Growth Strategies of Entrepreneurial Firms after Going Public: A European Perspective

Abstract

For entrepreneurial firms it is essential to develop new ideas and products, build a brand name and reputation, and expand manufacturing capacity to protect competitiveness and ensure long-run success and survival. For a sample of 2,679 European Initial Public Offerings (IPOs) we analyze how firms allocate their resources between internal and external growth strategies after going public and how the growth strategy affects performance. Our findings shed light on the motives for going public and the determinants of internal and external growth post-IPO. Our findings indicate that the financing effect of the IPO helps to increase both external and internal growth. In particular, going public benefits external growth strategies in the long-term as acquisition activities usually require subsequent equity and debt issuance. However, the direct effects of going public are weaker in Europe than reported in studies for the U.S. We document that European IPO firms that spend large amounts on acquisitions or Capex exhibit the best performance, and R&D-intensive firms the worst. During the growth years these high growth firms outperform the broad stock market, but performance reverses in the following years. Overall, our evidence is consistent with the idea that going public facilitates external growth as a complement or substitute to internal growth.