DP6061 Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability
|Author(s):||Lubos Pástor, Lucian Taylor, Pietro Veronesi|
|Publication Date:||January 2007|
|Keyword(s):||Diversification, IPO, Learning|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6061|
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.