Initial public offerings and the local economy: evidence of crowding out

Abstract

We test the effect of going public on economic growth in the areas surrounding IPO firms. We compare the effects of IPO filers that complete their IPOs with those that do not, using post-filing stock market fluctuations as an instrument for IPO completion. We show that IPOs that are large relative to the size of their counties lead to a 1.1 percentage point relative reduction in annual county-level establishment growth, with similar effects for employment and population growth. There are no corresponding effects for relatively small IPOs. These negative effects appear to be driven by a crowding out of local sector peers, but the crowding out also disrupts local agglomerations and slows down growth among other businesses that rely on local demand. Overall, our results indicate that macroeconomic gains from IPOs trade off against disruptions in local agglomeration economies where public firms originate.