Financial constraints limit firms' ability to invest in working capital, which results in opportunity costs from lost sales or stockouts. The author examines initial public offering (IPO) firms' working capital management and build on the idea that newly listed firms experience a liquidity shock that allows them to invest more in working capital.
The empirical results are based on a sample of European IPO firms matched with comparable non-IPO firms; the author uses the generalized method of moments panel-data regressions to test the hypotheses.
The author observes that IPO firms increase their inventories-on-sales ratio, accounts receivable-on-sales ratio and operating working capital after the IPOs, which is consistent with the idea that going public relaxes financial constraints and allows firms to adopt more conservative working capital management practices. The observed results are stronger for smaller firms and zero-debt firms, which are the most financially constrained firms.
The study shows that working capital requirements can be financed via equity and not only via debt, and can even motivate the decision to go public for financially constrained firms.
