Does Going Public Affect Innovation?

Research Paper No. 2126

Does Going Public Affect Innovation?

Shai Bernstein Graduate School of Business Stanford University

December 2012

RESEARCH PAPER SERIES

Does Going Public Affect Innovation?

Shai Bernstein∗ Stanford University October 14, 2012

Abstract This paper investigates the effects of going public on innovation by comparing the innovative activity of firms that went public with firms that withdrew their IPO filing and remained private. NASDAQ fluctuations during the book-building phase are used as an instrument for IPO completion. Using patent-based metrics, I find that the quality of internal innovation declines following the IPO and firms experience both an exodus of skilled inventors and a decline in productivity of remaining inventors. However, public firms attract new human capital and acquire external innovations. The analysis reveals that going public changes firms’ strategies in pursuing innovation.

Stanford University, e-mail: shaib@stanford.edu. I am deeply grateful to Fritz Foley, Josh Lerner, Andrei Shleifer, and Jeremy Stein for their invaluable guidance and encouragement. I also thank Philippe Aghion, Malcolm Baker, Bo Becker, Effi Benmelech, Lorenzo Casaburi, Josh Coval, Laura Field, Paul Gompers, Robin Greenwood, Sam Hanson, Oliver Hart, Naomi Hausman, Victoria Ivashina, Dirk Jenter, Lawrence Katz, Bill Kerr, Jacob Leshno, Gustavo Manso, Ramana Nanda, Francisco Perez-Gonzalez, David Scharfstein, Antoinette Schoar, Amit Seru, Andrea Stella, Adi Sunderam, Rick Townsend and Rodrigo Wagner for helpful comments. I am grateful to seminar participants at Columbia University, Dartmouth College, Entrepreneurial Finance and Innovation Conference, Harvard Business School, Hebrew University, London Business School, London School of Economics, NBER Productivity Lunch, Northwestern University, Searle Conference on Innovation and Entrepreneurship, Stanford University, Tel-Aviv University, University of British Columbia and University of Pennsylvania for...