The impact of underpricing on newly public firm investments

Abstract

Going public not only provides access to capital, but it is also an important mechanism through which firms can obtain feedback on opportunities from a wider set of stakeholders and market participants. We develop this argument by examining how feedback from the Initial Public Offering (IPO) process in the form of underpricing influences a firm's subsequent investment decisions. Our results indicate that underpricing is associated with increases in investment spending in R&D and Capex post-IPO. Further, we find that at extreme levels of underpricing these shifts in investments have a detrimental effect on firm outcomes. Our work highlights that going public significantly alters the information environment and shapes the perceived opportunities of newly public firms in important ways. As such, the IPO and underpricing are not simply outcomes, but rather are important contributors to how firms allocate resources and pursue opportunities into the future. Further, findings suggest that effectively interpreting information from markets may be a previously overlooked capability that influences successful transition to public firm status.