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

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Author Info
Lubos Pastor
Lucian Taylor
Pietro Veronesi

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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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12792.

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Date of creation: Dec 2006
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Handle: RePEc:nbr:nberwo:12792

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G1 - Financial Economics - - General Financial Markets
G3 - Financial Economics - - Corporate Finance and Governance

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jing Chen, 2009. "Selection and Serial Entrepreneurs," Working Papers 0913, Florida International University, Department of Economics. [Downloadable!]
  2. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Institute for Financial Research. [Downloadable!]
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