Going public and innovation: Evidence from the ChiNext stock market

Abstract

Innovation can drive corporate value and enhance competitiveness. Due to the high risks, long-term nature, and exclusivity of innovative projects, it is difficult for companies to meet R&D (Research & Development) investment needs through internal funding. An IPO (Initial Public Offering) represents the first major liquidity event in a firm’s lifecycle since founders and initial investors realize value from the sale of their equity stakes and consequent diversification of ownership. Firms raise funds from investors in the capital market through initial public offerings (IPOs), which serve as an essential means of corporate financing. Based on this, this paper investigates the effects of going public on innovation using the Difference-in-Differences approach. The treatment group comprises public firms on the ChiNext stock market between 2010 and 2016. As a control group, non-listed firms submitted IPO applications to the China Securities Regulatory Commission (CSRC) but failed during the same period. Consequently, the final data is collected from 2007 to 2019, encompassing the three years pre and post-IPO periods. We find going public can prompt corporate innovation, and this positive effect is achieved through three channels: alleviating financing constraints, accumulating human capital, and mitigating agency problems. Heterogeneity analysis reveals that the positive relation is more pronounced in non-high-tech firms, higher competitive industries, weaker intellectual property protection firms and the growth-stage firms. Taking into account the characteristics of IPO, we find that the promotion of corporate innovation is more pronounced in samples with pre-IPO venture capital or private equity investments and lower levels of underpricing during IPO. Additionally, the increased innovation induced by IPO positively impacts long-term value and total factor productivity. The analysis reveals a complex trade-off between public and private ownership. It enriches the research on the impact of IPO behavior on innovation and provides new empirical evidence to improve the multi-level capital market.