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Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality

Author

Listed:
  • Vojislav Maksimovic
  • Gordon M. Phillips
  • Liu Yang

Abstract

Using U.S. Census data, we track firms at birth and compare the growth pattern of IPO firms and their matched always-private counterparts over their life cycle. Firms that are larger at birth with faster initial growth are more likely to attain a larger size and to subsequently go public. We estimate a model to predict the propensity to become public (“public quality”) using initial conditions. Firms in the top percentile of public quality grow 29 times larger than the remaining firms fifteen years later if they actually become public and 14 times larger if they stay private, showing a large selection effect for IPO status. Public firms respond more to demand shocks after their IPO and are more productive than their matched private counterparts. This effect is stronger in industries that are capital intensive and dependent on external financing. Overall, initial conditions predict firm growth trajectories, selection into public status and responsiveness to demand shocks. We find no evidence of public market myopia when matching by initial conditions.

Suggested Citation

  • Vojislav Maksimovic & Gordon M. Phillips & Liu Yang, 2017. "Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality," NBER Working Papers 24104, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24104
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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