The Rise of IPO Activity around the World

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IPO activity in the United States has fallen compared to the rest of the world.

During the past two decades, there has been a dramatic change in IPO activity around the world. In The U.S. Left Behind: The Rise of IPO Activity Around The World (NBER Working Paper No. 16916), co-authors Craig Doidge, G. Andrew Karolyi, and Rene Stulz study cross-country IPO activity around the world, its evolution over time, and the role of financial globalization. Using a database spanning 89 countries from the years 1990 to 2007, they find that IPO activity in the United States has fallen compared to the rest of the world. U.S. firms also go public less than one would expect based on the economic importance of the United States.

Although the worldwide share of IPO activity by U.S. firms still ranks near the top, the yearly average of U.S. IPOs has decreased from 27 percent in the 1990s to 12 percent in the 2000s -- this despite a slightly increasing U.S. share of worldwide GDP over the period. The typical U.S. IPO is larger on average than an IPO in the rest of the world, but the U.S. share of total IPO proceeds worldwide also has declined, from about 30 percent in the 1990s to only 21 percent in the 2000s (through 2007). In fact, in 2006 and 2007 China's IPO proceeds exceeded those of the United States. Other countries that were predominant in the 1990s, such as the U.K., Singapore, Australia, and Hong Kong, also ceded substantial IPO share to a number of new countries which had sizeable IPO activity in the 2000s.

Doidge, Karolyi and Stulz attempt to explain the causes of this decline. They find that in the early 1990s, the declining U.S. IPO share was due to the extraordinary growth of IPOs in foreign countries; in the 2000s, however, it was due to higher IPO activity abroad combined with lower IPO activity in the United States.

Global IPOs, that is IPOs in which some of the proceeds are raised outside the firm's home country, play a critical role in the increase in IPO activity outside of the United States. In 2007, proceeds raised in global IPOs accounted for 61 percent of total IPO proceeds, double the fraction raised in 1990. U.S. firms have never been active participants in the global IPO marketplace.

Global IPOs enable firms to overcome poor institutions in their country of origin by giving them access to global capital markets. Financial globalization increasingly enables firms whose value is most closely tied to the quality of institutions to use global IPOs and to take advantage of the institutions of foreign countries. As a result, firms from countries with weak institutions that still use domestic IPOs are firms for which the quality of institutions is relatively less important. Indeed, the quality of a country's institutions is positively related to its domestic IPO activity and negatively related to its global IPO activity. With the rise of global IPO activity compared to domestic IPOs, a country's laws and institutions have become significantly less important in affecting its rate and pace of IPO activity.

The authors show that the dynamics of both global and country-level IPO activity are strongly affected by global factors. Higher levels of worldwide IPO activity outside a country are strongly and positively related to the level of IPO activity in that country. However, IPO activity is also related to domestic market conditions. Firms are more likely to choose to go public at home when valuations are higher in the home market.

--Claire Brunel