Study finds listing is a shot in the arm for profitability

Newly-listed firms enjoy a rapid profitability boost compared to those that abandon a planned Initial Public Offering (IPO), new academic research shows.

The conclusion contrasts with most post-millennium studies which have identified a hit to profitability after an IPO. Published in The Review of Financial Studies, it is based on an analysis of nearly 3,500 companies in the UK and 15 other European countries which started the listing process in the 20 years after 1997.

The paper is published against a backdrop of mounting concern over stagnant stock markets in London and many other key financial centres – with fewer IPOs and record de-listings.

Co-author Francisco Urzúa, Professor of Finance at Bayes Business School, says it is likely that improved access to funding for investment and the greater accountability demanded of company leaders drive this higher profitability.

“It is clear that despite the recent travails of several European stock markets, ambitious, energetic small to mid-sized companies frustrated by a lack of funding should consider an IPO. Going public may unlock growth potential, provided market conditions are favourable."

“We also show that maintaining healthy stock markets should be a key policy objective for governments pursuing economic growth as they provide capital and renewed focus on performance. The paper therefore raises significant questions around the relative paucity of IPOs on many stock markets and a trend towards de-listing.”

New status triggers changed priorities

Public firms are more likely to expand their geographical footprint and generate higher sales per employee – possibly due to productivity increases through capital investment, the paper concludes.

A stock exchange listing also appears to change the priorities of many firms, a development frequently reinforced by management changes that bring in expertise better suited to delivering the new strategy. Firms appear to shift focus from innovation and exploration to commercialising existing products and growing sales – a trend reflected in patent filing figures.

Regulation offers some reassurance to investors

The beneficial impact is especially strong in countries with stronger protections for investors.

Professor Urzúa said: “This suggests that when public firms are held more accountable – because of good legal and financial oversight – they tend to become more profitable. Policymakers chasing growth should not sacrifice regulatory protection for minority investors. We found that stronger investor rights lead to better post-IPO profitability, suggesting that a supportive legal environment improves outcomes.”

The paper confirmed earlier research findings that short-term market returns influence IPO decisions. Companies considering going public should monitor these indicators and plan accordingly, the paper says, but owners and senior managers should also take a more strategic approach and not allow adverse short-term market returns to always scupper or delay a planned IPO.