Abstract:
A key economic feature of IPOs is that issuing firms select the timing of when to go public. This assumption features prominently in the interpretations of prior literature on IPOs: for example, prior literature interprets the decline in post-IPO performance using different explanations including moral hazard and earnings management. However, the absence of an observable control group of issuing firms,
which do not voluntarily choose the timing of their IPO, leads to endogeneity concerns limiting the interpretability of prior results. This paper exploits a requirement in securities law that effectively forces private firms to go public. Under the Securities and Exchange Act 1934 Section 12(g), private firms were required to provide public disclosure and register with the SEC—similar to traded firms—once they reach a
threshold of $10 million in assets and more than 500 shareholders of record. As this unique setting mitigates the endogenous choice of IPO timing by the issuer, it enables
the revisiting of key previous findings within the IPO literature. Exploiting a difference-in-difference research design, and using a matched sample of voluntary IPO firms and firms forced to go public (i.e., non-voluntary IPO firms), I find that moral hazard and pre-IPO earnings management are unlikely to explain the post-IPO decline in performance, inconsistent with prior literature interpretations. In addition, I show
that section 12(g) inhibits firms’ ability to time their IPO and document that nonvoluntary IPO firms do not time their IPO, and go public with lower growth opportunities and lower industry market to book relative to a matched voluntary IPO firms, consistent with the interpretations of prior literature primarily applying to the on-voluntary subset of IPO firms.