Entrepreneurial Learning, the Ipo Decision, and the Post-Ipo Drop in Firm Profitability
47 Pages Posted: 19 Feb 2007
Date Written: September 24, 2007
We develop a dynamic model of the optimal IPO decision in the presence of learning about the average profitability of a private firm. In the IPO decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the U.S. between 1975 and 2004.
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