Abstract
We study how incumbents’ stock price responds to a new initial public offering (IPO) announcement in an uncertain industry. Conventional wisdom would argue that a new IPO is not good news, given that a new entrant would imply increased competition. However, we argue that a new IPO can signify good news in a highly uncertain industry. An IPO can provide more information to investors, thereby signaling a better future potential of the industry. We further suggest that the spillover benefits of an IPO will be more positive for incumbents if the new IPO firm is competitive (e.g., having more alliances with established firms or owning promising products in development) and cooperatively undertakes IPO with other competing firms. We find support for our hypotheses in a sample of biotechnology firms in the United States from 1999 to 2010.
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