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Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability

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  • Pástor, Luboš
  • Taylor, Lucian
  • Veronesi, Pietro

Abstract

We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6061.

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Date of creation: Jan 2007
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Handle: RePEc:cpr:ceprdp:6061

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Keywords: Diversification; IPO; Learning;

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References

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Citations

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Cited by:
  1. Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-180, Boston University - Department of Economics.
  2. Wang, Chong & Wang, Neng & Yang, Jinqiang, 2012. "A unified model of entrepreneurship dynamics," Journal of Financial Economics, Elsevier, vol. 106(1), pages 1-23.
  3. 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.
  4. Serguey Braguinsky & Atsushi Ohyama, 2011. "Noisy selection model and the evolution of firm size and within-firm earnings distributions: a unified approach," Small Business Economics, Springer, vol. 37(1), pages 59-72, July.
  5. Jing Chen, 2009. "Selection and Serial Entrepreneurs," Working Papers 0913, Florida International University, Department of Economics.
  6. Jirapun Chorruk & Andrew Worthington, 2010. "Firm-specific determinants and outcomes of initial public offerings in Thailand, 2001–2007," Discussion Papers in Finance finance:201002, Griffith University, Department of Accounting, Finance and Economics.
  7. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Institute for Financial Research.
  8. Benjamin E. Hermalin & Michael S. Weisbach, 2014. "Understanding Corporate Governance Through Learning Models of Managerial Competence," NBER Working Papers 20028, National Bureau of Economic Research, Inc.

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