Do IPO Firms Become Myopic?
Vojislav Maksimovic, Gordon Phillips, Liu Yang
Review of Finance, Volume 27, Issue 3, March 2023, Pages 765–807, https://doi.org/10.1093/rof/rfac054
Do short-term pressures to meet earnings expectations cause myopic investment distortions, whereby public firms under-respond to market opportunities? Comparing private firms with public firms is difficult and risks confounding the effects of public status with differences in size and life cycle trajectories of the two types of firms. These difficulties are compounded by the scarcity of publicly available data for private firms.
We analyze whether firms transitioning from private to public status become myopic. To isolate the effect of public status, we match IPO firms with similar firms that stay private. We use data from the Longitudinal Business Database at the U.S. Census Bureau to match firms prior to their IPO and also at birth, for a sample of 5,952,500 firm years.
In the five years after the IPO, publicly listed firms grow faster and react more positively to product-market growth opportunities than matched private firms do. This advantage dissipates over time but does not reverse. Importantly, even after post-IPO high growth has regressed to the mean, there is no evidence of myopia. Moreover, we find no evidence that public firms in industries or firms identified as being at risk for capital market myopia exhibit investment inefficiency or under-investment relative to private firms.
Public firms’ greater participation in the market for assets explains much of the difference in the responsiveness to growth opportunities between public and private firms, specifically in the five years post IPO.
Measures of initial firm quality predict future growth, as illustrated in the Figure. A firm within the top one percent propensity to subsequently go public (calculated using initial conditions) employs, on average, 16 times more employees at the age of ten than an average quality firm whose propensity to go public is outside the top one percent. Among firms within this top one percent propensity, those that eventually became public are 29 times larger. In contrast, those that stay private are only 14 times larger than the remaining firms fifteen years later. This difference can be interpreted as an upper bound on the benefits of public status. These estimates indicate the large role initial conditions play in predicting firm size over time. Our non-myopia result remains unchanged after these initial quality controls.
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