Local IPO waves, local shocks, and the going public decision

The existence of IPO waves or ‘hot’ IPO markets has been widely documented in financial literature. IPO waves occur when several firms decide to go public at the same time period.

This happens for many reasons: research mainly relates IPO waves to entrepreneurs taking their firms public when stock market conditions are sufficiently favorable, to information spillovers across concurrent IPOs, or to shocks in capital productivity.

All studies on IPO waves have one feature in common: IPO waves are essentially industry IPO waves, where firms in the same industry tend to go public in the same time period, and IPO waves are driven by industry-specific factors (e.g., industry overvaluation, information spillover among IPOs in the same industry, etc.).

In this paper, we posit that the timing of a firm's decision to go public and IPO waves also have a geographical pattern. More in particular, we posit the existence of local IPO waves, occurring when firms from different industries located in the same area go public together.

We see at least three motivations. First, firms tend to cluster, which has significant consequences on firm performance, for instance, due to the spillover of knowledge between nearby firms. As such, firms operating in different industries but located in the same area might encourage each other to list.

Second, mainly via word of mouth and observational learning, proximity facilitates the spillover of information, which is extremely important for IPO pricing.

Finally, a local IPO wave could even originate from a positive local shock that simultaneously affects all local firms, such as improvements in local political conditions or favorable changes in municipal tax rates or real estate prices. For instance, when land is used as collateral for debt financing, firms owning land in the same area experience simultaneous fluctuations in their ability to raise debt with positive effects on investments, which might lead a few local companies to list.

We classify IPOs within industry IPO waves and within local IPO waves and see that the sub-samples of IPOs on the wave by industry only slightly overlap IPOs on the wave by region. However, IPO waves by region are similar to IPO waves by industry, as early-in- the-wave IPOs are equally more underpriced than late-in-the-wave IPOs.

Our results show the listing decision is sensitive not only to high valuations of firms in the same industry but also to high valuations of firms in the same region but in different industries. Our results, however, do not support information spillover as a driver of local IPO waves. Using a difference-in-difference approach, we show that regions hosting IPO waves experience a parallel increase in several economic ratios post the wave, such as the volume of new firms, employees in the region, and local aggregate sales. Overall, our results support local IPO waves originating in positive local shocks.

Read the full article.

Authors at the Department of Management

Giulia Baschieri – Associate Professor in Corporate Finance

Academic disciplines: Corporate Finance

Teaching areas: Finance

Research fields: asset pricing, corporate geographic location, corporate valuation

Giulia Baschieri is an Associate Professor in Corporate Finance at the University of Bologna and a Core Faculty member of the Bologna Business School. Since 2015, she was an Assistant Professor in Corporate Finance at the University of Venice. She has a Ph.D. in Markets and Financial Intermediaries with a thesis on the local home bias in the Italian context. In the academic year 2009-2010, she was a Ph.D. exchange student in Finance at Cass Business School – City University London, London (UK).

Stefano Mengoli – Full Professor in Corporate Finance

Academic disciplines: Corporate Finance

Teaching areas: Finance

Research fields:  Corporate Governance, Empirical Asset Pricing, and the effect of Geography on the Firm Value

Stefano Mengoli is a full professor of corporate finance at the University of Bologna. He received his PhD in Financial Markets from the University of Siena in 2002. He was an Academic Visiting at the London School of Economics and a PhD Visiting at City University Business School. He is the director of the Bologna Campus of the Department of Management at the University of Bologna, and he coordinates the Master's Degree in Business Administration at the University of Bologna.