The going-public decision and firm risk

Abstract

We investigate the relationship between the going-public decision and firm risk. We employ a comprehensive sample of firms that went public on European stock exchanges from 2000 to 2015 and examine how the risks of these newly listed firms are different from those of private firms and long-listing firms. We find that compared with private firms, newly listed firms have significantly increased risks of financial distress. This difference is largely attributable to the increase in leverage and the decline in liquidity, profitability and retained earnings. The results are consistent after controlling for selection bias, the effect of stock issuance, and the impact of the financial crisis and are robust to different risk indicators and estimation models (namely, the treatment effect model and DID). Finally, we find that the risks of newly listed firms are much higher than those of long-listing firms, and the risk effect of newly listed firms gradually weakens after listing. We argue that the increase in risk of IPO firms is temporary and is likely to be caused by the transition to public listing.