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

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  • Lubos Pastor
  • Lucian Taylor
  • Pietro Veronesi

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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Bibliographic Info

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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Publication status: published as &Lubos Pástor & Lucian A. Taylor & Pietro Veronesi, 2009. "Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(8), pages 3005-3046, August.
Handle: RePEc:nbr:nberwo:12792

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Citations

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Cited by:
  1. Hui Chen & Jianjun Miao & Neng Wang, 2010. "Entrepreneurial Finance and Nondiversifiable Risk," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(12), pages 4348-4388, December.
  2. Thomas J. Chemmanur & Jie He, 2012. "IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence," Working Papers, Center for Economic Studies, U.S. Census Bureau 12-07, Center for Economic Studies, U.S. Census Bureau.
  3. 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, Springer, vol. 37(1), pages 59-72, July.
  4. 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.
  5. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series, Institute for Financial Research 53, Institute for Financial Research.
  6. Wang, Chong & Wang, Neng & Yang, Jinqiang, 2012. "A unified model of entrepreneurship dynamics," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 1-23.
  7. Jing Chen, 2009. "Selection and Serial Entrepreneurs," Working Papers, Florida International University, Department of Economics 0913, Florida International University, Department of Economics.
  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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