Why Does an IPO Impact Rival Firms?

Abstract

We use the IPO setting to demonstrate how the forecasts generated by a dynamic oligopoly model can help researchers overcome empirical challenges associated with establishing causality and identify appropriate control firms. Both of these are common issues in the empirical corporate finance literature. Recent papers report deteriorating performance by rivals following an IPO in the industry. Authors have attributed this to the competitive advantages a firm acquires by going public. When we reexamine this issue via a dynamic structural model, the results indicate that the value reductions across the industry primarily arise from an increased commoditization of the product market post-IPO. Based on the structural model, the paper develops a new causality test analogous to the difference-in-differences methodology and concludes that IPOs forecast future industry changes but do not cause them.