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Informational externalities of going public decisions: evidence from industrial sector

Author

Listed:
  • Cotei, Carmen

    (University of Hartford)

  • Farhat, Joseph Basheer

    (Social Security Investment Commission, Amman, Jordan)

  • Mukherjee, Tarun K.

    (University of New Orleans)

Abstract

Theoretical models predict that going public firms generate positive externalities, creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive informational externalities for the publicly traded rival firms in the same industry and test three related hypotheses. The hypotheses are: 1) Venture backed IPOs convey positive information about industry and this information is transferred to rival firms; 2) Intra-industry information transfer varies with rivals’ characteristics; 3) IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects only in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We also find evidence that the effect on rival firms is stronger if they operate in low concentrated industries (i.e. high competition) and have low growth opportunities. The relative size of IPO firm seems to play an important role in the direction and magnitude of industry rivals' valuation effects. Negative information revealed in the form of downward price revisions adversely affect rival firms’ valuation.

Suggested Citation

  • Cotei, Carmen & Farhat, Joseph Basheer & Mukherjee, Tarun K., 2004. "Informational externalities of going public decisions: evidence from industrial sector," Working Papers 2004-12, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2004-12
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    Keywords

    Initial public offering (IPO); Venture backing; Positive externalities;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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