Stock Market Development and the Financing Role of IPOs in Acquisitions

Abstract

We examine the role of IPOs as a source of financing by comparing firms from countries with different degrees of stock market development. Focusing on acquisition investments, our results suggest that firms operating in economies with a more developed stock market extract more benefits from the financing role of IPOs than firms from countries with a less developed stock market. Controlling for the importance of bank financing does not alter our main findings. IPO firms from market-focused countries also experience a relatively larger increase in size and in profitability in the post-IPO period. Our results indicate that the purpose of IPO financing varies with the financial system in general and with the degree of stock market development in particular

Keywords: stock market development, bank-based financial system, merger and acquisition, IPO, financial constraint

JEL Classification: G32, G34