Initial public offering, corporate innovation and total factor productivity: Evidence from China

Abstract

AbstractWe study how listing status affects corporate innovation and total factor productivity (TFP) in the Chinese capital market. Using a new data set of R&D investment and patent information on both industrial unlisted and listed firms, the following empirical findings are obtained: (i) firms experience an increase in innovation input and a decrease in innovation output following the initial public offering (IPO); and (ii) the decrease in innovation output significantly impedes TFP. We identify two possible mechanisms through which IPOs affect innovation activities: agency problems and easier access to funding. The results are robust to the propensity score‐matching approach that addresses selection bias. The analysis reveals that firms face a trade‐off between financing advantages and a potential decrease in innovation and productivity during the transition to public equity markets.