Does Going Public Affect Innovation? (SSRN)
Author: Professor Shai Bernstein, Stanford Graduate School of Business
Date: October 14, 2012
This paper investigates the effects of going public on innovation. Using a data set consisting of innovative firms that filed for an initial public offering (IPO), I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach reveals a complex trade-off between public and private ownership. The quality of internal innovation of public firms declines by 50 percent relative to firms that remained private, measured by standard patent-based metrics. Public firms experience both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions.