Going Public Decreases Innovation

I’m generally skeptical of using patent data to measure innovation, but this is still an interesting paper on the relationship between innovation and going public. By this measure, going public reduces innovation. [-]

Does Going Public Affect Innovation?


This paper investigates the e§ects of going public on innovation. Using a novel data setconsisting of innovative firms that filed for an initial public offering (IPO), I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long run innovation. Using this instrumental variables strategy, I find that going public leads to a 50 percent decline in innovation novelty relative to firms that remained private, measured by standard patent-based metrics. The decline in innovation is driven by both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions. I find suggestive evidence that changes in firm governance and managerialincentives play an important role in explaining the results.

Full paper here.