Product Life-Cycle and Initial Public Offerings

Abstract

The paper examines how firms' product life-cycle (PLC) influences their trade-off between benefits and costs of going public. We construct the PLC measure by performing a textual analysis on S-1 registration statements for initial public offerings (IPOs). We show that firms with a more product-innovative PLC are more likely to complete the IPO even though they face higher underpricing and offer a lower fraction of equity at IPO. These firms conduct more seasoned equity offerings, payout fewer dividends, and conduct fewer acquisitions after IPO. The findings demonstrate that firms with diverging PLC differently weigh the importance of raising capital through IPO, information asymmetry with investors, and revealing information to competitors. To establish causality, we use an instrumental variable approach with the average PLC of similar public firms as the instrument for an IPO firm's PLC as well as a difference-in-differences approach exploiting the introduction of the American Inventors Protection Act. Our paper offers novel evidence on a previously under-explored economic force determining the trade-off of going public: firms' product life-cycle.