IPOs and rivals' voluntary disclosures

Abstract

I examine the impact of completed initial public offerings (IPOs) on industry competitors’ voluntary disclosures. Prior research finds completed IPOs to negatively affect rivals’ performance and suggests that issuers gain competitive advantages as increased financing and risk tolerance allow them to engage in aggressive product market strategies. I expect industry rivals to respond by reducing voluntary disclosures in order to avoid revealing useful information that can be exploited by competitive issuers. Analyses indicate a significant decrease in the likelihood and frequency of public incumbents issuing management guidance after IPOs are completed in their industry. The decrease is more evident when IPOs are large, successful, when rivals are financially constrained, and when strategic actions of rivals and issuers are likely to be substitutes. Additional analyses find a decrease in the flow of industry-level information from public incumbents after the completion of IPOs in their industry. Consequently, valuation of peers becomes less useful when public incumbents make investment decisions post-IPO-completion. Overall, I provide new evidence on the disclosure response of public incumbents to completed IPOs and the resulting changes in the information environment. This study contributes to the literature that documents significant adverse effects of completed IPOs on the performance of industry competitors by showing that rivals respond to the increased competitiveness of new issuers by reducing voluntary disclosures in order to maintain their own competitiveness. I also extend the research on product market competition and voluntary disclosures. With many empirical studies on competition and voluntary disclosures, except for a few recent studies, being confounded by the endogeneity of measures of competition, additional evidence to demonstrate a causal relation is warranted. By using a difference-in-differences design that is robust to the use of the instrumental variables approach, I provide evidence supporting the theoretical prediction that competition from existing rivals reduces firms’ incentive to provide voluntary disclosures.