Working Paper: CEPR ID: DP6061
Authors: Lubos Pstor; 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.
Keywords: diversification; IPO; learning
JEL Codes: G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm profitability (L21) | decline in profitability post-IPO (G24) |
| volatility in profitability (G17) | decline in profitability post-IPO (G24) |
| uncertainty in average profitability (D89) | decline in profitability post-IPO (G24) |
| expected future profitability (G17) | realized profitability at IPO (G24) |
| realized profitability at IPO (G24) | decline in profitability post-IPO (G24) |