When Competitors Go Public: Innovation Spillovers through Competitive Pressure and Learning Channels

Abstract

This paper investigates how competitors' initial public offerings (IPOs) affect the innovation of incumbent companies by developing a novel measure of peer similarity based on Text-Based Network Industry Classifications (TNIC). Using comprehensive patent data, we document a significant increase in innovation output following competitors' IPOs. We provide two underlying channels driving this effect: increased competitive pressure and enhanced learning motivation following the IPOs of competitors. Furthermore, the increase in innovation is more pronounced at financially constrained, market-leading, and high-tech firms. We further establish that innovation stimulated by competitors' IPOs generates significant economic benefits on firms, including increase in the proportion of institutional ownership, improvement in production efficiency, and rise in capital investment. Our findings contribute to the literature on competitive spillovers, IPO externalities, and the real effects of capital market development.

Keywords: Initial public offerings, Peer effects, Innovation, China market.