Jess Cornaggia, Matthew Gustafson, Jason Kotter, Kevin Pisciotta
Review of Finance, Volume 28, Issue 4, July 2024, Pages 1245–1273, https://doi.org/10.1093/rof/rfae011
The choice to go public is arguably the most important and impactful decision firms make in their corporate lives. On their path to an IPO, firms connect with and contribute to their local community in many ways, sometimes growing to be one of the most important companies in their local economy.
In this paper, we ask how an IPO affects the local economy. Does the firm’s cash windfall generate economic growth or does a highly visible firm crowd out competitors? We exploit market-induced variation in IPO completion to answer this empirical question. We find that the effect of IPOs on local economic growth varies based on the size of the IPO relative to the home county. Although small IPOs have no effect on future local economic growth, IPOs that are large relative to their local economy significantly reduce local economic growth relative to what would have occurred had the firm remained private (see figure below).
Specifically, large IPOs reduce relative annual county-level establishment growth by 1.1 percentage points, with similar effects for employment and population growth. Consistent with a crowding out mechanism, this effect concentrates within the IPO firm’s industry, which also becomes more concentrated. Additional tests indicate that the observed effects are strongest in non-tradable and services industries, which is consistent with a story whereby the IPO firm’s competitors enter less and exit more after their competitor goes public because they expect less local demand when locating next to a newly public firm.
