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IPO waves, product market competition, and the going public decision: Theory and evidence

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  • Chemmanur, Thomas J.
  • He, Jie

Abstract

We develop a new rationale for initial public offering (IPO) waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.

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Bibliographic Info

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

Volume (Year): 101 (2011)
Issue (Month): 2 (August)
Pages: 382-412

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:382-412

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

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Keywords: IPO waves Product market competition Going public;

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References

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Cited by:
  1. Zhi Da & Ravi Jagannathan & Jianfeng Shen, 2012. "Building Castles in the Air: Evidence from Industry IPO Waves," NBER Working Papers 18555, National Bureau of Economic Research, Inc.

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