Research And Empirical Analysis On The Product Market Competition Effect Of IPO Companies

The product market and stock market have long been regarded as separate markets in the finance literature, and the influence of product competition on IPO decision-making is always ignored in IPO researches which mainly focus on three IPO phenomena: hot issue market, IPO underpricing and IPO long-run underperformance. IPO is a very important decision in enterprise’s life cycle, not only companies raise funds from capital market, seasoned equity offerings(SEO) and issuarance of other securities become more convenient. With the proceeds raised from IPO, enough money can be invested in promotion, product market expanding, research and new product development. Through the certification effect of investment banks, IPO increases public concern over the new IPO company and its products, enhances brand awareness and improves the trust of product market consumers and suppliers. After IPO, it is easier for company to merger relative enterprises, and with the stock option motivation mechanism, the company can hire more talented staff. So, IPO helps to consolidate and improve the competitive status of company in its product market. In addition, as a result of the geater ability to diversify idiosyncratic risk in the capital market, IPO firm’s owners tolerate higher profit variability than owners of private firms. Consequently, public firms adopt riskier and more aggressive output market strategies than private firms, which improves the competitive position of the former. Therefore, IPO helps to improve companies’ product market competition status and competitiveness which we called “product market competitive effect of IPO”.Under the Cournot output competition model, each company considers rival’s output decisions and chooses their own production in order to maximize the value of the company. At the same time, companies makes the IPO decision boils down to trade-offs. Due to dispersion the risk of enterprise heterogeneity, the new IPO company’s equilibrium output and market share after IPO are greater than that of before, and there is a decline in competitor’s equilibrium output and market share. Under the assumptions of mature industry and no new entrants, the IPO company’s market share increases at the cost of its competitors’ s market share. Market share growth rate increases in product market competition. While in Bertrand price competition model, because the competition behavior between the enterprises is strategic complementary, as a price maker, IPO company tends to take less aggressive competition strategy, thus leads to competitor’s attack reducing which causes an increase in the residual demand for the product of IPO company. In other words, going public has a stratigic benefit under both Cournot and Bertrand competition, although the driving forces behind this benefit are different in the two scenarios.The empirical studies of the product performance after IPO are almost from the perspective of financial performance, using the profitability indicators such as total return on assets, return on equity. Although the proceeds of IPO brings high growth rates in companies’ operating assets, but there is a delay in economic benefits from the investment. Revenues and profits cannot achieve high growth synchronously with operating assets. So there is a sharp decline in overall yield in the IPO year, which is the so-called IPO performance "suddenly turn hostile" phenomenon. Therefore profitability factors cannot reflect companies’ product market performance in the short term after IPO. This article is the first study to research the changes of the company’s market performance of the IPO from the perspective of the product market competition, selecting market share and growth of market share as the main indicators to measure IPO’s market competition effect for the growth of the market share is not affected by the asynchronization growth of operating assets and profit.And the market share variable can eliminate the influence of the industry’s economic cycle. Considering the IPO earnings management may affect our empirical result, we add the variable of financial quality in our empirical model and select the company pre-ipo market forces, asset-liability ratio, return on equity, proceeds of IPO as corporate characteristic variables, and industry concentration, the industry risk, enterprise strategy sensitivity as industry characteristic variables.We study the influence of IPO on the competitors’ performance Based on the theory of market share effect of IPO, we point out the effect will cause the decline of both operationg performance in product market and stock return in capital market of listed competitors. According to Schumpeter’s creative destruction(Schumpeter, 1942) theory, the more intense market competition, the more motive for R&D and innovation activities. The motivation to improve the competitiveness of the enterprises in the product market brings the huge impact to the entire industry and threatens the surviving and market position of competitors. Therefore, more intense the product market competition, more creative destruction caused by enterprises’ innovation activities, and greater competition risk faced by competitors. On the other hand, firms operating in the less competitive industries can withstand the shock of competitor’s IPO for their monopoly allow them accumulating large profits. Therefore, the influence of competitor’s IPOs on monopoly enterprises is far less than enterprise operating in competitive industries. Thus we put forward the hypothesis that companies’ stock price will decline at the success of competitor’s IPO and the falling range positively related to the degree of industry competition.Competitor’s IPO has a negative effect on companies’ market performance.We match the firm level data in National Bureau of Statistics(NBS) with Resset Data on the CSRC industry classification standard, and obtained data of 33 industries, 1759 firms to do the empirical test and the empirical results support our hypothesisA company’s IPO decision may influence its rival’s IPO decision. Looking for the causes of IPO wave from the product market competition effect of IPO is realy a new attempt. Based on Chemmanur & He’s(2011) theory and combined with the characteristics of China’s capital market, we study the the IPO decision and IPO waves from the angle of product market competition to reveal the causes and mechanism of China’s capital market IPO wave. In China, in the presence of productivity shocks, to avoid the IPO’s market share grab form IPO firms, companies with low productivity tend to follow enterprises with high productivity in new stock issuing, which leads to IPO wave. Firms going public during an IPO wave have lower productivity and post-IPO profitability than those going public off the wave; Firms going public earlier in an IPO wave have higher productivity and post-IPO profitability than those going public later in the wave. We empirically test these predictions.At present, the research of the relationship between IPO and product market competition has just started and I hope this article can cast a light on the further research of this field.