Growth Strategies of Entrepreneurial Firms after Going

Public: A European Perspective

Wolfgang Besslera and 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 name
and reputation, and expand manufacturing capacity to protect competitiveness and ensure
long-run success and survival. For a sample of 2,679 European Initial Public Offerings (IPOs)
we analyze how firms allocate their resources between internal and external growth strategies
after going public and how the growth strategy affects performance. Our findings shed light
on the motives for going public and the determinants of internal and external growth postIPO. Our findings indicate that the financing effect of the IPO helps to increase both external
and internal growth. In particular, going public benefits external growth strategies in the longterm as acquisition activities usually require subsequent equity and debt issuance. However,
the direct effects of going public are weaker in Europe than reported in studies for the U.S.
We document that European IPO firms that spend large amounts on acquisitions or Capex
exhibit the best performance, and R&D-intensive firms the worst. During the growth years
these high growth firms outperform the broad stock market, but performance reverses in the
following years. Overall, our evidence is consistent with the idea that going public facilitates
external growth as a complement or substitute to internal growth.

Keywords: Initial Public Offering, Financing Policy, Internal Growth, External Growth
JEL Classification: G32, G34
__________________
a

Corresponding author: Wolfgang Bessler, Center for Finance and Banking, Justus-LiebigUniversity Giessen, Licher Strasse 74, 35394 Giessen, Germany; Phone: +49-641-99 22 460,
Mail: Wolfgang.Bessler@wirtschaft.uni-giessen.de
b

Center for Finance and Banking, Justus-Liebig-University Giessen, Licher Strasse 74, 35394
Giessen, Germany; Mail: Jan.Zimmermann@wirtschaft.uni-giessen.de

Electronic copy available at: http://ssrn.com/abstract=2139998

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), including the acquisition activities of IPO firms (Celikyurt, Sevilir and Shivdasani
2010; Hovakimian and Hutton 2010; Hsieh, Lyandres and Zhdanov 2010). As argued by
Pagano, Panetta and Zingales (1998), analyzing post-issue investment behavior can offer
valuable insights into the question whether market timing or growth financing motivates
going public. Second, a growing body of literature incorporates measures of corporate growth
into asset pricing models, including applications of real options and Q theory to explain postissue (Lyandres, Sun and Zhang 2008; Carlson, Fisher and Giammarino 2006) and postmerger underperformance (Chang 2011; Mortal and Schill 2009; Hackbarth and Morellec
2008). However, due to the numerous alternative growth measures, a direct comparison
between the different growth strategies should offer new insights and provide a more
complete understanding. Other papers that are related to our study are Jain and Kini (2008)
who examine how pre-IPO investments in R&D, Capex and advertising affect post-IPO
operating performance and survival, and Lvesque, Joglekar and Davies (2012) who analyze
the influence of R&D and advertising expense on revenue growth for established and IPO
firms. Most closely related are studies by Celikyurt, Sevilir and Shivdasani (2010) who
examine the determinants of external and internal growth for a sample of 1,295 U.S. IPOs and
find that acquisitions are at least as important as Capex and R&D and Aktas, de Bodt and

1
Electronic copy available at: http://ssrn.com/abstract=2139998

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
external growth strategies in Europe. In addition, we find evidence for both complementary
and substitute roles of internal and external growth. We document that going public has
primarily a long-term effect on growth strategies, given that acquisitions and internal growth
are financed by subsequent equity and debt issuance. Acquiring IPO firms raise twice as much
equity and debt capital after going public as non-acquirers to finance their growth. A potential
explanation for the weaker immediate effects of underpricing and the cash increases at the
IPO on acquisition activity are the unique ownership and governance structures of European
firms (Martynova and Renneboog, 2009; Faccio and Masulis, 2005).
Second, we build on existing research to explore the long-run performance of IPO
firms in the context of their growth strategy. Aktas, de Bodt and Samaras (2008) analyze
whether external and internal growth impact performance differently by examining publicly
listed firms over multiple non-overlapping three-year periods. Our approach to analyze the
growth strategy post-IPO has the advantage of an easily identifiable event that acts as a
common starting point for an analysis of growth strategies over time. Also, their approach
relies on an accounting-based decomposition of the asset growth rate which may be
influenced by mergers and acquisitions accounting. We find that IPO firms which spend large

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Electronic copy available at: http://ssrn.com/abstract=2139998

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
how this decision impacts performance.
2.1 Determinants of External versus Internal Growth
Internal or organic growth and external growth through acquisitions are alternative
means for corporate growth that can be employed both as compliments and substitutes. Both
growth strategies are typically associated with financing activities, although only larger
investment projects may require external funding, and have the potential to severely impact
performance if the projects net present value is negative.
The specific advantages of external growth are that mergers and acquisitions allow
firms to grow faster as the targets assets are already in place, and that they offer a
restructuring opportunity in case of industry-wide shocks such as deregulation (Andrade and
Stafford 2004). Because acquisitions can be paid for with cash or stocks, they may be better
suited for firms with small cash reserves and limited debt capacity and they may be cheaper
when the acquirer is able to capitalize on the overvaluation of its stocks (Shleifer and Vishny
2003). The most often cited reason for acquisitions, however, is to to take advantage of
synergies that arise from economies of scale and scope or the creation of market power
(Devos, Kadapakkam and Krishnamurthy 2009). However, there are also some shortcomings

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
Economy period (Schultz and Zaman 2001).
Empirical evidence on the determinants of external growth through acquisitions is
scarce. Huyghebaert and Luypaert (2010) examine the antecedents of external growth through
acquisitions for a sample of 484 private and public acquirers in Belgium between 1997 and
2007. They find that ownership concentration and bank loans reduce acquisition likelihood,
while internal resources and financial market conditions do not increase it as evidenced for
the U.S. and U.K. A potential explanation are the unique ownership and governance structures
of firms in continental Europe (Martynova and Renneboog 2009; Faccio and Masulis 2005).
Hay and Liu (1998) analyze for a sample of 110 U.K. manufacturing firms between 1971 and
1989 whether a firm makes acquisitions and which factors determine their level. Their results
generally support the free cash flow hypothesis and suggest that external and internal growth
are substitute means of growth, although acquisitions are more likely for growth firms that
invest more. Studies for the U.S. by Sorensen (2000) and Trahan (1993) also document a
positive association between external growth and firm size, the market-to-book ratio and
profitability, and a negative relation with leverage.

2.2 Influence of Going Public on the Growth Strategy

An extensive literature on the motives and performance of initial public offerings
(IPOs) documents at least three major effects how growth strategies of entrepreneurial firms
may be influenced by going public.
The financing effect is directly related to the new equity capital raised at the IPO from
the sale of primary shares. However, the increase in cash holdings is not limited to the
proceeds from IPO. It also entails the ability to issue additional equity through the sale of
primary shares in seasoned equity offerings (SEOs) as well as an improved access to debt
capital as a consequence of going public. Thus, by going public entrepreneurial firms may
raise the external funds needed to lessen the financial constraints typically faced by privately
held firms and to finance their internal and external growth. Celikyurt, Sevilir and Shivdasani
(2010) and Hovakimian and Hutton (2010) provide evidence that the value of cash
acquisitions post-IPO is positively related to the primary proceeds from the IPO as well as the
new capital raised by subsequent debt and equity offerings. Kim and Weisbach (2008) report
that firms spend a substantial fraction of funds raised in both initial and seasoned equity
offerings on R&D and Capex.
The market timing effect or acquisition currency hypothesis for post-IPO acquisition
activity builds on the information asymmetries between existing and new shareholders or
between prospective acquirers and targets. If firms are temporarily overvalued, they may
capitalize on this overvaluation by issuing new equity, thereby increasing the value of existing
shares at the expense of the new shareholders. Similarly, the creation of an acquisition
currency by going public can facilitate acquisitions of targets at an effective discount when
the acquirer pays with overvalued stocks even in cases where the target is also overvalued.
Kim and Weisbach (2008) provide evidence that firms sell more secondary shares, thus
benefiting selling shareholders, or keep a larger fraction of the primary SEO proceeds as cash
when market conditions are favorable. For a sample of Italian IPOs Pagano, Panetta and
Zingales (1998) report that the primary motivation for going public is to rebalance the capital
structure and exploit mispricing rather than to finance growth. Celikyurt, Sevilir and
Shivdasani (2010) and Hovakimian and Hutton (2010) document a positive association
between underpricing and stock acquisitions but not for R&D and Capex, suggesting that
highly valued firms may find it easier to grow through acquisitions.
Lastly, the market feedback effect is related to the reduction in valuation uncertainty
that arises from public market trading of the firms shares. The assumption is that managers

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 and
timing of acquisitions for a sample of IPO firms.
2.3 Influence 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
both initial public offerings and seasoned equity offering (Loughran and Ritter 1995). The
general view of these studies is that the decline in performance which is typically observed
after new equity issues can be explained either by market timing or agency problems. The
first argument is that managers attempt to time the market by issuing equity when the firms
stock is overvalued. The second argument is that in badly governed firms the new capital may
be spent for empire building instead of profitable investment projects. Thus, new equity
capital may not solely be used to finance positive net present value projects. Pagano, Panetta
and Zingales (1998) argue that to discriminate between market timing and growth financing,
one can look at the post-issue investment behavior. Following this idea, Kim and Weisbach
(2008) analyze the ex post uses of funds from IPOs and SEOs and find supporting evidence
for both motives. Another approach is pursued by Autore, Bray and Peterson (2009) and
Walker and Yost (2008) who examine seasoned equity issuers ex ante stated use of proceeds.
These studies report that issuers stating specific investment plans do not underperform,
credibly signaling profitable investment opportunities, while firms stating recapitalization or
more ambiguous general corporate purposes experience subsequent underperformance.
Overall, this implies that issuing firms growth strategies influence their performance.

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 pricing has 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) or
the 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
Schill (2009) show that post-merger underperformance is only part of a broader asset growth
effect, i.e., returns are related to all forms of asset expansion or contraction.
However, numerous factors have been proposed to capture the influence of corporate
growth or investment on the cross-section of returns, including investment-to-assets, asset
growth, investment growth, net stock issues, and abnormal corporate investment. This raises
the question which variables are significant factors given that previous research has
documented a negative capex-return relation, but positive return-relations for both R&D and
advertising (Eberthart, Maxwell and Siddique 2004; Chan, Lakonishok and Sougiannis 2001).
Further, high financing activities do not have to coincide with high investment activities, for
example, if the issuing firm builds up cash reserves as observed by Kim and Weisbach (2008).
The only paper that directly compares the performance of firms with internal growth to firms
with external growth is Aktas, de Bodt and Samaras (2008). They estimate the influence of
concurrent and lagged, internal and external growth rates on performance over multiple threeyear periods, and find that both internal and external growth are associated with higher
abnormal returns. Further, their impact on performance is comparable and materializes mostly
concurrently, consistent with firms deciding rationally between different growth strategies.

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 return
index. 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 database. In line with the literature on M&As, we search for all acquisitions of public
or private European targets, with a change of control, deal value of $1 million or larger,
relative size of one percent or more (deal value to acquirers market value of equity) and
discarding financial firms and utilities. A change of control requires that less than 50 percent
of the target shares were held before the announcement and more than 50 percent owned after
the transaction. 594 IPO firms (or 22 percent) of our sample complete an acquisition within
five years after going public. These acquiring IPO firms are also presented in Figure 1.
[ Insert Figure 1 about here ]
The amounts spent by acquiring IPO firms on acquisitions after the going public are
substantial. We calculate the fractions of acquisition volume that are made with stock, cash or
other payments. The latter includes debt, convertibles, preferred stocks, earn-outs and any
other payments other than cash or stocks. To facilitate comparison these values are
normalized by dividing by pre-IPO market value. This is the market value of the firm at the
day before going public. We then cumulate all stock, cash and other acquisition volumes over
years 0 to t. The respective amounts are presented in Figure 2. The cumulative volumes of
both stock and cash acquisitions rise materially over the five year period implying that these
IPO firms are active acquirers, beginning as early as the first fiscal year after going public. No

acquisition is completed within the year of going public. After five years, the average
acquiring IPO firm has spent over 65 percent of pre-IPO market value on acquisitions, the
majority with cash payment (35 percent, compared to 25 percent stock and five percent other
payment). This suggests that acquisitions are an important means of growth for these
entrepreneurial firms after going public.
[ Insert Figure 2 about here ]
We obtain stock returns from Thomson Datastream and firm data from Worldscope.
Data on acquisitions comes from the Thomson SDC M&A database, data on initial public
offerings (IPOs) and seasoned equity offerings (SEOs) from the Thomson SDC New Issues
database. We manually check whether a firm is venture capital (VC) backed or private equity
(PE) backed at the time of the IPO by searching for company names in the Thomson
VentureXpert database, considering investments during the ten years prior to going public.
All variables are adjusted for inflation (denominated in 1996 dollars) and winsorized at the 1
percent level.
3.2 Methodology
For a multivariate analysis of the determinants of external and internal growth
strategies, we perform separate cross-sectional regressions for each growth measure where the
respective growth measure

s regressed on a set of explanatory variables

. Because all

growth measures are constrained to be positive or zero, we employ a Tobit model which is
censored (from below) at zero and has the general form:
(1)

where
(2)

,
.
To control for the presence of firm and time effects in the data, we estimate all

regressions with clustered standard errors that permit heteroskedasticity and within-cluster
error correlation. This is important because residuals which are correlated across firms (serial
correlation) or across time (cross-sectional correlation) can produce biased OLS standard
errors (Petersen 2009). We cluster by industry (classified into the 48 Fama-French industries)
and include year fixed effects in the regressions. In our univariate analysis paired t-tests,
Wilcoxon signed rank tests, and rank sum tests are employed to test for differences in mean
and median values between subsamples.
9

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 n is the number of firms,

the return of firm i on day t, and

the market return on

this 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 the
bootstrapped 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)

with
(5)
where

and

is the abnormal return of firm i over period .

4. Empirical Findings
Internal and external growth may be complementary or substitute means of growth for
entrepreneurial firms, depending on their access to capital and profitable investment
opportunities. To examine the resource allocation decision between various growth strategies
after going public, we conduct univariate (4.1 and 4.2) and multivariate (4.3 and 4.4.)
empirical analyses of the internal and external growth post-IPO. We also compare the longrun performance of IPO firms differentiated by their growth strategy (4.5).
4.1 Internal and External Growth post-IPO
We examine the importance of external and internal growth strategies for
entrepreneurial firms after going public by analyzing the amounts spent on acquisitions,

10

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 postIPO 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
combined Capex plus R&D amounts indicates that for the median firm, acquisitions are
slightly less important at shorter horizons. For a sample of 1,295 U.S. IPO firms, Celikyurt,
Sevilir and Shivdasani (2010) find that acquisitions are at least as important as Capex and
R&D, whereas we find that only for the subsample of acquiring IPO firms acquisitions are at
least as important as Capex and R&D. However, their sample is biased towards larger firms,
because they only examine offerings with proceeds larger than $100 million. Usually, the
acquisition activities are lower for smaller IPOs as reported by Bessler and Zimmermann
(2012) for Europe. For the average entrepreneurial firm, Capex is the major source of growth
after going public. Thus, we find initial evidence that some entrepreneurial firms pursue a
strategy of external growth through acquisitions after going public.
[ Insert Figure 3 about here ]
[ Insert Table 1 about here ]
To finance their growth, our sample firms rely on a number of different capital sources
including the proceeds from the IPO, subsequent equity offerings (SEOs), and long-term debt
issuance. We track all equity offerings of our sample firms for up to five years including the
IPO year in the Thomson SDC New Issues database. The results presented in Figure 4 provide

11

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
subsamples based on industry acquisition activity, industry growth opportunities, primary IPO
proceeds and underpricing. We examine how industry acquisition activities influence IPO
firms allocation between internal and external growth by sorting all 48 Fama-French
industries by the total volume of acquisitions scaled by the aggregate market value of all firms
in that industry for each year from 1996 to 2010. An industry is classified as high (low)
acquisition-intensive if its acquisition activity measure exceeds the median of all 48 industries
in that year. In accordance with our growth variables we recalculate this measure over all time
horizons from years 0-1 to 0-4. The results presented in Table 2 suggest that IPO firms rely
more on external growth if their industry is also highly acquisition-intensive. In contrast, IPO
firms spend higher amounts on Capex and R&D in less acquisition-intensive industries. Also,
we find that more firms go public when their industry also features high acquisition activities.

Because the amount of stocks issued reported in companies cash flow statements also includes the proceeds
from conversion or exchange of debt and preferred stock, stocks issued for acquisitions and the sale of treasury
shares and stock options, it does not have to equal the amount of equity offerings in Thomson SDC. In fact, the
value of stock issuance reported in the cash flow statement is higher for acquiring IPO firms and slightly lower
for non-acquiring IPO firms. However, we just need the amount for comparison with long-term debt issuance.
1

12

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 ]
To evaluate the importance of the increase in cash holdings from going public, we
compare how acquisitions and organic growth are influenced by the new capital raised
through the IPO. Therefore, we sort our sample firms into high and low primary IPO proceeds
subsamples based on whether the proceeds from the sale of primary shares is above (below)
the sample median. We only consider primary shares because their sale provides new capital
to the firms whereas secondary shares are sold by the owners to monetize their holdings. In
addition, we examine only cash acquisitions which should benefit more directly from raising
new capital. The results in Table 3 suggest that the financing effect of the IPO helps to
increase both external and internal growth. These firms raise new capital to pursue corporate
growth through all available means. Consequently, they also spend more on advertising and
administration. Celikyurt, Sevilir and Shivdasani (2010) and Kim and Weisbach (2008) obtain
similar results for their samples of U.S. IPOs and international IPOs and SEOs.
[ Insert Table 3 about here ]
To examine the role of the acquisition currency, we form two subsamples based on
above and below median underpricing. To the extent that underpricing reflects overvaluation,
the more overvalued firms should be more likely to take advantage of their overvalued stocks

13

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 higher
underpricing 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
bound at zero. Our primary variables of interest are related to the influence of industry effects
and the going public:
Industry acquisition intensity is the total volume of acquisitions in an industry scaled
by the total market value of all firms in that industry. We cumulate this measure over years 0
to t. If industry-wide acquisition activities motivate the going public, we expect this variable
to be positively related to acquisition volumes.
Industry growth opportunities is the median M/B ratio of an industry, averaged over
years 0 to t. This variable is a broader measure of growth opportunities in an industry and,
hence, we expect it to be positively related to acquisition volumes if growth opportunities are
partly realized by acquisitions in addition to organic growth.
Primary IPO proceeds is the capital raised at the IPO from the sale of primary shares,
scaled by pre-IPO market value. If the financing effect of going public is important for both
internal and external growth, we expect this variable to be positively related to the volume of
cash acquisitions.
Primary SEO proceeds is the total primary equity capital raised in SEOs over years 0
to t, scaled by pre-IPO market value. If the financing effect also encompasses the ability to tap
14

public equity markets subsequent to going public, we expect this variable to be positively
related to the volume of cash acquisitions.
Debt capital is the total amount of long-term debt issued during years 0 to 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 include secondary IPO proceeds which is the capital raised at
the IPO from the sale of secondary shares, scaled by pre-IPO market value, and PE/VC
backed dummy which takes the value of one if the IPO firm is backed by a private equity (PE)
or venture capital (VC) firm. High-tech dummy takes 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
dummy takes the value of one if the IPO firm is from the UK or Ireland.
The results of regressions for the volume of cash acquisitions are presented in the left
panel of Table 4. Our univariate finding of a positive association between industry acquisition
activity and the volume of cash acquisitions is confirmed over shorter horizons. This may be
reflective of an acquisition motive in the going public decision of some entrepreneurial firms.
Among the variables related to the influence of going public on growth strategies, only debt
capital exhibits a consistently positive effect. In contrast, the primary capital raised from the
IPO and subsequent SEOs does not have a consistent effect on the volume of cash
acquisitions. At most, there is weak evidence for a significantly positive effect of the new
capital raised from SEOs after going public over the long horizon. For their sample of larger
U.S. IPOs, Celikyurt, Sevilir and Shivdasani (2010) report significantly positive coefficients
on all three financing variables. Thus, our results reflect the prevalence of debt and internal
financing for cash acquisitions in Europe as reported by Martynova and Renneboog (2009)
and Faccio and Masulis (2005). In addition, it seems that the proceeds from sale of primary
shares at the IPO are less important for IPO firms cash acquisition. Finally, we find that
offerings at junior markets are negatively related to the post-IPO cash acquisition activity,
while IPO firms from common law countries conduct more cash acquisitions as a percentage
of pre-IPO market values. These institutional features are also documented by Bessler and

15

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.
[ Insert Table 4 about here ]
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
readily be used for stock acquisitions, our findings may merely reflect the fact that
entrepreneurial firms often pursue both internal and external growth, and the more growth
they seek, the more capital they have to raise.2 This is also supported by the positive
coefficient on debt capital. Among the control variables, the proceeds from sale of secondary
shares at the IPO as well as the common law dummy exhibit significantly positive effects on
the volume of stock acquisitions.
4.4 Determinants of Internal Growth: R&D and Capex
To make our findings comparable to the determinants of external growth, we employ
the same set of primary and control variables in separate regressions for the total volumes of
Capex and R&D.3 Our approach to regress all internal growth variables separately is
warranted by prior research that documents differential effects for investments in tangible and
2

Bessler, Drobetz and Zimmermann (2011) extensively discuss the relationship between method of payment and
various financing alternatives in corporate mergers and acquisitions.
3

We run similar regressions for the volume of selling, general and administrative expense (SG&A) as a proxy
for advertising and administration expenses. The results support the notion that SG&A is mainly related to firm
size as both equity and debt issuance is positively related to the volume of SG&A. The results are available from
the authors upon request.

16

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
growth as both primary SEO capital and debt capital increase the amount of Capex. We do not
find a significant effect of the primary IPO capital. Thus, access to public capital may be the
most important financing effect for Capex. As for the control variables, PE/VC backing and
the high-tech dummy have a negative impact on Capex which is consistent with a focus on
growth and innovation in these firms.
Regressions for the volume of R&D are presented in the right panel of Table 5.
Inversely to the results for Capex, we find a negative relationship between the volume of
R&D and industry acquisition activity and a positive correlation with industry growth
opportunities. These findings are consistent with a greater importance of research activities in
high growth industries and an outsourcing of R&D through acquisitions in rapidly evolving
industries such as biopharmaceuticals (Higgins and Rodriguez 2006). Our results on the
importance of financing variables suggest that R&D activities are predominantly financed by
raising new equity capital as the coefficients on primary IPO proceeds and primary SEO
proceeds are both positive, while the coefficient on debt capital is negative. This is generally
4

As we have documented in our univariate analysis of external and internal growth strategies, combined Capex
plus R&D outlays are dominated by the amount of Capex, however, for the average IPO firm. Therefore, our
analysis of Capex determinants should be more comparable to Celikyurt, Sevilir and Shivdasani (2010).

17

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.
[ Insert Table 5 about here ]
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 0 to 1 or 0 to 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
performance over one, two and three years after going public to include both concurrent and
lagged effects of the entrepreneurial firms growth on performance. The BHAR over the 750
trading days that correspond to the three year period are presented in Figure 6 and Table 6.
Our findings reveal that acquisition-intensive IPO firms exhibit a strong
outperformance of 49.82 percent (median 10.23 percent) over the first year after going public
(Figure 6, upper panel; Table 6, left panel). However, after the first year, the average
performance starts to deteriorate as has been observed in most studies, and is -4.14 percent at
the end of the third year (median -30.66 percent). For firms with high organic growth during
years 0 to 1 after going public, the outperformance during the first year is much lower with
29.44 percent for Capex-intensive IPOs, and 19.83 percent for R&D-intensive IPOs (median
4.76 and -6.16 percent). After the first year, these firms also experience performance declines
which are nevertheless much smaller than for acquisition-intensive firms. Over the full threeyear period, the BHAR of Capex-intensive IPOs are still significantly positive with 14.79
percent (median -20.60 percent). This contrast with the negative BHAR of acquisitionintensive and R&D-intensive IPOs (mean: -0.27 percent, median: -32.35 percent). Thus, we
find evidence of a significant outperformance of acquisition-intensive IPO firms during the

18

first year of being public, which is followed by a strong performance reversal. Only R&Dintensive 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 ]
[ Insert Table 6 about here ]
The results based on cumulated growth measures over the years 0 to 2 are 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
outperform by 33.48 and 22.68 percent over two and three years, respectively. In contrast, the
performance of R&D-intensive firms is still inferior given that their BHAR are 8.95 percent
after two years and -0.03 percent after three years. Overall our evidence is that during the
growth years, IPO firms which spend large amounts on acquisitions and Capex exhibit a
strong outperformance that is followed by a performance decline during subsequent years.
This performance reversal is strongest for IPO firms with high acquisition volumes during the
first year, raising the question about the reasons for this first year acquisitions effect. Further,
we document that the performance of R&D-intensive IPO firms is inferior to all other growth
strategies despite substantial underpricing. Based on this evidence, investors were not
rewarded for investing in innovative growth firms on average.

5. Conclusion
We examine how entrepreneurial firms allocate their resources between internal and
external growth after going public and how the growth strategy impacts performance for a
sample of 2,679 European IPOs between 1996 and 2010. We track the total amounts spend on

19

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 0 to 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
growth, depending on the firms access to financing and growth opportunities.
To analyze the determinants of external and internal growth post-IPO, we run multiple
cross-sectional regressions on the respective growth measures. Our univariate findings for the
influence of industry acquisition activity and industry growth opportunities are generally
supported. In addition, we find some evidence that internal investments in physical assets and
external growth through acquisitions are substitute means of growth in rapidly evolving
industries. Possible explanations are that acquisitions allow companies to grow faster and that
overvalued stocks can be used to acquire other firms at relatively low costs. Further, we
document a negative association between R&D and industry acquisition activity which might
reflect the outsourcing of R&D through acquisitions in industries such as biopharmaceuticals.
We document that the volumes of cash and stock acquisitions as well as Capex are
positively related to primary SEO capital and debt capital. However, we do not find a
significant effect of primary IPO proceeds on Capex, and the association with cash and stock
acquisitions is even negative over longer horizons. These findings suggest that the financing
effect of going public on growth strategies is predominantly a long-term effect that is related
to obtaining access to public capital markets. In contrast, the immediate cash increase at the

20

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.

21

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24

Appendix
594 Acquiring IPO firms

2,679 total IPO firms

Datastream Europe Index

500

10,000

450

9,000

400

8,000

350

7,000

300

6,000

250

5,000

200

4,000

150

3,000

100

2,000

50

1,000

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 1: Sample of total and acquiring IPO firms.

Value of stock payment

Value of cash payment

Value of other payment

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
0

Figure 2: Spending on acquisitions differentiated by the method of payment, i.e. stock, cash
and other payments by acquiring IPO firms. All values are cumulated over years 0 to t and
normalized by pre-IPO market value.

25

Acquiring IPO firms

0.8
0.7
0.6

Acquisitions
Capex
R&D

0.5
0.4
0.3
0.2
0.1
0
0

Non-acquiring IPO firms

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0

Figure 3: Spending on acquisitions, capital expenditures (Capex), and research and

development (R&D) post-IPO. All values are cumulated over years 0 to t and normalized by
pre-IPO market value. Acquiring IPO firms are shown in the upper graph, non-acquiring IPO
firms in the lower graph.

26

Acquiring IPO firms

0.5
Proceeds from IPO

0.45

Proceeds from SEOs

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
0

Non-acquiring IPO firms

0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
0

Figure 4: Capital raised from initial public offering (IPO) and subsequent equity offerings
(SEOs) post-IPO (source: Thomson SDC). All values are cumulated over years 0 to t and
normalized by pre-IPO market value. Acquiring IPO firms are shown in the upper graph, nonacquiring IPO firms in the lower graph.

27

Acquiring IPO firms

0.6
Value of stocks issued
0.5

Value of long-term debt issued

0.4
0.3
0.2
0.1
0.0
0

Non-acquiring IPO firms

0.6
0.5
0.4
0.3
0.2
0.1
0.0
0

Figure 5: Values of stocks and long-term debt issued post-IPO (source: cash flow statement).
All values are cumulated over years 0 to t and normalized by pre-IPO market value.
Acquiring IPO firms are shown in the upper graph, non-acquiring IPO firms in the lower
graph.

28

Cumulated values over years 0-1

60%
Acquisition-intensive IPOs (n=259)
Capex-intensive IPOs (n=399)
R&D-intensive IPOs (n=518)

50%
40%
30%
20%
10%
0%
-10%

50 100 150 200 250 300 350 400 450 500 550 600 650 700 750
Cumulated values over years 0-2
60%
50%
40%
30%
20%
10%
0%
-10%

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

Figure 6: Long-run Buy-and-Hold abnormal returns (BHAR) of IPO firms with high external
and internal growth after going public over the 750 trading days (three years) post-IPO. The
dashed line denotes the period over which growth is measured. Based on cumulative values
over years 0 to 1, and cumulative values over years 0 to 2 in the lower graph.
.

29

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
0.4029
Median
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
0.0762
Median
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
0.4969
Median
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
1.479
signed 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 IPO
firms (left panel) and the subsample of acquiring IPO firms (right panel). All values are cumulated over years 0 to t and normalized by pre-IPO
market value. ***, **, * denote significance at the 1, 5, and 10 percent level.

30

High acquisition-intensive industries

Means
Number of firms (max.)
Acquisitions
Capex
R&D
Capex plus R&D

Years 0-1
1,633
0.0770
0.1363
0.0145
0.1541

Years 0-2
1,612
0.1056
0.1999
0.0264
0.2339

Years 0-3
1,568
0.1370
0.2832
0.0398
0.3369

High M/B ratio industries

Years 0-4
1,431
0.1760
0.3765
0.0570
0.4554

Years 0-1
1,340
0.0876
0.1167
0.0518
0.1801

Low acquisition-intensive industries

Means
Number of firms (max.)
Acquisitions
Capex
R&D
Capex plus R&D

Years 0-1
958
0.0581
0.1761
0.0606
0.2543

Years 0-2
948
0.0970
0.2958
0.1078
0.4446

Years 0-3
923
0.1141
0.4016
0.1653
0.6351

Years 0-3
1,337
0.1414
0.2518
0.1369
0.4366

Years 0-4
1,185
0.1856
0.3520
0.2125
0.6730

Low M/B ratio industries

Years 0-4
783
0.1372
0.5572
0.2706
0.9930

High minus low acquisition-intensive industries

Years 0-1
1,251
0.0511
0.1906
0.0098
0.2027

Years 0-2
1,223
0.0848
0.3107
0.0180
0.3345

Years 0-3
1,154
0.1136
0.4201
0.0276
0.4586

Years 0-4
1,029
0.1354
0.5491
0.0404
0.6087

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
Acquisitions
3.516***
2.900***
3.557***
3.467***
2.483**
Capex
-5.214***
-5.736***
-5.819***
-5.763*** -11.947***
R&D
-1.153
-0.435
-0.611
-0.149
7.551***
Capex plus R&D
-6.390***
-6.988***
-6.901***
-6.701***
-8.467***
Table 2: Comparison of post-IPO acquisition activity, capital expenditures (Capex), and research
subsamples based on industry acquisition intensity and industry M/B ratio. All values are cumulated
market value. The amount of Acquisitions includes the values of all cash, stock and other acquisitions.
and 10 percent level.

31

Years 0-2
1,337
0.1185
0.1730
0.0918
0.2910

Years 0-2
Years 0-3
Years 0-4
1.823*
1.772*
2.240**
-12.769*** -13.160*** -12.237***
7.952***
8.256***
8.978***
-9.002***
-9.158***
-8.051***
and development expenses (R&D) between
over years 0 to t and normalized by pre-IPO
***, **, * denote significance at the 1, 5,

High primary IPO proceeds

Means
Number of firms (max.)
Acquisitions
Capex
R&D
Capex plus R&D

Years 0-1
1,292
0.0586
0.1758
0.0522
0.2379

Years 0-2
1,286
0.0754
0.2661
0.0930
0.3849

High underpricing

Years 0-3
1,260
0.0937
0.3725
0.1407
0.5624

Years 0-4
1,130
0.1090
0.5176
0.2177
0.8515

Years 0-1
1,320
0.0317
0.1337
0.0218
0.1596

Low primary IPO proceeds

Means
Number of firms (max.)
Acquisitions
Capex
R&D
Capex plus R&D

Years 0-1
1,299
0.0190
0.1222
0.0110
0.1367

Years 0-2
1,274
0.0324
0.1992
0.0197
0.2260

Years 0-2
1,312
0.0489
0.2107
0.0402
0.2600

Years 0-3
1,296
0.0556
0.2950
0.0586
0.3711

Years 0-4
1,176
0.0750
0.3928
0.0820
0.5058

Low underpricing

Years 0-3
1,231
0.0421
0.2759
0.0306
0.3179

Years 0-4
1,084
0.0611
0.3549
0.0437
0.4171

High minus low primary IPO proceeds

Years 0-1
1,271
0.0143
0.1693
0.0416
0.2242

Years 0-2
1,248
0.0230
0.2615
0.0737
0.3665

Years 0-3
1,195
0.0319
0.3618
0.1163
0.5300

Years 0-4
1,038
0.0380
0.4930
0.1897
0.8002

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 0-4
Acquisitions
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) between
subsamples based on primary IPO proceeds and underpricing. All values are cumulated over years 0 to t and 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.

32

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
-0.0083
2.3884
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
-0.8512
0.4781
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
1.5155
PE/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
1.1126
High-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
3.2655
Junior 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
-0.3327
Common 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
6.7489
Pseudo-R2
0.1387
0.1516
0.1296
0.0993
0.0945
0.1281
0.1097
0.1028
Sample 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 the
volume of stock acquisitions (right panel), cumulated over years 0 to t and normalized by pre-IPO market value. All regressions are based 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.

33

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
3.9701
PE/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
6.0172
High-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
2.7781
Junior 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
-3.4355
Common 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
0.4797
Pseudo-R2
0.7212
0.5746
0.5105
0.5139
0.5925
0.5254
0.4548
0.4353
Sample 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 of
Capex (left panel) or the volume of R&D (right panel), cumulated over years 0 to t and normalized by pre-IPO market value. All regressions are
based 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.

34

Cumulated values over years 0-1

Cumulated values over years 0-2
BHAR (0,250)
BHAR (0,500)
BHAR (0,750)
BHAR (0,250)
BHAR (0,500)
BHAR (0,750)
49.819%***
18.386%***
-4.140%
54.312%***
37.282%***
32.428%**
29.436%***
24.628%***
14.788%**
35.564%***
33.480%***
22.679%***
19.834%***
-0.342%
-0.270%
21.676%***
8.946%
-0.029%
Cumulated values over years 0-1
Cumulated values over years 0-2
Median
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%***
Cumulated values over years 0-1
Cumulated values over years 0-2
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
0.545
Acquisitions vs R&D
3.481***
2.375**
-0.302
3.794***
2.324**
1.798*
Cumulated values over years 0-1
Cumulated values over years 0-2
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
-1.121
Acquisitions 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 firms
over 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.
Means
Acquisition-intensive IPOs
Capex-intensive IPOs
R&D-intensive IPOs

35