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Growth Strategies of Entrepreneurial Firms after Going

Public: A European Perspective

Wolfgang Bessleraand Jan Zimmermannb

Center for Finance and Banking,Justus-Liebig-University Giessen

Giessen, Germany

This draft: September 1, 2012

Abstract

For entrepreneurial firms it is essential to develop new ideas and products, build a brand nameand reputation, and expand manufacturing capacity to protect competitiveness and ensure

l d i l F l f 2 679 E I iti l P bli Off i (IPO )

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l d i l F l f 2 679 E I iti l P bli Off i (IPO )

1. Introduction

For the managers of entrepreneurial firms the decision how to allocate their limited

resources between internal and external growth is essential. They are simultaneously occupied

with developing new ideas and products, building a brand name and reputation, and

expanding manufacturing capacities to protect competitiveness and to ensure long-run

survival. An important event in the entrepreneurial firms history is the decision to go public

by offering its shares for the first time on public equity markets (initial public offering or

IPO). This decision has the potential to significantly influence the firms growth strategies

and ultimately its performance. We examine the entrepreneurial firms resource allocation

decision between internal and external growth after going public and analyze how the growth

strategy impacts post-IPO performance. Specifically, we compare the long-run performance

of IPO firms with high acquisition activities to the performance of IPO firms with high capital

expenditures (Capex), or research and development (R&D).

Our research is related to two major strands in the literature. First, several studies

examine the investment activities associated with entrepreneurial firms financing decisions

(Kim and Weisbach 2008; Van Bommel and Vermaelen 2003; Pagano, Panetta and Zingales

1998) i l di th i iti ti iti f IPO fi (C lik t S ili d Shi d i

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Samaras (2008) who investigate whether external and internal growth differently impact

performance and find a comparable positive influence for a sample of 7,223 U.S. publicly

listed firms over the period from 1990 to 2004. Their combined results suggest that post-IPO

acquisition activity is important both as a motive for going public as well as for corporate

growth, and that it is closely linked to subsequent equity and debt issuance. Further, it is

consistent with rational decision making between growth strategies.

We contribute to the literature in multiple ways: First, we provide new evidence on the

determinants of external and internal growth post-IPO for a sample of 2,679 European IPOs

over the period from 1996 to 2010. Celikyurt, Sevilir and Shivdasani (2010) analyze the

determinants of acquisitions and internal growth for a sample of U.S. IPOs to provide

evidence on the importance of various hypotheses concerning the acquisition motive when

going public. However, they do not examine the influence of growth strategies on

performance. Our results show that acquisitions are an important means of growth for 594

acquiring IPO firms in our sample. These firms spend 66.17 percent of pre-IPO market value

on acquisitions over a five-year period which is more than the 49.69 percent for Capex and

R&D combined. But the average for the full sample is only 16.23 percent compared to 44.00

percent for Capex and 13.25 percent for R&D, suggesting an overall lower importance of

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amounts on acquisitions or Capex exhibit the highest outperformance, although the

performance of acquisition-intensive IPOs depends strongly on the period over which growth

is measured. Our sample firms outperform during growth years, but experience a performance

reversal in subsequent years. Further, we document that high amounts of R&D spending after

going public are associated with the lowest performance of all growth strategies.

The remainder of the paper is organized as follows. We review the literature in section

2 and describe the data and methodology in section 3. In section 4, we present the results of

our empirical analysis of entrepreneurial firms growth strategies after going public and their

long-run performance. Section 5 concludes.

2. Literature Review

In this section we review the literature on the internal and external growth strategies of

entrepreneurial firms, focusing on the determinants of external versus internal growth (2.1),

the influence of going public on the growth strategy (2.2), and the relationship between

growth strategy and performance (2.3). This provides the framework for our analysis of how

entrepreneurial firms allocate their resources between the different growth mechanisms and

h hi d i i i f

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associated with external growth given that a large number of mergers and acquisitions do not

create shareholder value for acquirers. Most importantly, acquisitions can also be driven by

agency motives or hubris which results in empire building (Jensen 1986) and overbidding

(Roll 1986). Further, mergers may fail due to post-merger integration risks or interventions by

antitrust authorities.

Internal growth offers several advantages over external growth through acquisitions.

First of all, it provides more corporate control and encourages entrepreneurship. Because

management typically has superior information about their own firm, internal investment can

be planned more efficiently and privately, resulting in competitive advantages that are harder

to replicate by competitors (Aktas, de Bodt and Samaras 2008). Moreover, internal growth

protects organizational culture which is a typical source of post-merger integration problems

when top management styles and firm structures markedly differ (Datta 1991). However, the

shortcomings of internal growth are that it is difficult in mature and declining industries

where firms are under pressure to consolidate or shift their resources into growing industries

and new markets to ensure their survival (Powell and Yawson 2005). In addition, because

internal growth tends to be slower, firms in rapidly evolving industries may prefer

acquisitions in order to grab market share as documented for internet IPOs during the New

E i d (S h lt d Z 2001)

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take into consideration the markets opinion about the value of the firm because outside

investors may be better informed about the firms growth opportunities and cost of capital,

particularly if the firm just went public. In the context of mergers and acquisitions, the market

reaction at the announcement may be used in a similar way to improve the firms acquisition

decision, for example, whether to complete the offer. Van Bommel and Vermaelen (2003)

provide support for a market feedback effect in IPO firms investment decisions, given that

post-IPO Capex are positively related to final offer price revisions and underpricing. In

addition, Jegadeesh, Weinstein and Welch (1993) interpret their finding of a higher

importance of aftermarket returns over the period after the IPO date for the size and likelihood

of subsequent SEOs to be consistent with the market feedback effect and not with signaling,

which only predicts a relation with underpricing. While the evidence for mergers and

acquisitions is generally mixed (Kau, Linck and Rubin 2008), Hsieh, Lyandres and Zhdanov

(2010) report a positive association between offer price revisions and the likelihood andtiming of acquisitions for a sample of IPO firms.

2.3Influence of the Growth Strategy on Performance

In the corporate finance literature, there is a long standing debate of the causes and

consequence of post-issue underperformance or the new issues puzzle that is associated with

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The asset pricing literature provides another avenue to examine the influence of

growth strategies on firms performance. Starting with Cochrane (1991) research on

investment-based asset pricinghas both theoretically and empirically examined the negative

cross-sectional association of firms investment and expected returns. These studies link the

negative financing-return relation to the negative investment-return relation, thereby offering

efficient markets explanations for underperformance after firms raise external capital (see

Butler, Cornaggia, Grullon and Weston 2011 for an excellent review). According to the q

theory of investment, firms increase investment in response to a reduction of required returns

because lower costs of capital increase the marginal value of investment. Further, the real

options theory is based on the idea that investing firms convert risky growth options into less

risky assets in place, which should lead to a reduction in required returns. Several applications

to explain post-issue and post-merger underperformance have been made that are based on

real options theory (Hackbarth and Morellec 2008; Carlson, Fisher and Giammarino 2006) orthe q theory of investment (Chang 2011; Mortal and Schill 2009; Lyandres, Sun and Zhang

2008). Lyandres, Sun and Zhang (2008) find empirical support for an investment-based

explanation of post-IPO and post-SEO underperformance. Chang (2011) reports that acquirer

underperformance can largely be explained by including an investment factor. Mortal and

S hill (2009) h th t t d f i l t f b d t th

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3. Data and Methodology

3.1 Data

Our sample consists of all initial public offerings (IPOs) of European firms with listing

dates between January 1, 1996 and December 31, 2010 in the Thomson SDC New Issues

database. After excluding observations with double counts, missing sedols, differing offer

dates in Thomson Datastream and Thomson SDC, American depository receipts (ADRs), unit

offerings, limited partnerships, non-European exchanges, penny stocks with offer prices

below $1 and financial firms and utilities, our final sample comprises 2,679 IPOs in Europe.

Following the approach by Gajewski and Gresse (2006), we exclude 371 issues where the

base date is later than 30 days after the listing date or more than 60 days prior to the listing

date for consistency.

The sample is presented in Figure 1 along with the Datastream Europe total returnindex. The number of IPOs rises sharply during the periods from 1998 to 2000 and 2006 to

2007 at the peaks of stock market valuations. To investigate the internal and external growth

strategies of these entrepreneurial firms after going public, we track all M&A activities of our

sample firms over a period of up to five years, including the IPO year in the Thomson SDC

M&A d t b I li ith th lit t M&A h f ll i iti f bli

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We analyze the long-run performance by calculating buy-and-hold abnormal returns

() on a daily basis, averaged over all firms. Abnormal returns are calculated from the

first day of trading until 750 trading days (or three years) after going public:

(3) .

where nis the number of firms, the return of firm ion day t, and the market return onthis day. This measure compares the average performance of a buy-and-hold investment in a

portfolio consisting of all IPOs to the buy-and-hold investment in an appropriate benchmark

portfolio. We use the Datastream Europe index as our benchmark portfolio. Because some

firms delist within three years after going public due to, for example, bankruptcy or merger,

they are dropped starting from the delisting date. While this approach leads to variations in

sample size, it mitigates a survivorship bias and ensures that our portfolio returns only reflect

the returns of firms that are actively traded. To test for statistical significance, we employ thebootstrapped skewness adjusted t-test advocated by Lyon, Barber and Tsai (1999) in addition

to the signed rank test for the respective median values. We draw 1,000 samples of size

to calculate the critical values of the transformed t-statistic :

(4) ,

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capital expenditures (Capex), or research and development (R&D) over a period of up to five

years including the IPO year (i.e. from year 0 to 4). To facilitate comparison all values are

normalized by dividing by pre-IPO market value, which is the market value of the firm at the

day before going public. Figure 3 presents the mean cumulated acquisition volumes and

internal growth outlays for acquiring IPO firms in the upper panel and for non-acquiring IPO

firms in the lower panel. The reported amounts are cumulated over years 0 to t. For firms

pursuing acquisitions external growth appears to be as important as organic growth. In all

years, but the IPO year, more resources are allocated to acquisition activities than to Capex

and R&D combined. This is also supported by the results presented in Table 1. For the full

sample of IPO firms, acquisition volumes as a percentage of pre-IPO market value are

significantly lower than all other outlays for organic growth. Over the five-year period post-

IPO the average firm spends 16.23 percent of pre-IPO market value on acquisitions compared

to 44.00 percent on Capex and 13.25 percent on R&D.

However, for the subsample of acquiring IPO firms acquisition volumes are

significantly higher than Capex and R&D particularly over longer horizons. As a percentage

of pre-IPO market value these firms spend 66.17 percent on acquisitions, 40.29 percent on

Capex and 7.62 percent on R&D. The only cutback is that the signed rank test for the

bi d C l R&D t i di t th t f th di fi i iti

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evidence that acquiring and non-acquiring IPO firms raise comparable amounts of equity after

going public. The proceeds from the IPO represent over 0.45 percent of pre-IPO market value

for acquiring IPO firms and 0.40 percent for non-acquiring IPO firms. In addition, these firms

raise more than 0.25 percent and 0.35 percent of their pre-IPO market value, respectively,

through subsequent SEOs over the five-year period since the IPO. Another source of capital

for growth financing comes from the issuance of long-term debt including bank loans and

bonds. We obtain the cumulative values of stocks and long-term debt issued over the five

years including the IPO year from companies cash flow statements.1

The results presented in

Figure 5 suggest that acquiring IPO firms raise about two times as much equity and debt

capital subsequent to going public to finance their growth. Thus, entrepreneurial firms which

pursue a strategy of external growth through acquisitions rely much more on external sources

of capital than firms which grow only organically. This is in line with the idea that going

public facilitates acquisitions in addition to further organic growth.

[ Insert Figures 4 and 5 about here ]

4.2 Effects of Industry, Capital Infusion and Underpricing on Growth Strategy

A first insight into how going public influences entrepreneurial firms growth

strategies can be gained by analyzing the amounts spent on acquisitions, Capex and R&D for

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Thus, our results are consistent with the idea that going public may be partly motivated by

acquisition motives.

We further consider how industry growth opportunities influence the entrepreneurial

firms post-IPO growth strategies by sorting all industries into high and low market-to-book

ratio (M/B ratio) industries based on whether the industrys M/B ratio is higher (lower) than

the median M/B ratio of all 48 Fama-French industries over that time period. The results are

also presented in Table 2. Interestingly, the number of firms does not markedly differ between

both groups, so we do not find strong evidence for the proposition that industry IPO activity

tends to cluster in high growth industries. With respect to the importance of alternative growth

strategies, we find that external growth through acquisitions is an important part of the growth

strategy of entrepreneurial firms in high growth industries. These firms spend more on

acquisitions than firms in low growth industries. Not surprising, IPO firms in high growth

industries have lower Capex and higher R&D expenditures. Overall, these findings provide

some evidence that acquisitions are an important means of growth for IPO firms in

acquisition-intensive and high growth industries and that IPO firms substitute to some degree

between internal and external growth.

[ Insert Table 2 about here ]

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by pursuing acquisitions where payment is made with stocks. Therefore, we only consider

stock acquisitions while acknowledging that firms could also capitalize on their overvaluation

by raising more proceeds from the IPO or subsequent SEOs. Nevertheless, the acquisition

currency hypothesis predicts a direct relationship between overvaluation and stock

acquisitions. Similarly, overvalued firms have an incentive to raise more money if they are

temporarily overvalued and increase their cash holdings or overinvest as argued by Kim and

Weisbach (2008). While we cannot differentiate between these hypotheses, our evidence is

stronger for the acquisition currency hypothesis (see Table 3). IPO firms with a higherunderpricing spend twice as much on acquisitions over the five year period. In contrast, their

outlays on Capex and R&D are lower. While we find a negative influence of underpricing on

organic growth, Celikyurt, Sevilir and Shivdasani (2010) document a positive influence on

both acquisitions and organic growth. Still, their findings are stronger for acquisitions.

4.3 Determinants of External Growth: Cash and Stock Acquisitions

For a multivariate analysis of the determinants of entrepreneurial firms external and

internal growth strategies post-IPO, we run several cross-sectional regressions with the

respective growth measure as the dependent variable. Because all growth measures are

constrained to be positive and strongly cluster at zero, we employ a Tobit model with lower

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public equity markets subsequent to going public, we expect this variable to be positively

related to the volume of cash acquisitions.

Debt capitalis the total amount of long-term debt issued during years 0to t, scaled by

pre-IPO market value. Similar to the new capital raised from SEOs following the IPO, the

resolution of uncertainty and improved capital market access associated with going public

predict this variable to be positively related to the volume of cash acquisitions.

Underpricing is the percentage change from the offer price to the first day closing

price. To the extent that underpricing reflects overvaluation, the acquisition currency effect

predicts this variable to be positively related to the volume of stock acquisitions.

As control variables we includesecondary IPO proceedswhich is the capital raised at

the IPO from the sale of secondary shares, scaled by pre-IPO market value, and PE/VC

backed dummywhich takes the value of one if the IPO firm is backed by a private equity (PE)or venture capital (VC) firm.High-tech dummytakes the value of one if the IPO firm belongs

to a high-tech industry as classified by Loughran and Ritter (2004), junior market dummy

takes the value of one if the offering was conducted on a junior market, and common law

dummytakes the value of one if the IPO firm is from the UK or Ireland.

Th l f i f h l f h i i i d i h l f

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Zimmermann (2012) in their analysis of long-run performance of acquiring IPO firms in

Europe. Possibly, the benefits from going public on acquisition activity may be more

pronounced in a common law setting, and when listing standards are higher.


Regressions for the volume of stock acquisitions are also presented in Table 4 in the

right panel. The results confirm our univariate finding of a positive association between

industry growth opportunities and the volume of stock acquisitions. Entrepreneurial firms

from high growth industries resort to equity financing for acquisitions either to preserve their

financial flexibility or due to financial constraints which make equity financing more

accessible. Also, this may reflect attempts to capitalize on relative overvaluation. However,

we do not find a significant influence of the level of underpricing which renders the market

timing argument less likely. Nevertheless, the acquisition currency effect more broadly

generalizes to IPO firms ability to pay for acquisitions with stocks and this may be an

important reason in the going public decision of some entrepreneurial firms. As for the

regressions of cash acquisitions, we find a negative relationship between the volume of stock

acquisitions and primary proceeds from the IPO but a positive association with primary SEO

proceeds over longer horizons. Because the cash raised through equity offerings can not

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intangible assets and is motivated by the objective to understand the entrepreneurial firms

resource allocation decision between the various alternative growth strategies. Thus, we differ

from Celikyurt, Sevilir and Shivdasani (2010) who analyze the combined outlays on Capex

and R&D.4

The results of regressions for the volume of Capex are presented in the left panel of

Table 5. Interestingly, we find a positive association of Capex with industry acquisition

activity and a negative correlation with industry growth opportunities. Because of the positive

relation between industry growth opportunities and the volume of stock acquisitions, this

suggests that internal investments in physical assets and external growth through acquisitions

might be substitute means of growth. A possible explanation is that acquisitions allow

companies to grow faster which may be particularly important for rapidly evolving industries.

In addition, the acquisition currency hypothesis postulates that overvalued stocks can be used

to acquire other firms cheaply. Both arguments suggest that Capex may be less preferable to

acquisitions in high growth industries. Nevertheless, the positive coefficient on industry

acquisition activity is also consistent with the idea that building up physical capital and

acquiring other firms can be complements. With respect to the influence of going public on

the volume of Capex post-IPO, we obtain similar results to the determinants of external

h b h i SEO i l d d b i l i h f C W d

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consistent with the literature on financing innovation (Brown, Fazzari and Petersen 2009; Hall

2002). Because of the high risk nature, limited collateral, risk shifting and financial distress

costs internal and equity capital are the preferred sources of innovation financing. Not

surprising, there is a high prevalence of PE/VC backed, high-tech firms among the R&D

intensive firms. These firms often have to incur large underpricing when going public. Among

the remaining control variables, junior market listings are negatively associated with the

volume of R&D and secondary IPO proceeds and the common law dummy positively.


4.5 Post-IPO Long-run Performance

To examine the influence of internal and external growth strategies on long-run

performance, we calculate three-year Buy-and-Hold abnormal returns (BHAR) and compare

the means and medians of IPO firms which spend the highest amounts on acquisitions, Capex,and R&D as a percentage of pre-IPO market value and cumulated over years 0to 1or 0to 2.

We classify all IPO firms with total volume of acquisitions above the 90th percentile in our

sample as acquisition-intensive, given that only a minority of IPO firms pursues acquisitions.

Similarly, we code firms that spend more than the 80th percentile of all sample firms on

Capex or R&D as Capex-intensive and R&D-intensive, respectively. We measure

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first year of being public, which is followed by a strong performance reversal. Only R&D-

intensive firms perform similarly inferior over the three-year period, but these firms do not

experience a comparable first year effect. In fact their performance mostly comes from

underpricing. Over periods of two and three years, IPO firms which spend large amounts on

Capex exhibit the highest performance. Together these findings suggest that high acquisition

activity post-IPO is associated with a strong outperformance, but we cannot conclude whether

the good performance drives acquisition activity or merely reflects an expansion of the

acquirers growth opportunities set that also leads to M&A activities.

[ Insert Figure 6 about here ]


The results based on cumulated growth measures over the years 0to 2are presented in

the lower panel of Figure 6 (and Table 6, right panel). Overall, we obtain similar findings

except for a more moderate performance reversal of acquisition-intensive IPO firms. During

the first two years after going public, these acquiring IPO firms gain BHAR of 37.28 percent

which is not much higher than the 32.43 percent realized over the full three-year period. This

performance is comparable to IPO firms which spend large amounts on Capex as these firms

f b 33 48 d 22 68 d h i l h

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acquisitions, Capex, and R&D, and all financing activities after going public over a period of

up to five years including the IPO year (i.e. from year 0to 4).

Our results reveal that for acquiring IPO firms external growth is as important as

organic growth. As a percentage of pre-IPO market value these firms spend 66.17 percent on

acquisitions over the five-year period, significantly more than the combined Capex (40.29

percent) and R&D outlays (7.62 percent). For the full sample of IPO firms, however, the

volume of acquisitions is only 16.23 percent compared to 44.00 percent for Capex and 13.25

percent for R&D. Thus, for the average IPO firm in our sample, Capex is the most important

means of growth while acquisitions are an important means of growth for some of our sample

firms after going public.

Investigating industry effects and the influence of IPO firms growth strategies, we

find that the volume of acquisitions is larger for acquisition-intensive and high growth

industries, consistent with the idea that going public may be partly driven by acquisition

motives. In addition, higher primary IPO proceeds are associated with larger amounts of cash

acquisitions and internal growth, and higher underpricing is associated with larger amounts of

stock acquisitions but lower Capex and R&D outlays. Overall, our evidence supports that

internal and external growth may be both complementary and substitute means of generating

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time of the IPO is less important. Similarly, it can be argued that although we do not find a

significant influence of underpricing on the value of stock acquisitions, the benefits from

creating an acquisition currency may be more important from a long-run perspective (i.e.

being able to pay with stocks). Our results are also consistent with prior research that

documents a dominance of internally or debt financed cash acquisitions in Europe. In line

with the literature on financing innovation, we find that equity capital is the preferred source

of innovation financing given that primary proceeds from IPO and subsequent SEOs have a

positive influence on R&D. As expected, debt capital is negatively associated with R&D.

Our results on the long-run performance post-IPO indicate that firms which spend

large amounts on acquisitions or Capex after going public experience the highest

outperformance, although the performance of acquisition-intensive IPOs depends strongly on

whether growth is measured over a two- or three-year period. During the growth years, these

firms exhibit a strong outperformance that is followed by a performance reversal in the

following years. Based on our findings, it seems that investors were not rewarded for

investing in risky R&D-intensive IPOs.

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6. References

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Bessler, Wolfgang and Jan Zimmermann (2012), Acquisition activities post-IPO in Europe:

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mergers and acquisitions, in: H. Kent Baker and Gerald S. Martin (eds.), Capital

Structure and Corporate Financing Decisions, Wiley, Hoboken.

Brown, James R., Steven M. Fazzari and Bruce C. Petersen (2009), Financing innovation andgrowth: Cash flow, external equity, and the 1990s R&D boom, Journal of Finance, 64:1,

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Butler, Alexander W., Jess Cornaggia, Gustavo Grullon and James P. Weston (2011),

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Eberhart, Allan C., William F. Maxwell and Akhtar R. Siddique (2004), An examination of

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Faccio, Mara and Ronald W. Masulis (2005), The choice of payment method in European

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Hackbarth, Dirk and Erwan Morellec (2008), Stock returns in mergers and acquisitions,

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Higgins, Matthew and Daniel Rodriguez (2006), The outsourcing of R&D through

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Hovakimian, Armen and Irena Hutton (2009), Merger-motivated IPOs, Financial

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Hsieh, Jim, Evgeny Lyandres and Alexei Zhdanov (2010), A theory of merger-driven IPOs,

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Loughran, Tim and Jay R. Ritter (1995), The new issues puzzle,Journal of Finance, 50:1, 23-

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Appendix

Figure 1: Sample of total and acquiring IPO firms.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

50

100

150

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250

300

350

400

450

500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

594 Acquiring IPO firms 2,679 total IPO firms Datastream Europe Index

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0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0 1 2 3 4

Acquiring IPO firms

AcquisitionsCapex

R&D

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Non-acquiring IPO firms

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0

0.05

0.1

0.15

0.2

0.25

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0.35

0.4

0.45

0.5

0 1 2 3 4

Acquiring IPO firms

Proceeds from IPO

Proceeds from SEOs

0.4

0.45

0.5


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0.0

0.1

0.2

0.3

0.4

0.5

0.6

0 1 2 3 4

Acquiring IPO firms

Value of stocks issuedValue of long-term debt issued

0.5

0.6


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-10%

0%

10%

20%

30%

40%

50%

60%

0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750

Cumulated values over years 0-1

Acquisition-intensive IPOs (n=259)

Capex-intensive IPOs (n=399)

R&D-intensive IPOs (n=518)

50%

60%

Cumulated values over years 0-2

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All IPO firms Acquiring IPO firms

Statistic Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4

Number of firms Maximum 2,591 2,560 2,491 2,214 593 592 588 543

(1) Acquisitions Mean 0.0700 0.1024 0.1285 0.1623 0.3058 0.4428 0.5445 0.6617

Median 0.0000 0.0000 0.0000 0.0000 0.0194 0.0861 0.1476 0.2119(2) Capex Mean 0.1507 0.2348 0.3267 0.4400 0.1417 0.2271 0.3113 0.4029Median 0.0580 0.0937 0.1279 0.1699 0.0614 0.1002 0.1402 0.1951

(3) R&D Mean 0.0315 0.0565 0.0863 0.1325 0.0203 0.0364 0.0531 0.0762Median 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

(4) Capex plus R&D Mean 0.1905 0.3105 0.4464 0.6443 0.1631 0.2656 0.3701 0.4969Median 0.0794 0.1350 0.1905 0.2557 0.0792 0.1393 0.2075 0.3032

(1) - (2) paired t-test -6.336*** -7.047*** -6.517*** -5.005*** 2.673*** 2.849*** 2.319** 2.750***signed rank test -29.233*** -26.347*** -24.071*** -20.633*** -2.746*** -0.644 0.295 1.459

(1) - (3) paired t-test 2.243** 1.699* 1.031 0.444 6.082*** 7.507*** 8.480*** 8.826***signed rank test -6.900*** -3.825*** -2.835*** -2.107** 11.591*** 15.779*** 16.933*** 16.534***

(1) - (4) paired t-test -4.790*** -4.455*** -3.824*** -3.005*** 2.110** 1.939* 1.149 1.479signed rank test -30.008*** -27.619*** -26.112*** -23.047*** -3.998*** -2.326** -2.191** -1.607

Table 1: Post-IPO acquisition activity, capital expenditures (Capex), and research and development expenses (R&D) for the full sample of all IPOfirms (left panel) and the subsample of acquiring IPO firms (right panel). All values are cumulated over years 0 to t and normalized by pre-IPOmarket value. ***, **, * denote significance at the 1, 5, and 10 percent level.

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High acquisition-intensive industries High M/B ratio industries

Means Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4

Number of firms (max.) 1,633 1,612 1,568 1,431 1,340 1,337 1,337 1,185Acquisitions 0.0770 0.1056 0.1370 0.1760 0.0876 0.1185 0.1414 0.1856Capex 0.1363 0.1999 0.2832 0.3765 0.1167 0.1730 0.2518 0.3520R&D 0.0145 0.0264 0.0398 0.0570 0.0518 0.0918 0.1369 0.2125Capex plus R&D 0.1541 0.2339 0.3369 0.4554 0.1801 0.2910 0.4366 0.6730

Low acquisition-intensive industries Low M/B ratio industries


Number of firms (max.) 958 948 923 783 1,251 1,223 1,154 1,029Acquisitions 0.0581 0.0970 0.1141 0.1372 0.0511 0.0848 0.1136 0.1354Capex 0.1761 0.2958 0.4016 0.5572 0.1906 0.3107 0.4201 0.5491R&D 0.0606 0.1078 0.1653 0.2706 0.0098 0.0180 0.0276 0.0404Capex plus R&D 0.2543 0.4446 0.6351 0.9930 0.2027 0.3345 0.4586 0.6087

High minus low acquisition-intensive industries High minus low M/B ratio industries

Wilcoxon rank-sum test Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4Acquisitions 3.516*** 2.900*** 3.557*** 3.467*** 2.483** 1.823* 1.772* 2.240**Capex -5.214*** -5.736*** -5.819*** -5.763*** -11.947*** -12.769*** -13.160*** -12.237***R&D -1.153 -0.435 -0.611 -0.149 7.551*** 7.952*** 8.256*** 8.978***Capex plus R&D -6.390*** -6.988*** -6.901*** -6.701*** -8.467*** -9.002*** -9.158*** -8.051***

Table 2: Comparison of post-IPO acquisition activity, capital expenditures (Capex), and research and development expenses (R&D) betweensubsamples based on industry acquisition intensity and industry M/B ratio. All values are cumulated over years 0to tand normalized by pre-IPOmarket value. The amount of Acquisitions includes the values of all cash, stock and other acquisitions. ***, **, * denote significance at the 1, 5,and 10 percent level.

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High primary IPO proceeds High underpricing



Low primary IPO proceeds Low underpricing



High minus low primary IPO proceeds High minus low underpricing

Wilcoxon rank-sum test Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4Acquisitions 3.066*** 2.696*** 2.412** 2.507** 3.555*** 3.849*** 3.836*** 4.483***Capex 3.766*** 4.098*** 3.887*** 3.802*** -2.570** -1.612 -2.001** -2.160**R&D 3.873*** 3.351*** 2.975*** 3.117*** -6.738*** -7.041*** -6.765*** -5.992***Capex plus R&D 5.848*** 6.144*** 5.831*** 5.497*** -0.975 0.071 -0.338 -0.818

Table 3: Comparison of post-IPO acquisition activity, capital expenditures (Capex), and research and development expenses (R&D) betweensubsamples based on primary IPO proceeds and underpricing. All values are cumulated over years 0to tand normalized by pre-IPO market value.Primary IPO proceeds subsample includes only the value of cash acquisitions, underpricing subsample only the value of stock acquisitions. ***, **,* denote significance at the 1, 5, and 10 percent level.

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Total volume of cash acquisitions Total volume of stock acquisitions

Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4

Industry acquisition intensity 0.0997** 0.0430 0.0360 0.0153 0.0458 0.0252 0.0140 -0.00832.3884 1.5302 1.1774 0.5419 0.5106 0.3967 0.3019 -0.1944

Industry growth opportunities 0.0548 0.0009 -0.0157 -0.0227 0.2276* 0.2869*** 0.3283*** 0.3514***0.5538 0.0098 -0.1867 -0.2241 1.8148 3.1865 3.1739 3.0529

Primary IPO proceeds 0.0082 -0.0101 -0.0485 -0.2491* -0.0739 -0.2708 -0.2352* -0.4200***0.1987 -0.2109 -0.5294 -1.8209 -0.3682 -1.6137 -1.7397 -3.0523

Secondary IPO proceeds 0.1252 0.3124* 0.3381** 0.3894** -0.7134 -0.4830 -0.7541 -0.85120.4781 1.8580 2.0038 2.2295 -1.0383 -0.9384 -1.4227 -1.4331

Primary SEO proceeds -0.0028 -0.0010 0.0200 0.1093** 0.0438 0.1369 0.1184* 0.2051***-0.1254 -0.0421 0.4642 2.1741 0.4201 1.6048 1.7193 2.8674

Debt capital 0.7651*** 0.5870*** 0.4920*** 0.3913*** 0.1610* 0.4841*** 0.3968*** 0.3230***3.1695 3.1758 3.0110 2.8202 1.7727 2.7765 3.0894 3.1922

Underpricing -0.0065 0.0132 0.0485 0.0352 0.0269 0.0908 0.1583 0.1912

-0.0869 0.1978 0.6770 0.4056 0.1919 0.7874 1.1293 1.5155PE/VC backed dummy -0.0783 0.0062 0.0575 -0.0044 -0.0150 0.1530 0.1775 0.1249

-0.8768 0.0785 0.7947 -0.0474 -0.1013 0.9910 1.4498 1.1126High-tech dummy 0.0088 0.0220 0.0526 0.1396 0.0826 0.0812 0.1128 0.2856***

0.0776 0.2368 0.7163 1.2897 0.6552 0.9370 1.1979 3.2655Junior market dummy -0.1183** -0.1985*** -0.1975*** -0.2070*** 0.1513 0.1381 0.0314 -0.0264

-2.1309 -4.7961 -5.3329 -4.3599 1.3733 1.5535 0.3884 -0.3327Common law dummy 0.5833*** 0.5542*** 0.6082*** 0.7097*** 1.1154*** 1.1466*** 1.0931*** 1.2748***

5.7800 7.2553 7.1160 7.4800 3.0993 4.4968 5.2265 6.7489Pseudo-R 0.1387 0.1516 0.1296 0.0993 0.0945 0.1281 0.1097 0.1028Sample size 2,573 2,543 2,474 2,199 2,573 2,543 2,474 2,199

Table 4: Regressions of cash and stock acquisitions by IPO firms. The dependent variable is the volume of cash acquisitions (left panel) or thevolume of stock acquisitions (right panel), cumulated over years 0 to t and normalized by pre-IPO market value. All regressions are based on aTobit model with lower bound at zero and clustered by Fama-French industry. Intercept and year dummies are included but not reported. We reportthe estimated coefficients along with their t-statistic (below). ***, **, * denote significance at the 1, 5, and 10 percent level.

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Total volume of capital expenditures (Capex) Total volume of research and development (R&D)

Years 0-1 Years 0-2 Years 0-3 Years 0-4 Years 0-1 Years 0-2 Years 0-3 Years 0-4

Industry acquisition intensity 0.0136 0.0190** 0.0427*** 0.0399*** -0.0366 -0.0585** -0.1030** -0.2022***1.1658 2.2637 3.2405 3.6639 -1.3322 -2.1922 -2.4428 -2.9337

Industry growth opportunities -0.0491*** -0.0977*** -0.1186*** -0.1582*** 0.0937* 0.1340 0.2215 0.3370*-3.4947 -4.8684 -5.0082 -4.5079 1.7080 1.5499 1.6080 1.6570

Primary IPO proceeds 0.0123 0.0282 0.0563 0.0551 0.0224 0.0398 0.0777* 0.1000*1.0169 1.4658 1.1879 1.2591 1.5569 1.5427 1.8295 1.6806

Secondary IPO proceeds -0.0279 -0.0421 -0.1363 -0.1987 0.0430 0.1355** 0.2217** 0.3228**-0.7730 -0.8240 -1.2318 -1.6352 0.7668 1.9961 2.2668 2.4785

Primary SEO proceeds 0.0815*** 0.1459*** 0.2346*** 0.3340*** 0.2074*** 0.3653*** 0.5608*** 0.8546***13.3385 15.0042 9.7570 14.7086 28.6279 23.3612 21.7413 22.6660

Debt capital 0.1544*** 0.1935*** 0.3286*** 0.5726*** 0.0002 -0.0600 -0.1882** -0.4306***6.3615 3.4971 3.3547 4.2316 0.0102 -1.1030 -2.5714 -3.8677

Underpricing -0.0193 -0.0211 -0.0349 -0.0667 0.0990*** 0.1770*** 0.2727*** 0.3198***

-1.1358 -0.7459 -0.8760 -1.4239 3.0812 3.9307 4.8434 3.9701PE/VC backed dummy -0.0622*** -0.0948*** -0.1270*** -0.1370*** 0.1521*** 0.2155*** 0.3322*** 0.3799***

-4.0289 -4.2012 -4.8451 -3.4618 4.2458 6.5235 7.0057 6.0172High-tech dummy -0.0277* -0.0315* -0.0467* 0.0036 0.0481 0.1084* 0.2281** 0.4136***

-1.8862 -1.7665 -1.9285 0.0852 1.2101 1.7217 2.2553 2.7781Junior market dummy -0.0080 -0.0236 -0.0189 -0.0041 -0.0707*** -0.0938*** -0.1748*** -0.2116***

-0.5218 -1.1566 -0.6643 -0.0904 -3.9685 -3.1706 -4.7552 -3.4355Common law dummy -0.0566*** -0.0960*** -0.1317*** -0.1454*** 0.0872*** 0.0890** 0.1275** 0.0339

-4.1458 -3.9791 -4.2679 -4.2025 2.8801 2.3527 2.4092 0.4797Pseudo-R 0.7212 0.5746 0.5105 0.5139 0.5925 0.5254 0.4548 0.4353Sample size 1,980 1,809 1,596 1,262 2,573 2,543 2,474 2,199

Table 5: Regressions of capital expenditures (Capex) and research and development (R&D) by IPO firms. The dependent variable is the volume ofCapex (left panel) or the volume of R&D (right panel), cumulated over years 0to tand normalized by pre-IPO market value. All regressions arebased on a Tobit model with lower bound at zero and clustered by Fama-French industry. Intercept and year dummies are included but not reported.We report the estimated coefficients along with their t-statistic (below). ***, **, * denote significance at the 1, 5, and 10 percent level.

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Cumulated values over years 0-1 Cumulated values over years 0-2

Means BHAR (0,250) BHAR (0,500) BHAR (0,750) BHAR (0,250) BHAR (0,500) BHAR (0,750)Acquisition-intensive IPOs 49.819%*** 18.386%*** -4.140% 54.312%*** 37.282%*** 32.428%**Capex-intensive IPOs 29.436%*** 24.628%*** 14.788%** 35.564%*** 33.480%*** 22.679%***R&D-intensive IPOs 19.834%*** -0.342% -0.270% 21.676%*** 8.946% -0.029%

Cumulated values over years 0-1 Cumulated values over years 0-2Median BHAR (0,250) BHAR (0,500) BHAR (0,750) BHAR (0,250) BHAR (0,500) BHAR (0,750)Acquisition-intensive IPOs 10.231%*** -11.281% -30.656%*** 14.948%*** -3.833% -28.747%**Capex-intensive IPOs 4.759% -13.099% -20.595%** 7.753%*** -8.430% -14.070%R&D-intensive IPOs -6.159% -25.990%*** -32.352%*** -6.991% -26.401%*** -35.083%***


t-test for equality of means BHAR (0,250) BHAR (0,500) BHAR (0,750) BHAR (0,250) BHAR (0,500) BHAR (0,750)Acquisitions vs Capex 2.564** 0.028 -1.651* 2.183** 0.601 0.545Acquisitions vs R&D 3.481*** 2.375** -0.302 3.794*** 2.324** 1.798*


Wilcoxon rank-sum test BHAR (0,250) BHAR (0,500) BHAR (0,750) BHAR (0,250) BHAR (0,500) BHAR (0,750)Acquisitions vs Capex 2.848*** 0.872 -0.730 1.905* 0.265 -1.121Acquisitions vs R&D 4.771*** 3.271*** 0.065 5.366*** 4.322*** 1.363

Table 6: Comparison of long-run Buy-and-Hold abnormal returns (BHAR) for acquisition-intensive, Capex-intensive, and R&D-intensive IPO firmsover various event windows. Based on cumulative values over years 0 to 1(left panel), and cumulative values over years 0 to 2 (right panel). ***,**, * denote significance at the 1, 5, and 10 percent level.

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