CES-WP-08-20
The Going Public Decision and the Product Market
Thomas Chemmanur, Shan He, Debarshi Nandy
July 01, 2008
At what point in a firm’s life should it go public? How do a firm’s ex ante product market
characteristics relate to its going public decision? Further, what are the implications of a firm
going public on its post-IPO operating and product market performance? In this paper, we
answer the above questions by conducting the first large sample study of the going public
decisions of U.S. firms in the literature. We use the Longitudinal Research Database (LRD) of
the U.S. Census Bureau, which covers the entire universe of private and public U.S.
manufacturing firms. Our findings can be summarized as follows. First, a private firm’s product
market characteristics (market share, competition, capital intensity, cash flow riskiness)
significantly affect its likelihood of going public. Second, private firms facing less information
asymmetry and those with projects that are cheaper for outsiders to evaluate are more likely to
go public (consistent with Chemmanur and Fulghieri (1999)). Third, IPOs of firms occur at the
peak of their productivity cycle (consistent with Clementi (2002)): the dynamics of total factor
productivity (TFP) and sales growth exhibit an inverted U-shaped pattern. Finally, sales, capital
expenditures, and other performance variables exhibit a consistently increasing pattern over the
years before and after the IPO. The last two findings are consistent with the widely documented
post-IPO operating underperformance of firms being due to the real investment effects of a firm
going public, and inconsistent with underperformance being solely due to earnings management
immediately prior to the IPO.
59 Pages 1100622 Bytes
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CES-WP-08-19
The Effect of Power Plants on Local Housing Values and Rents: Evidence from Restricted Census Microdata
Lucas Davis
July 01, 2008
Current trends in electricity consumption imply that hundreds of new fossil-fuel power
plants will be built in the United States over the next several decades. Power plant siting has
become increasingly contentious, in part because power plants are a source of numerous negative
local externalities including elevated levels of air pollution, haze, noise and traffic. Policymakers
attempt to take these local disamenities into account when siting facilities, but little reliable
evidence is available about their quantitative importance. This paper examines neighborhoods in
the United States where power plants were opened during the 1990s using household-level data
from a restricted version of the U.S. decennial census. Compared to neighborhoods farther away,
housing values and rents decreased by 3-5% between 1990 and 2000 in neighborhoods near
sites. Estimates of household marginal willingness-to-pay to avoid power plants are reported
separately for natural gas and other types of plants, large plants and small plants, base load plants
and peaker plants, and upwind and downwind households.
33 Pages 928410 Bytes
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CES-WP-08-18
Using Internal Current Population Survey Data to Reevaluate Trends in Labor Earnings Gaps by Gender, Race, and Education Level
Richard Burkhauser, Jeff Larrimore
July 01, 2008
Most empirical studies of trends in labor earnings gaps by gender, race or education level
are based on data from the public use March Current Population Survey (CPS). Using the
internal March CPS, we show that inconsistent topcoding in the public use data will understate
these gaps and inaccurately capture their trends. We create a cell mean series beginning in 1975
that provides the mean of all values above the topcode for each income source in the public use
March CPS and better approximate earnings gaps found in the internal March CPS than was
previously possible using publically available data.
36 Pages 124417 Bytes
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CES-WP-08-17
Entry, Exit, and Plant-Level Dynamics over the Business Cycle
Yoonsoo Lee, Toshihiko Mukoyama
June 01, 2008
This paper analyzes the implications of plant-level dynamics over the business cycle. We
first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of
employment and productivity, between 1972 and 1997. We show how entry and exit patterns
vary during the business cycle, and that the cyclical pattern of entry is very different from the
cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and
employment and compare its predictions to the data. In our model, plants enter and exit
endogenously, and the size and productivity of entering and exiting plants are also determined
endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax
that is constant over time can destabilize the economy by causing fluctuations in the entry rate.
Entry subsidies are found to be effective in stabilizing the entry rate and output.
53 Pages 305002 Bytes
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CES-WP-08-16
How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface
Thomas Chemmanur, Karthik Krishnan, Debarshi Nandy
June 01, 2008
Using a unique sample from the Longitudinal Research Database (LRD) of the U.S. Census Bureau, we study several related questions regarding the efficiency gains generated by venture capital (VC) investment in private firms. First, does VC backing improve the efficiency (total factor productivity, TFP) of private firms, and are certain kinds of VCs (higher reputation versus lower reputation) better at generating such efficiency gains than others? Second, how are such efficiency gains generated: Do venture capitalists invest in more efficient firms to begin with (screening) or do they improve efficiency after investment (monitoring)? Third, how are these efficiency gains spread out over rounds subsequent to VC investment? Fourth, what are the channels through which such efficiency gains are generated: increases in product market performance (sales) or reductions in various costs (labor, materials, total production costs)? Finally, how do such efficiency gains affect the probability of a successful exit (IPO or acquisition)? Our main findings are as follows. First, the overall efficiency of VC backed firms is higher than that of non-VC backed firms. Second, this efficiency advantage of VC backed firms arises from both screening and monitoring: the efficiency of VC backed firms prior to receiving financing is higher than that of non-VC backed firms and further, the growth in efficiency subsequent to receiving VC financing is greater for such firms relative to non-VC backed firms. Third, the above increase in efficiency of VC backed firms relative to non-VC backed firms increases over the first two rounds of VC financing, and remains at the higher level till exit. Fourth, while the TFP of firms prior to VC financing is lower for higher reputation VC backed firms, the increase in TFP subsequent to financing is significantly higher for the former firms, consistent with higher reputation VCs having greater monitoring ability. Fifth, the efficiency gains generated by VC backing arise primarily from improvement in product market performance (sales); however for higher reputation VCs, the additional efficiency gains arise from both an additional improvement in product market performance as well as from reductions in various input costs. Finally, both the level of TFP of VC backed firms prior to receiving financing and the growth in TFP subsequent to VC financing positively affect the probability of a successful exit (IPO or acquisition).
60 Pages 1799989 Bytes
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