I wrote the article “The growth process of IPO firms” published in the Journal of Business Venturing Insights for entrepreneurship scholars, PhD students, entrepreneurs and managers of small businesses, as well as public decisions-makers. Business growth is a topic that is often viewed differently by entrepreneurs and managers on one side and academics and public policies on the other side. While entrepreneurs and managers often care a lot about growth in performance (larger sales and profits), academics and public policies pay attention to growth in resources (additional assets and workforce) as well. In this article, I wanted to reconcile both views by proposing that growth is a staged-process that begins with the acquisition of resources and continues with increased performance.
But to acquire resources, firms need money. Going public on equity markets is a powerful channel to obtain financial resources that can be leveraged to fuel the growth process and, ultimately, grow faster. This article is thus about the role of initial public offerings (IPOs) in facilitating firm growth.
What did I do in the article and what did I observe?
To examine the growth of IPO firms, I used a commercial database that provides access to financial and accounting information on firms located in Continental Europe countries. After identifying IPO firms, I matched them with non-IPO firms that had comparable characteristics. Then, I examined with econometric techniques the differences in the speed of growth between these two categories of firms. It appeared that IPO firms grow faster than comparable non-IPO firms in several key aspects. In particular, IPO firms acquire more fixed assets and employees immediately after going public and, later on, generated more sales than their non-IPO counterparts. Episodes of very fast-growth in sales are also more common for IPO firms. Interestingly, when IPO firms acquire fixed assets, they subsequently hire more employees, and generate more sales, which suggests that the resource-acquisition step of growth is followed by an increase in performance.
So what?
In Continental Europe, the context of the article, public equity markets are not as developed as in the US or the UK and relatively few firms go public. The results of the paper suggest that European entrepreneurs and small business managers can miss opportunities to grow their businesses fast when they neglect to consider the benefits of going public. Going public is undoubtedly a key decision that can only be taken after due considerations, because it has major implications on the business running and the obligations to disclose information to the public. The results of the article highlight the bright side of going public: To the extent that entrepreneurs and managers want to grow their businesses, going public is a powerful channel to fuel growth.
For public decision-makers, a straightforward implication of the article is the importance to develop the attractivity of public equity markets and increase the number of initial public offerings in order to support businesses growth. Several attempts have been made in Europe in recent years to facilitate the listing process and structure public equity markets in a way that makes them more attractive to entrepreneurs and managers. Such efforts are definitely in the right direction to give entrepreneurs and managers a larger access to financial resources to fuel firm growth.
Read the full paper here to find out more: https://www.sciencedirect.com/science/article/pii/S2352673423000069
Author bio
Vivien Lefebvre is associated professor of finance at EM Strasbourg Business School. His research focuses on SMEs’ financial management and the process of mobilizing financial resources.
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