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RFS Advance Access originally published online on August 29, 2008
Review of Financial Studies 2009 22(8):3005-3046; doi:10.1093/rfs/hhn082
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability

Lubos Pástor
Graduate School of Business, University of Chicago and CEPR and NBER

Lucian A. Taylor
Graduate School of Business, University of Chicago

Pietro Veronesi
Graduate School of Business, University of Chicago and CEPR and NBER

Send correspondence to Lubos Pástor, University of Chicago, Graduate School of Business, 5807 S. Woodlawn Ave., Chicago, IL 60637. E-mail: lubos.pastor{at}chicagogsb.edu.

JEL Classification: D83, G32, L26


  Abstract

We develop a model of the optimal initial public offering (IPO) decision in the presence of learning about the average profitability of a private firm. The entrepreneur trades off diversification benefits of going public against benefits of private control. Going public is optimal when the firm's expected future profitability is sufficiently high. 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 7183 IPOs in the United States between 1975 and 2004.

We thank Ray Ball, Markus Brunnermeier (discussant), Tom Chemmanur (discussant), Doug Diamond, Michael Halling (discussant), John Heaton, Gene Kandel, Peter Kondor, Morten Sorensen, Matt Spiegel, Ivo Welch (discussant), Frank Yu, Mike Weisbach, an anonymous referee, and the audiences at the NBER Entrepreneurship Meeting (Spring 2007), the NBER Asset Pricing Meeting (Spring 2007), the Western Finance Association meeting (2008), the Vienna Symposia in Asset Management, New York University, University of Chicago, University of Illinois at Urbana-Champaign, University of North Carolina, and University of Toronto for helpful comments.


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