Why Some Firms Beat the Post-IPO Slump

Fuqua Professor Christine Moorman and colleagues find an important connection between innovative businesses and risk-tolerant investors

August 9, 2022
Finance, Innovation
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On average, 7 in 10 private firms that decide to go public experience an innovation slump following their Initial Public Offering (IPO).

This phenomenon has been widely studied, with a key explanation being that firms succumb to stock market pressures that seemingly discourage risky, long-term investments.

Christine Moorman, the T. Austin Finch, Sr. Professor of Business Administration at Duke University’s Fuqua School of Business, was interested to find out if there were commonalities among the 30% of firms that do meet or outperform their pre-IPO innovation performance.

In a recently published paper in the Journal of Marketing, “Innovation Imprinting: Why Some Firms Beat the Post-IPO Innovation Slump,” Moorman and two colleagues studied a sample of 207 firms in the consumer-packaged goods industry that underwent an IPO and found that the seeds of success or failure are sown early.

“Our arguments and results show that strategic choices made fairly early in a privately-owned firm’s life can determine later outcomes that occur under the glare of stock markets,” the authors note in their paper. “Indeed, we argue and show that the consequences of imprinting are far from trivial: they include outcomes as fundamental as the persistence of breakthrough innovation, financial performance, and the very survival of the firm.”

Firms engaging in more “innovation imprinting” while private -- such as the development and introduction of breakthrough innovations over incremental innovations, more consistent introductions of those breakthrough introductions, and bundling and leveraging market capabilities --– offer an early signal of how they will act once public. This signal offers the company an opportunity to attract investors in the post-IPO period who share the firm’s tolerance for risk, value the potentially high returns, and are more forgiving of the risks, Moorman’s team suggests. Attracting like-minded investors plays an important role in the firm beating the post-IPO innovation slump.

Moorman and colleagues point to the fact that investors, like consumers, are not a homogenous group. Instead, investors vary in their appetite for risk. The authors note, “… just as marketing-related actions can attract different segments of customers, we find that a firm’s marketing-related actions in the form of pre-IPO innovation imprinting attracts a segment of investors who share its values and support innovation.”

Companies that beat the slump have higher stock market valuations and survive longer. Therefore, early imprinting and the attracting of like-minded investors have important performance implications.

Moorman said the idea to study the successful IPO stories came to her when she learned of an epidemiologist who studied terminal cancer survivors to identify reasons how they beat the odds. In the process of studying these exceptions, the epidemiologist was able to uncover new insights.

“My co-authors and I thought we could look at successes in business and see why some firms remain innovative after they go public,” Moorman said.

The paper concludes that “our findings challenge the idea that the stock market causes the inevitable death of breakthrough innovation. Instead, our results show that managers can help their firms remain innovative by planting the seeds of innovation before they go public.”

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