Year of Graduation
Valuation Effects of IPOs on Industry Rivals
The study examines whether IPOs influence the competitive environment within industries, being guided by the main assumption that an IPO has implications not only for a specific firm, but an industry as a whole. The study contingently divides IPOs effects on two major groups: information and competitive ones. Concerning information effects, an IPO could signal the investors that the market is rather promising and, thus, lead to a positive revaluation of share prices. Competitive effects, on the contrary, primarily provide adverse impacts on incumbent firms, since by its means the firm can increase its visibility, expand and, hence, compete more efficiently. The study is aimed to measure the performance of listed industry rival around IPOs announcement and completion dates and to investigate the influence of each group of factors. The second motive relates to the investigation of the role of venture capital backing on information externalities produced by issuing firms. On the basis of theoretical models it is hypothesized that venture-backed IPO firms generate superior positive spillover effects on listed industry rivals due to the issues of successful IPO timing and access to top investment banks. To meet research goals two event studies, content analysis and cross-sectional regression analysis are conducted. The study revealed that competitive effects prevail over information ones. The strongest effect on rivals’ performance measured by cumulative abnormal returns around the event date is noticed in highly concentrated industries. This effect can be even enhanced by the IPO size: the higher the capital gains from a new issuance, the poorer the performance of incumbent firms. The study also did not identify positive effects in response to venture capital backed IPOs, but showed that rivals’ negative reaction is significantly lower, than for non-venture backed IPOs.