Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

Matthew Billett, Mark (Shuai) Ma, Xiaoyun Yu

Series number :

Serial Number: 
732/2021

Date posted :

March 02 2021

Last revised :

March 02 2021
SSRN Share

Keywords

  • Initial Public Offerings • 
  • product market competition • 
  • strategic reporting

A firm’s initial public offering (IPO) generates negative externalities for industry competitors. To mitigate this threat, incumbent firms manage their earnings downwards, issue more negative management forecasts, and use a more negative disclosure tone when industry peers file for an IPO.

Negative accruals reverse when the threat is resolved.  Incumbents manage earnings more aggressively when costs are small and benefits are large.  Such strategic disclosure lowers incumbent firm valuation multiples and associates with more negative IPO firm media sentiment.  IPO firms obtain lower offer prices, raise less capital, and are more likely to withdraw from the offering. They also invest less, hoard more cash, and experience lower profitability post IPO, while incumbents experience higher profitability and market share growth. Our results highlight the role of strategic reporting on product market competition and identify a new cost of going public.

Authors

Real name:
Mark (Shuai) Ma
Professor of Finance
Real name:
Matthew Billett
Indiana University Kelley School of Business