innovative PLC are more likely to complete the IPO even though they face higher underpricing and offer a lower fraction of equity at IPO. These firms conduct more seasoned equity offerings, payout fewer dividends, and conduct fewer acquisitions after IPO. The findings demonstrate that firms with diverging PLC differently weigh the importance of raising capital through IPO, information asymmetry with investors, and revealing information to competitors. To establish causality, we use an instrumental variable approach with the average PLC of similar public firms as the instrument for an IPO firm's PLC as well as a difference-in-differences approach exploiting the introduction of the American Inventors Protection Act. Our paper offers novel evidence on a previously under-explored economic force determining the trade-off of going public: firms' product life cycle.

Keywords: IPO, Product life cycle, Competition, Disclosure, Information asymmetry, Textual analysis

Suggested Citation

Oreski, Tina and Xu, Jiajie, The Role of Product Life Cycle in the Benefits and Costs of IPO (December 15, 2020). Available at SSRN: https://ssrn.com/abstract=3910034 or http://dx.doi.org/10.2139/ssrn.3910034

Tina Oreski

ESCP Business School ( email )

Corso Unione Sovietica, 218 bis
Turin, 10134
Italy

HOME PAGE: http://sites.google.com/view/tinaoreski

Jiajie Xu (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Pappajohn Business Building S296
Iowa City, IA 52242-1000
United States

HOME PAGE: http://www.jiajiexu.com/

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