Agency Costs, Market Discipline and Market Timing: Evidence from Post-IPO Operating Performance

We compare ninety-nine 1985 IPO firms with a matched sample of “seasoned” firms. The IPO firms were more efficient and profitable, yet exhibited declining market-to-book-equity ratios over the 1985-1992 period. However, we observe no significant trend toward lower efficiency or profitability among the IPO firms. In fact, we observe a significant improvement in operating efficiency five to six years after the IPO. Post-IPO evidence suggests that (1) agency costs do not Increase; (2) the markets discipline entrepreneurs with incentives to maintain pre-IPO performance; and (3) poor stock performance is due to investors who overpay, extrapolating current performance into the future.