When IPOs fail, competitors benefit

A firm seeking to go public in the U.S. files documents with the SEC. With some minor limitations, it can withdraw from the process at any time. Understandably, media focus is on IPO successes rather than failures, although more than one in five filers does so. Withdrawal is not always a bad thing. For some firms a better offer arrives (e.g., a buyout bid) while for others it is a bad thing (e.g., investors are unwilling to invest). Importantly, the net result of a withdrawal is one less publicly traded competitor. In a recent paper I have with Dr. Craig Dunbar, we show that the existing publicly traded competitors experience a positive cumulative abnormal return of about .35% when a “would be” competitor fails to complete its IPO. Can you profit from this? Not likely. You would have to predict a withdrawal, and then buy stock in competing firms. Only those inside the firm’s IPO process would have enough insight. The rest of us must read the tea leaves.