Firm Mortality and Natal Financial Care

In the paper, Firm Mortality and Natal Financial Care, which was recently made publicly available on SSRN, we ask three related questions about the survival of U.S. public firms in the 1985 to 2006 period. First, what is their death rate as a function of age after their initial public offerings (IPOs)? Second, do financial intermediaries in the IPO process affect this death rate function? Third, if they do, how?

To address the first question, we adopt the econometrics from the actuarial sciences and construct a mortality table for U.S. public companies during 1985–2006. Following Queen and Roll (1987), we classify births of public companies as their appearance on the Center for Research in Security Prices (CRSP) tape, and deaths as their disappearance from the CRSP tape. We focus on bad deaths (liquidation, delisting, permanent trading halts) rather than good deaths (e.g., mergers and takeovers), since bad deaths incur substantial economic and social welfare costs. The mortality rate table reveals that the death rates of U.S. public firms increase with age, peak at three years at a level three times higher than the long-term mortality rate, and then decrease with age. This finding is an important contribution in its own right, because the mortality literature in the economics of industrial organization notes that survival risk decreases as a firm ages. With mortality rates first increasing and then decreasing, we are the first to document that U.S. public firms have to survive up to three years after their IPO—the critical age—before the survival risk starts diminishing.

Second, we explore the role of two financial intermediaries involved in the early stage of a firm’s life on its subsequent mortality rate. We find that after controlling for the usual determinants of survival, the presence of venture capitalists and high-quality underwriters during the IPO stage is associated with lower death rates for sometimes up to seven years after the IPO. The economic impact of these intermediaries is more pronounced during the very early stages of a firm’s public life than later stages. In addition, the relation between financial intermediaries and a lower mortality rate does not vary with the stages of business cycles.

Lastly, we explore to what extent natal financial care, defined as financial intermediaries’ involvement and interactions with a firm around its public birth, affects firm post-IPO mortality. Using both a two-stage model with Heckman (1979) correction for self-selection and an instrumental variable approach, we find that value added during the relationship by reputable underwriters and VCs is associated with a decline in IPO firms’ subsequent mortality rate, and that the effect prevails after we control for selection by these financial intermediaries at the pre-IPO stage.

The full paper is available for download here.