NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Lubos Pastor, Lucian Taylor, Pietro Veronesi

NBER Working Paper No. 12792
Issued in December 2006
NBER Program(s):   AP   CF

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.

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Document Object Identifier (DOI): 10.3386/w12792

Published: &Lubos Pástor & Lucian A. Taylor & Pietro Veronesi, 2009. "Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(8), pages 3005-3046, August.

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