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Strategic IPOs and product market competition

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  • Chod, Jiri
  • Lyandres, Evgeny
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    Abstract

    We examine firms' incentives to go public in the presence of product market competition. As a result of their greater ability to diversify idiosyncratic risk in the capital market, public firms' owners tolerate higher profit variability than owners of private firms. Consequently, public firms adopt riskier and more aggressive output market strategies than private firms, which improves the competitive position of the former vis-à-vis the latter. This strategic benefit of being public, and thus, the proportion of public firms in an industry, is shown to be positively related to the degree of competitive interaction among firms in the output market, to demand uncertainty, and to the idiosyncratic portion of this uncertainty. Additional empirical predictions concern the effect of a firm's initial public offering on its market share and on its rivals' valuations. We test the model's predictions and find empirical support for most of them.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 1 (April)
    Pages: 45-67

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:1:p:45-67

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: IPO Risk aversion Product market competition Demand uncertainty;

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    Cited by:
    1. Çolak, Gönül & Günay, Hikmet, 2011. "Strategic waiting in the IPO markets," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 555-583, June.
    2. Chemmanur, Thomas J. & He, Jie, 2011. "IPO waves, product market competition, and the going public decision: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 101(2), pages 382-412, August.

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