Study On Firm’s IPO Decision Mechanism And Post-IPO Performance:a Technological Innovation Perspective

To study and understand various phenomenons in the IPO market and better encourage its financing role rather than to cheat or to speculate, it is essential to figure out the mechanism of the IPO decision of the firm. This paper features a new technological innovation perspective. Considering every firm as potentially technologically innovative, the firm’s financing demand, the building of the technological innovation project, the spillover and imitation of technological information, the product market competition among firms, the technology advancement of industry, and even the post-IPO long-run performance of the firm, can all be organically integrated.Although the financing cost of IPO is relatively low for the innovating firm, the information disclosure requirement of IPO process is prone to cause spillover of the technological innovation information. This is called the technological information spillover effect. The earlier of information spillover, the shorter of the period of relative competitive advantage from the technology innovation. For the firm with a higher revenue generating ability, the benefit of the relative competitive advantage is greater, the cost from the information spillover effect of IPO is greater, thus its motivation to finance through IPO is weaker. Instead it is the firm with a lower revenue generating ability that has a lower information spillover cost, and thus a higher motive to IPO. Using China’s real data, the above theoretical conclusions can be supported empirically.On the pro side, the IPO process can help to increase the product market share of the IPO firm. China’s empirical data shows that most firms’market shares experience a boost after its IPO. This is called the product market competition effect. Under the effect of product market competition, the non-innovation firm that originally does not need financing now does have a need, because IPO can help it to gain market share, or prevent it from loosing market share. Moreover, under the product market competition effect, firms began to have a motive to IPO in advance, which is the main reason of the "hot-market" phenomenon. Because the innovating firm’s technological productivity is higher and its cash holding will be less after IPO due to its innovation, there should be a difference in the productivity and the post-IPO cash holding between IPO firms in the hot market and off the hot market, and also a difference between IPO firms that issues early in the hot market and late. These propositions are also empirically supported by China’s real data. Technological innovation usually brings higher return. However, it carries higher risk, too. One kind of risk is that the innovation project itself may be infeasible or fail to win the customers. The other more important risk is that the innovation project may be replaced by a newer revolutionary innovation. This is called the industry technological revolution risk. Under the industry technological revolution risk effect, it is possible for the firm to IPO in advance, private financing in advance, or delay financing. The occurrence of each of the possibilities is determined by the prior probability of the feasibility of the innovation project, the prior probability of success of the revolutionary innovation, and the proportion of the first-stage investment of innovation. The effects of these exogenous factors to the firm’s IPO decision are all supported by the empirical data in the IPO market of China.The study on the internal mechanism of the firm’s IPO decision can help to infer the motivation of innovation after the firm’s IPO. Relying on the past input or output on innovation project of the firm before its IPO, it is hard to adjust the post-IPO strength of its technological innovation motivation, because the IPO process is usually the turning point in the firm’s life cycle, where firms that invested much on the innovation project or produced much innovation will usually behave in the same way after its IPO. Based on the theory proposed in this paper, however,7determining factors that influence the innovation motive of the IPO firm can be identified using the pre-IPO characteristics of the firm. Empirical study shows that, innovating firm and non-innovating firm can be distinguished from the7determining factors, and the post-IPO financial performance of the former is high and stable, its stock market return exceeds that of the stock index, and its surviving period is longer and survival rate is higher. The non-innovating firm sharply contrasts the former. Its long-run financial performance goes weak, its stock return does not exceed index return and volatitity is higher and risk is higher, and its surviving period is shorter and the survival rate is lower.This paper not only helps people understand the firm’s IPO decision, but also helps the supervisor and policy maker of the IPO market to control the quality of the firms who applies to IPO, to stabilize the secondary market, and to protect general investors. Based on the above analysis, the paper provides a scries of practical policy suggestions on how to regulate China IPO market to encourage technological innovation.