Jisu Jeun

Abstact:

This paper analyzes the role of Initial Public Offerings (IPOs) on employment cyclicality. Using Compustat data, I show that IPOs are cyclical in numbers and compositions and that the economic conditions at the time of IPO have long-lasting effects on subsequent firm growth. An important factor driving this result is the procyclical amount of capital raised from IPOs. Building on this evidence, I develop a firm dynamics model in which private firms decide whether to go public, while public and private firms decide about employment, investment, and exit in the presence of borrowing constraints. Crucially for the model mechanism, public firms face a looser borrowing constraint. The model is calibrated to match selected features of the U.S. non-financial firm sector and replicates the procyclical number of IPOs, selection patterns, and procyclical capital injections observed in the data. Using my model, I find that if IPOs were acyclical, the volatility of employment would be reduced by 10.4 percent. This amplification operates through two channels: first, a decline in the public firm share exacerbates capital misallocation; second, a lower propensity to go public reduces potential entrants' expected future value, decreasing entry rates. These findings suggest that policies mitigating IPO cyclicality during recessions could facilitate a faster recovery in aggregate employment.