Yearly Archives: 2021

Going public is a key decision for many firms. Whether or not going public is good for firms has been called into question by authors and the press who have written that firms after they go public may be myopic as the public markets may cause firms to suboptimally focus on the short-term at the expense of the long term. We raise an alternative perspective and examine whether going public may be optimally be associated with a change in strategy to raise funds for commercialization and also to focus on increasing profitability. We examine firms in 16 countries around the world that file for IPOs using a sample of 3,400 firms. For a benchmark for IPO firms, we use firms that file for an IPO but withdraw and do not complete their IPO. For all these firms, our data contains pre- and post-IPO-attempt information irrespective of whether firms complete or withdraw their IPO. In particular, the post-withdrawal profitability of private firms has not been previously considered. We also build unique measures of commercialization decisions for both public and private firms.

Explanations for why firms go public include diversification and liquidity for previous owners, as well as to raise capital for expansion. There are conflicting benefits and costs of going public. There is the positive effect of additional capital that allows the firm to undertake new investment opportunities. There are also potential agency costs as going public changes concentrated ownership to dispersed ownership where the incentives of managers and investors can diverge, or managers faced with stock market pressure can become myopic. The stylized fact in the literature so far is that, on average, profitability falls after IPOs, which seems to speak against the benefits of public status. In addition, recent evidence shows that IPO firms have lower patenting rates and fewer citations after going public. These results could be interpreted as evidence of short-termism or agency costs of being public. However, being public may might alternatively be associated with an optimal change in strategy to raise funds for commercialization and to focus on increasing profitability. (A recent WSJ article on UBER raises this possibility saying “Mr. Khosrowshahi (CEO) has moved to restructure Uber to deliver on a promise to make the company profitable, … The company has promised to be profitable on an adjusted basis before interest, taxes, depreciation and amortization by the end of next year (2021).” (Wall Street Journal, December 7, 2020)). READ MORE »