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CFGE-5: New theory and evidence on IPOs
Initial Public Offerings and the Local Economy
University of Kansas, United States of America
We provide evidence that a firm’s transition from private to public ownership stunts local economic growth, especially in less populated and poorer areas. After accounting for endogeneity in the ownership decision, areas hosting companies that go public experience muted growth in employment, establishments, population, and wages, relative to areas where firms remain private. Establishment-level analyses and tests of IPO filer acquisition activity reveal that transitioning to public ownership causes firms to geographically diversify their establishments and employee base. These findings are consistent with public ownership reducing a firm’s reliance on local agglomeration economies, to the detriment of the local community.
The Wharton School, University of Pennsylvania, United States of America
This paper studies the strategy of entrepreneurs to finance their experimentation given the presence of adverse selection in capital markets. It quantifies the effect of information frictions on firm value by structurally estimating a dynamic model that features volatile market valuation, strategic experimentation, and dynamic adverse selection. Entrepreneurs make decisions to access public financing by weighing market-timing incentives against the costly delay to signal by conducting additional experimentation. Leveraging the unique setting of biotech startups with drug development, I employ data variations in leading drug stages at IPOs, durations of staying private, and IPO valuations to estimate the model. I find that adverse selection is prevalent between early-stage startups and investors. My baseline estimates suggest that information frictions cause about 24% loss of ex- ante firm value, which is due to the direct effect of market belief distortions and the indirect effect of firms remaining private longer and hence burdened with higher financing costs by approximately 15%. I also document substantial variations in magnitude of the effect across VC-backed startups and firms with more effective “patent fences.” These results show that information frictions have a large impact on the financing behavior of startups and firm values.
Technological Disruptiveness and the Evolution of IPOs and Sell-Outs
1University of Lugano and Swiss Finance Institute; 2University of Southern Californa; 3Virginia Tech
We show that the recent decline in IPOs on U.S. markets is related to changes in the technological disruptiveness of startups, which we measure using textual analysis of patents from 1930 to 2010. We focus on VC-backed startups and show that those with ex-ante disruptive technologies are more likely to exit via IPO and less likely to exit via sell-out. This is consistent with IPOs being favored by firms with the potential to carve out independent market positions with strong defenses against rivals. We document an economy-wide trend of declining technological disruptiveness since World War II that accelerated since the late 1990s. This trend predicts fewer IPOs and more sell-outs, and we find that roughly 20% of the recent dearth of IPOs, and 49% of the surge in sell-outs, can be attributed to changes in firms' technological characteristics.
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