"Our findings show that after a firm goes public, every firm in its industry will likely see a decline in its profits per unit of market share and its customers will become easier to steal," says Spiegel.
In their paper "An IPO's Impact on Rival Firms," Spiegel and Tookes create a model in which firms and their rivals compete for consumers. Using industry data that includes the IPOs of U.S. publicly listed stocks from 1983 through 2011, they forecast future changes in profitability and consumer loyalty for an IPO and its rivals at 3, 5, and 10 years post-IPO. According to their findings, after an IPO, the median industry will see a long-term drop in profits per unit of market share of between 10% and 25%, and it will become three to four times easier to lure away a rival's customers.
According to the authors, one scenario that could explain these results is that after an IPO, the products produced by an industry become more homogeneous. In general, more homogeneous products result in lower profits per unit sold and an increase in customers moving from firm to firm, since they are less likely to view a company's products as unique. For example, in the mobile phone industry, unit sales have increased while profits have decreased as products have become more alike over time.
IPO firms are typically very small players, with market shares of 1% or less, so what explains the fact that IPOs correlate with industry-wide changes? The authors examined what role the IPO itself plays in the study's findings, testing whether industry changes occur because an IPO firm is stronger after going public and rivals face a more formidable competitor or whether an IPO simply signals impending industry changes. They found that firm fundamentals for an IPO firm and its rivals look similar post-IPO, indicating that the IPO is not causing a competitive disruption.
"An IPO is like a canary in the coal mine," says Tookes. "It's a forewarning of significant changes to come in the industry, but it isn't the catalyst for those changes."