Going Public: How Stock Market Listing Changes Firm Innovation Behavior

Although going public allows firms access to more financial capital that can fuel innovation, it also exposes them to a set of myopic incentives and disclosure requirements that constrain innovation. This tension is expected to produce a unique pattern of innovation strategies among firms going public, causing such firms to increase their innovation levels but reduce their innovation riskiness. Specifically, the authors predict that after going public, firms innovate at higher levels and introduce higher levels of variety with each innovation; however, these innovations are less risky, characterized by fewer breakthrough innovations and fewer innovations in new-to-the-firm categories. The authors compare 40,000 product introductions in the period 1980-2011 from a sample of consumer packaged goods firms that went public with a benchmark sample of firms that remained private, and the results support their predictions. Utilizing tests to resolve questions about endogeneity, including self-selection, reverse causality, and competing explanations, the authors demonstrate that initial public offering selection and dynamics do not drive this going-public effect. The authors also uncover a set of industry factors that mitigate the drop in breakthrough innovation by offering product-market incentives that counterbalance the documented effect of stock market incentives.