Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability
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.
All authors are at the Graduate School of Business, University of Chicago. Pastor and Veronesi are also affiliated with the CEPR and NBER. We thank Ray Ball, Doug Diamond, Michael Halling (discussant), John Heaton, Gene Kandel, Peter Kondor, and the audiences at the University of Chicago and the Vienna Symposia in Asset Management for helpful comments.
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
&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. citation courtesy of