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Firm age-at-IPO and the long-term performance of internet companies
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Since the burst of the dot-com bubble in 2000, there has been an ongoing debate around the long-term viability of Internet-specific business models. Quick IPOs with lacking profitability and high failure rates have put many investors off in the aftermath of the crisis. In this thesis, I therefore analyze how Internet companies’ age-at-IPO relates to long-term stock performance. The sample consists of 116 Internet firms that went public on NASDAQ between 2003 and 2010. As predicted, I find that there is a significant U-shaped relationship between age-at-IPO and 5-year post-IPO performance. This implies that, on average, very young and old firms are most successful in the long run. The rationale for this finding is that Internet companies with quick IPOs have outstanding business models and can gain first-mover advantages, whereas older companies benefit from learning effects and already maintained a competitive advantage – even without public funding. Severe underperformance is mainly found for medium-aged Internet companies going public (age of 6 to 10 years). Furthermore, this thesis provides evidence that profitable Internet firms that have an IPO perform better in the long run than their unprofitable counterparts. Still, in contrast to most academic research, I do not find a significant relationship between profitability in the year of the IPO and long-term firm survival. A possible explanation is that most studies include the burst of the dot-com bubble and thus contain a large number of quick IPOs with high failure rates, whereas this thesis focuses on Internet IPOs in the more stable years 2003 to 2010. The findings underline the importance of first-mover advantages, especially in winner-takes-all Internet markets. Furthermore, they emphasize benefits from learning effects and the solid market position of older IPO companies. Overall, investors should carefully assess the IPO’s strategic implications and treat hot markets with caution – especially in the Internet sector.
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Internet Age-at-IPO Time-to-IPO Profitability Long-term Post-IPO perform