Capital structure, growth and performance of initial public offering firms

Abstract

A firm’s decision to go public via an initial public offering (IPO) has attracted scholarly attention due to the changes in ownership structure at the time of the IPO. Previous studies have mainly focused on different implications of IPOs, such as the under-pricing phenomenon. However, there is a lack of research investigating the direct impact of IPO on a firm’s performance in emerging markets, particularly in Malaysia. Besides, existing literature on the matter indicates mixed results upon the examination of the relationship between post-IPO financing, strategic investments, growth, and performance of IPO firms. Therefore, the first aim of this study is to investigate the effects of IPO on the capital structure, growth, and performance of firms. The second aim of this study is to examine the relationship between post-IPO capital structure and R&D expenditure as a growth strategy of IPO firms. This study utilised Propensity Score Matching (PSM) to compare the capital structure, growth, and performance of firms that have gone public (treated) with non-IPO or untreated firms. Additionally, the System Generalised Method of Moments (GMM) was adopted in the estimation process during the post-IPO period. Based on the firm-level panel data of 295 non-IPO firms listed on the Bursa Malaysia for the period 2000–2011, the PSM analysis showed that going public via IPO contributes to the deterioration in profitability and productivity in the first five years after the listing of the IPO firm. However, IPO firms show better growth than non-IPO firms. The growth differences start to diminish after one year. The results indicated firms that go public, after a period of high growth could strengthen their balance sheets by reducing their debt over equity levels. Meanwhile, the GMM estimation results found that the total sales growth of IPO firms has no association with R&D investment. The results also showed that IPO firms increase their total R & D expenditure in line with the growth of their assets; the lower debt-to-equity ratio also encourages them to increase their R & D investment. This study found that the debt-to-asset ratio has a significant positive impact on the stock market value of IPO firms. However, the debt-to-equity ratio affects the stock market value negatively. Financial leverage has a significant negative impact on profitability but has no impact on the productivity of IPO firms. Finally, the growth of IPO firms has a positive impact on profitability. However, the growth affects their productivity and stock market value negatively. The outcomes of this study provide valuable contributions and practical implications for several key parties, including the firm’s managers and investors, to better understand the impact of IPOs on the firm’s performance and to better understand the post-IPO behaviour of firms.