MASTER THESIS MSc BA Small Business & Entrepreneurship

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MASTER THESIS

MSc BA Small Business & Entrepreneurship

The role of the initial public offerings in SMEs’ performance and

innovativeness

by

Arman Arzumanyan

(S3061078)

University of Groningen

Faculty of Economics and Business

June 2018

Supervisor: Dr. S. Murtinu

Co-Assessor: Dr. O. Belousova

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The role of the initial public offerings in SME’s performance and innovativeness

ABSTRACT

IPO is an important step in a company’s lifecycle. Due to IPOs companies may access new resources, gain legitimacy and attract financial investments; thus, following the resource based view of the firm, an IPO may be beneficial for the company and may lead to a better performance. As doing an IPO can be costly, and there is a chance of failure, an IPO can be considered as a risky decision. It can reflect the risk propensity of a company which may actually be beneficial for the firm performance, as suggested by the entrepreneurial orientation literature. Accessing new resources and having higher risk propensity have been linked also with a company’s innovativeness. The access to new resources is especially important for SMEs, because usually they have resource constrains, weak market power, informal and less professional management, higher risk of failure and difficulties to receive funds from external investors. The risk propensity is also critical for SMEs since the owners usually do not consult with others before making a decision, they have a less professional management, and an IPO can be very costly for them. To the best of my knowledge, no previous research has examined the role of the IPO among SMEs under the light of risk propensity and the resource based view of the firm.

Additionally, many companies quite heavily invest in R&D activities prior to the IPO. This can have multiple reasons, such as to attract more investors, to signal about the quality of the company or to simply trigger an IPO and develop their innovations further. It is interesting to test whether such prior R&D investments will actually have a positive influence on the performance or not. Furthermore, in this Thesis I am also interested in the role of a company’s age during an IPO. As younger firms are more flexible and have higher learning capabilities, it is interesting to explore whether this will play a role for the firm’s performance and innovativeness after an IPO.

In order to test the relationships, I have implemented an event study analysis. My findings suggest that contrary to my formulated hypothesis, being listed is negatively associated with a firm’s performance, but it is positively associated with a firm’s innovativeness. I also found that pre-IPO innovativeness has a positive relationship with a firm’s performance; however, the influence is very small. As for the age, no significant results were found for the relationship between the age of the company during the IPO and company’s performance and innovativeness.

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ACKNOWLEDGEMENTS

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CONTENT

1. Introduction 4

2. Literature review 7

2.1. IPO and firm’s performance 7

2.2. IPO and firm’s innovativeness 12

2.3. Pre-IPO innovativeness 13

2.4. Firm’s age during IPO 15

2.5. Conceptual model 15 3. Methodology 16 3.1. Data collection 16 3.2. Measurements 16 3.3. Analysis 18 4. Results 21

4.1. Descriptive statistics and correlations 21

4.2. Wilcoxon Signed-Rank Test 23

4.3. Regression Analysis 24

4.4. Robustness check 28

5. Discussion 29

6. Conclusions 31

7. Limitations and future research 31

8. Practical implication 32

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1. INTRODUCTION

Depending on their legal form, businesses face different financial, organizational or managerial opportunities and challenges. Public companies represent one legal form, which is a legal entity with a capital divided into freely transferable shares. The first step of the transformation from a private firm to a public firm is called “Initial Public Offering” or IPO. In other words, “IPO is a private firm's first public offering of stock” (Nelson, 2003, p. 712). Due to an IPO the governance and ownership structure of the company change, and the company can gain new capital, public recognition and visibility (Nelson, 2003).

In this research I will focus on the role played by IPOs on the innovativeness and performance of small and medium-sized enterprises (SMEs). I define SMEs as those independent firms which had less than 500 employees (OECD, 2005) in the IPO year. There are many authors who have discussed the advantages and disadvantages of IPOs; however, only very few of them were focused on SMEs (Martin, 2001; Bancel & Mittoo, 2009; Pagano, Panetta & Zingales, 1998). In general, SMEs are less inclined to use equity finance mainly because either the owners are not aware of such opportunities or they do not want to lose the full control (Storey & Greene, 2010). Usually SMEs have resource shortages, weak market power, informal and less professional management, lower brand value and higher risk of failure in comparison to large firms (Storey & Greene, 2010); therefore, it is important to distinguish SMEs from large firms in terms of consequences of the IPOs. There are three main issues addressed in this thesis.

First. Since an IPO allows firms to sell their shares to the public, it allows them to gain new

financial resources, it gives them an opportunity to raise new capital and gain more financial flexibility (Ritter & Welch, 2002; Bancel & Mittoo, 2009; Huyghebaert & Hulle, 2005). Additionally, in order to become public, it is required that these companies submit reports about their financials and provide a certain level of transparency to the investors. Thus, IPOs can help companies to acquire intangible resources, such as reputation and credibility (Bancel & Mitto, 2009). The resource based view of the firm (RBV) suggests that resources play a tremendous role for the firm and can lead to a competitive advantage (Barney, 1991). As mentioned, an IPO can help to obtain both financial and other intangible resources, which means that, following the RBV logic, an IPO can be beneficial for the company.

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Thus, the decision to engage in an IPO is risky and may lead the company into uncertainty, because the future outcomes of the IPO cannot be predicted with a high level of accuracy.

In the entrepreneurial orientation2_{literature risk taking propensity has been either positively or}

negatively linked with the firm performance. On the one hand, some authors claim that risk propensity is positive for the firm performance because in uncertain environments businesses need to take risky decisions in order to seize opportunities or – at least – to survive (Rauch, Wiklund, Lumpkin & Frese, 2009). In other words, risk propensity may help companies to explore opportunities and to adopt new business strategies (Miller & Friesen, 1982; Baird & Thomas, 1985). On the other hand, some authors suggest that risk propensity has a negative relation with the SME performance because in case of SMEs usually the strategic decisions are made by the business owners alone and are based on fewer opinions (Naldi, Nordqvist, Sjöberg & Wiklund, 2007).

Thus, there is a debate in the literature, where one stream suggests that risk propensity is beneficial for the performance, while another stream claims the opposite. This Thesis aims to contribute to this debate by testing the relationship between IPOs and SMEs’ performance.

Second. This Thesis is also interested in investigating whether an IPO is beneficial for the

company’s innovativeness or not. As already mentioned, an IPO provides access to new resources for the firm. While obtaining new financial resources the firm will have to choose where to invest. Previous research showed that IPO firms are prone to invest more in R&D and even overinvest (Fedyk & Khimich, 2018).

The risk propensity is also linked to a firm’s innovations (García-Granero, Llopis, Fernández-Mesa & Alegre, 2015; Avlonitis & Salavou, 2007). It is suggested that the firms3_{with higher risk propensity}

usually have more innovations. However, to the best of my knowledge, no previous study researched and/or tested the relationship between IPOs and innovativeness in the context of SMEs in the light of RBV and the firm’s risk propensity. This issue is important because the results may advise the entrepreneurs or managers about the level of their risk taking activities and may help them with their IPO decisions.

Furthermore, it is also interesting to focus on the firm’s innovativeness before the IPO. On the one hand pre-IPO innovativeness may be used merely to attract potential investors after the IPO. On the other hand, there are many authors (e.g. López-Nicolás & Meroño-Cerdán, 2011; Rosenbusch, Brinckmann & Bausch, 2011; Verhees & Meulenberg, 2004; Jiménez-Jiménez & Sanz-Valle, 2011) claiming the general benefits of the innovativeness for the performance of the company. However, these studies do not take into

2_{Risk taking is one of the components of Entrepreneurial orientation (EO). However, the EO itself and its other} components are beyond the scope of this thesis.

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account of specific events (such as an IPO) in the company’s lifecycle. Additionally, pre-IPO innovations may be one of the reasons for pursuing an IPO, as companies may need more financial resources to enhance the current innovations. However, no previous studies (to the best of my knowledge) focused on the pre-IPO innovativeness and future performance of the SMEs; thus this research will explore whether in fact such pre-IPO R&D investments are justified or not in terms of performance improvements.

Third. Younger firms have more difficulties in accessing new financial resources (Adelino, Ma &

Robinson, 2017), and such barriers may play a detrimental role in their growth and performance, and on their alertness to new opportunities in their environment. Authors such as Loderer, Stulz & Waelchli (2017), suggest that the older a firm is, the less it spends on R&D. Furthermore, organizational learning theory suggests that in order to be competitive a firm needs to adapt to the changing environment through learning and improving its strategies, capabilities, skills and knowledge (Levitt & March, 1988). Linking organizational learning theory to the suggestion of Loderer et al. (2017), we may assume that younger firms are more prone to learning than older firms. Hence, in the case of an IPO, younger firms may have more benefits due to such flexibility and capabilities which can enhance their innovativeness and performance. It is interesting to test the relationships between SMEs’ IPO age and their future performance and innovativeness, because the results may suggest whether it is better for the company to do an IPO earlier or later. However, to the best of my knowledge, this relationship has not been tested in the literature; thus, this Thesis aims to fill this literature gap as well.

Considering the issues and questions mentioned above, I have formulated the following three research questions:

RQ1: Does the SMEs’ performance and innovativeness improve after doing an IPO? RQ2: Is a firm’s pre-IPO innovativeness beneficial for its future performance?

RQ3: Do younger firms benefit more from IPOs than older firms in terms of performance and innovativeness?

In order to answer to my research questions, I have conducted analyses based on the data collected from 353 companies. I have adopted the event study analysis (Bowman, 1983) where I focused on the IPO year as an “event” year and compared the performance and innovativeness measurements before the event and after the event. In other words, this study allowed me to observe the change of the performance and innovativeness before the event and after the event. Additionally, in order to find answers to my second and third research questions, linear regression analyses were conducted. These methods are explained more in details in the methodology part of this Thesis.

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and innovativeness. Moreover, this Thesis will help them on deciding the suitable time for doing an IPO, since this thesis also considers the role of the firm’s age during an IPO.

This thesis has the following structure. After the introduction follows the literature review, where I discuss the concepts important for this research. After follows the methodology part, where I present the method of the analysis and the measurements. Next follows the analysis and the results parts, where I conduct the analysis and receive the results. In the discussion part, which follows after, I discuss the findings, where I present and elaborate on whether my hypotheses are supported or not. Next follows the conclusion, after which I will discuss the limitations of the study and will provide suggestions for the future research and practical implication.

2. LITERATURE REVIEW

2.1. IPO and firm’s performance

In this Thesis I discuss the relationship between IPO and firm performance from the perspective of the resource based view and risk propensity. Below I will discuss both and consequently suggest my hypothesis.

Resource based view

As one of the most influential approaches in the business literature (Kellermanns, Walter, Crook, Kemmerer & Narayanan, 2016) the resource based view suggests that firm’s competitive advantage against its rivals is based on the type of the resources these firms possess4_{(Barney, 1991; Kellermanns et al., 2016;}

Wernerfelt, 1984). Barney (1991) agrees that firm resources are “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness” (Daft, 1983 IN Barney, 1991, p. 101). A simpler definition is suggested by Wernerfelt (1984) as “resource is meant anything which could be thought of as a strength or weakness of a given firm.” (p. 172).

Furthermore, Barney (1991) proposes that the sources of sustainable competitive advantage can be not all resources but only those that are valuable, rare, imperfectly imitable, non-substitutable. In other words, these four characteristics lead to a heterogeneity of resources among firms. If all companies were

4 _{Resource based view received also criticism by some authors. For example Priem & Butler (2001) claim that}

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possessing the same or similar resources than such resources could not be sources of competitive advantage since everyone would have the same opportunities and would not have advantage against others. However, if a company had resources that were rare, and competitors could not easily obtain or imitate and could not find other substitutes for such resources then a firm could have different opportunities and could have advantages against its competitors. If such resources were also valuable, then the firm would gain sustainable competitive advantage. In other words, RBV suggests that it is the heterogeneity of the resources that makes firms different and such resources should have the four characteristics mentioned earlier if the company aims to have a sustainable competitive advantage (Barney, 1991; Rangone, 1999).

There are different approaches about what competitive advantage (CA) is. For instance, Besanko, Dranove, Shanley & Schaefer (2013), suggests that a firm has a CA “when a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market” (p. 295). According to Peteraf & Barney (2003) a firm has a CA “if it is able to create more economic value than the marginal (breakeven) competitor in its product market” (p. 314). Barney (1991) suggests that competitive advantage is about “implementing value creating strategy not simultaneously being implemented by any current or potential competitors” (p. 102). As we can notice the first two articles suggest that CA is about being better than competitors in terms of economic profit or economic value. In case of Barney (1991) it is about value creating strategies, where the term “value” is not well defined. In our case, since we consider IPO as a method of acquiring new resources and mainly financial resources, I consider that the competition will be based more about economic profit, since the IPO company will have more opportunities to invest in marketing, human resources and other performance enhancing activities, which may yield a better economic profit. Hence, in this thesis I consider that Besanko et al. (2013) definition is more suitable.

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As mentioned above, resources can lead to a competitive advantage which can lead to a better performance. Therefore, it is important to understand and analyze the resources that an SME may obtain due to an IPO. For that reason, I have separated two main resources that SMEs may obtain through an IPO5_. a) Financial resources. One of the most important resources that a company can receive through

IPOs are the financial resources. These resources are obtained through sales of the company’s stocks, when the investors buy from the company. In that case these investors become shareholders and they receive a share in that company. In general, SMEs have shortage of financial resources and limited options to gain financial resources (Mahérault, 2000; Storey & Greene, 2009), hence an IPO can help SMEs to improve their financial situation through involving new financial resources from sales of the issued stocks. These new financial resources can be invested in various direction, such as in marketing, R&D, human resources, in internal systems and communication methods, which can influence the overall performance of the company.

b) Legitimacy. Due to an IPO a company may obtain intangible resources as well. One of such

resources are the trustworthiness, credibility and transparency, which together can be referred as a legitimacy. Legitimacy can be defined as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574).

In order to be allowed to become public a company needs to meet several requirements set by law or institutional investors (Ravasi & Marchisio, 2003). Depending on the jurisdiction, companies are required to do audits, submit financial reports, provide higher level of transparency to the public and to ensure a higher level of accounting standards6_{. Their financial reports are}

expected to have higher level of comprehensiveness and timeliness (Ravasi & Marchisio, 2003). This will increase the transparency and credibility of the company and will improve its prestige and allow investors or other parties to assess the company better. Such transparency can reduce the uncertainty in the business and lead to a higher trustworthiness (Ravasi & Marchisio, 2003). Trustworthiness in turn can help the company to improve its competitive advantage, because due to it the company may obtain better partners and reduce transaction costs (Barney & Hansen, 1994). The transparency may help also to become listed in the exchanges, which in turn can contribute to

5_{For the purposes of this study, the resources are not measured in accordance with the four attributes of sustainable}

competitive advantage, since that largely depends on the specific firm, and many other features of the company should be taken into account (each company should be approached individually). However, since this research adopts different methodology, individual assessment of the companies is not aligned with it.

6_{The trustworthiness of the company may also be affected by the reputation of the underwriter (e.g. Carter, Dark &}

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the credibility of the company, since usually these exchanges have several strict requirements about the company’s quality.

As mentioned, such trustworthiness, credibility and transparency overall contribute to the legitimacy of the company and this in general helps to increase the reputation of the company, reduce transaction costs and attract more investments.

Risk propensity

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Therefore, in general the decision to do an IPO is a risky decision and this risk is higher for SMEs. Hence, IPO decision relates to the degree of risk taking that the business owner or SME management are willing to take.

Risk propensity is about the degree that an entrepreneur or a manager wants to take a risk. This topic gained special attention in the entrepreneurial orientation literature since depending on a such attitude the strategy of the company may shape, and it can affect the overall firm performance. Furthermore, it can influence the overall business strategy of the firm, which can play important role in the future development of the firm (Baird & Thomas, 1985). There are many definitions of what the risk propensity is. Brockhaus (1980) suggests that the propensity for risk taking is “the perceived probability of receiving the rewards associated with success of a proposed situation, which is required by an individual before he will subject himself to the consequences associated with failure, the alternative situation providing less reward as well as less severe consequences than the proposed situation” (p. 513). A simpler definition is suggested by Sitkin & Weingart (1995) as “an individual's current tendency to take or avoid risks” (p. 1575). As it can be noticed, risk propensity concerns the perception and tendency about future uncertain situations and outcomes of such situations. For the purposes of this research I will follow Sitkin & Weingart (1995) definition, since it covers a broad range of decision making approaches and best suits with the spirit of this research.

Risk propensity is considered as a part of entrepreneurial orientation of the firm (Lumpkin & Dess, 1996). As such, when the risk propensity is high, it is more likely that the firm has higher entrepreneurial orientation. In the literature risk propensity has been linked both to a positive and negative performance of the firm.

Generally, scholars suggesting the benefits of the risk taking from the perspective of entrepreneurial orientation argue that in uncertain environments businesses sometimes need to take bold actions in order to not miss the opportunity (Rauch, Wiklund, Lumpkin & Frese, 2009). Risk propensity may help companies to explore opportunities and to adopt new business strategies (Miller & Friesen, 1982; Baird & Thomas, 1985). New profitable opportunities may allow firms to expand their market, introduce new products, take advantage of the situation or obtain new resources, resulting in improved performance. Risk propensity is especially important when the uncertainty of the environment is higher (Lumpkin & Dess, 1996).

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various alternatives (Naldi et al., 2007). Therefore, risky decisions of the SMEs are more likely to move the company into undesirable situations and are more likely to harm the performance (Naldi et al., 2007).

Overall, the risk propensity literature argues for both upsides and downsides of risk propensity for the firm performance. One the one hand it is suggested that risk propensity is positively related with the performance, mainly because it can help to explore new opportunities. On the other hand, it is argued that it is negatively related with the performance, since in case of SMEs business owners usually make the decisions alone without considering other opinions, thus making the decisions more vulnerable. RBV, in turn, suggests that resources play key important role for the firm’s CA, which can improve the performance. Focusing on IPOs as risky decisions and as reflections of firm’s risk propensity and considering that IPOs will help companies to obtain new resources, I assume that, overall, IPOs will have positive relationship with the firm performance. Thus, my first hypothesis is:

H1: There is a positive relationship between the IPO of a company and its future performance.

2.2. IPO and firm’s innovativeness

Innovations play important role in the firm’s life. They allow firms to explore new opportunities and to expand their competencies. In general innovation is “the first commercialization of the idea” (Fagerberg, 2003 IN Storey & Greene, 2009,p. 78). The idea itself is not enough to be considered as an innovation regardless how new and valuable it is. The idea needs to be commercialized and implemented in a business model. Damanpour (1991) suggests that innovation is “the adoption of an internally generated or purchased device, system, policy, program, process, product, or service that is new to the adopting organization” (p. 556). Interestingly, this definition considers innovations that are only new to the organization. That means if the company generates a product that is very new to the company itself but widely used by the others, it will be still considered as an innovation. This topic is discussed by Davidsson (2005), who created a matrix with the dimensions of newness to the firm and newness to the market. They suggest that the product is new only when it is new both to the firm and the market. However, analysis whether the new product is new to the firm or to the market is beyond the scope of this Thesis, and I will use the term “innovation” for the first commercialization of the new ideas, regardless if these products are new to only the adopting firm or not.

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culture” (p. 44). Since innovation is not only about ideas but also about their commercialization, I define innovativeness based on Hurley & Hult (1998) definition but with an adaptation as “innovativeness is the notion of openness to new ideas and their commercialization as an aspect of a firm’s culture”.

As already mentioned, IPO is considered as a risky decision and may indicate about the risk propensity of the firm. Risk propensity is also related to the innovativeness of the firm. Particularly, the innovations usually require a lot of resource commitment while the outcomes are uncertain (García-Granero et al., 2015). When management or the owner have higher propensity to the risk taking they usually conquer against uncertainty through bold initiatives and solutions, including innovations. In other words, those companies who take more risks are more prone to initiate innovations in comparison to those who are less risk takers. One of the reasons for this can be that since generation of innovations assumes a certain level of risk, those who avoid risk are less likely to take the risk to innovate (García-Granero et al., 2015). Similar suggestions have Miller, Kets de Vries & Toulouse (1982) by emphasizing the necessity of risk taking for substantial product innovations.

As mentioned earlier, IPO can help the company to gain more financial resources. One of the directions that a company may invest is the R&D. When a company invests in R&D it aims to increase its innovativeness. Such expenditures have been linked with higher innovation level (Himmelberg & Petersen, 1994). By spending on R&D company may hire professionals, may purchase special equipment and conduct special test. Expenditures on R&D may help the company to gain more collaboration for the product development (Hall & Bagchi-Sen, 2002). In other words, IPO will help the company to gain new financial resources and it is assumed that the company will use this opportunity to invest more in R&D, thus increasing its innovativeness.

Considering that IPO is a risky decision and considering that risk propensity is also linked with higher innovativeness, and considering that due to an IPO a company may obtain new financial resources and will have more chances to invest in R&D, which is better for the innovativeness, I assume that IPO has a positive relation with the innovativeness of a firm. Therefore, my second hypothesis is:

H2: There is a positive relationship between an IPO and the firm’s innovativeness.

2.3. Pre-IPO innovativeness

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In general, the positive influence of innovations on the firm performance has been found by many authors (e.g. López-Nicolás & Meroño-Cerdán, 2011; Rosenbusch, Brinckmann & Bausch, 2011; Verhees & Meulenberg, 2004; Jiménez-Jiménez & Sanz-Valle, 2011). Innovation can help firms to establish a temporary monopoly (Schumpeter, 1934 IN Rosenbusch, Brinckmann & Bausch, 2011) due to patents or know-how or early-mover’s advantage. In case of SMEs their flexibility will allow to take the most from this monopoly and such flexibility will help them to keep their monopoly status longer (Rosenbusch et al., 2011). For SMEs new products and innovations in general can become a gateway to niche markets where they can grow their business further. In other words, since SMEs do not have enough market power and resources to compete with larger firms, one of their strategies can be focusing on specific niche market where they can specialize their products and sales, thus becoming a leader in the particular market (Porter, 1980). Innovations can allow them to find these niches and to enter them. Furthermore, due to innovations companies are able to survive and even take the advantage of environmental turbulences and rapid changes. Those companies who innovate more will be able to survive such changes since they will provide solutions for the new market conditions (Jiménez-Jiménez & Sanz-Valle, 2011).

However, none of these authors focused on pre-IPO innovations. As IPOs are risky actions for companies and can lead to an uncertainty, it is interesting to find out whether the general approach of “Innovativeness is good for the performance” will apply also for the pre-IPO innovativeness. As mentioned, it is possible that the pre-IPO innovativeness was used as a veil to have a successful IPO, while after the IPO they may change their trajectory. These questions may challenge the overall perception of the Innovation-Performance link; hence it is interesting to test the relationship between pre-IPO innovativeness and post IPO performance.

To the best of my knowledge, current literature does not give an answer to this specific question and, moreover, there was no empirical tests of such assumptions. I will base my assumptions on the general approach of the benefits of the innovations and will consider that pre-IPO innovativeness will still be beneficial for the company. I assume that such positive characteristics overweight the possible challenges about pre-IPO innovativeness mentioned earlier. Moreover, considering that IPO can lead the company into uncertainty, and considering that innovativeness is a method to “conquer” the uncertainty, I assume that those companies which have higher pre-IPO innovativeness will have higher chances to survive and grow after the IPO. Thus, my third hypothesis is:

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2.4. Firm’s age during IPO

As companies age, their behavior and characteristics alter. There are both positive and negative changes that occur due to ageing. The organizational learning theory emphasizes the importance of learning skills of the company in order to survive and prosper in the changing environment. It should constantly invest and improve its knowledge, strategies, capabilities, resources to remain competitive and to advance (Levitt & March, 1988). According to Loderer et al. (2017), when firms get older they spend less on R&D. As firm age they become less radical innovators and are less open to new opportunities. They usually become more hierarchical and formal, which are usually obstacles for being more innovative (Loderer et al., 2017).

Since IPO will give new financial resources to the firm, we assume that these new financial resources will be spend more on R&D by younger firms rather than by older firms. Additionally, since an IPO assumes a certain level of risk, young firms which as mentioned are more flexible and resistant to turbulences, will have more chances to survive this transition and have a better performance after the IPO. Thus, I assume that the younger the firm is during the IPO the better will be its performance and more innovative it will be. Thus, my fourth and fifth hypotheses are:

H4: There is a negative relationship between the age of the firm during the IPO and its performance.

H5: There is a negative relationship between the age of the firm during the IPO and its innovativeness.

2.5. Conceptual Model

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3. METHODOLOGY

3.1. Data collection

The data about the companies were collected from Bureau van Dijk’s ORBIS database. ORBIS is a database which contains information about 300 million companies in the world obtained from 160 separate data providers. Considering the purpose and specificities of my Thesis I have chosen those companies which had conducted an IPO between 2009 and 2015 and had available financial data for my measurements. They also should have had maximum of 500 employees for at least one of the available years7_{. Since I am focused only on those companies that were SMEs during the IPO, and since IPO year}

was different per companies, I have filtered out all those companies which had more than 500 employees during their IPO year. For those companies, which had limited information about their employees I have oriented based on the last available number before the IPO year. Afterwards, the extreme values (1st, 2nd, 98th and 99th percentiles of the distribution) for ROA and ROE were eliminated in order to have more reliable results. Eventually this led to a final sample of 353 companies from 30 countries in the world.

3.2. Measurements

Performance

There are multiple methods indicated in the literature on how to measure the performance of a company and several researches indicated that there are no perfect or universal performance measures (Barton, Hansen & Pownall, 2010; Murphy, Trailer, & Hill, 1996). In this Thesis I will use Return on Assets (ROA) as a main performance measure, while for the robustness check I will use Return on Equity (ROE).

Return on Assets (ROA) is calculated by dividing the net income on the total assets of the company. ROA is considered one of the ubiquitous choices of measuring the performance of the company (Dowling & McGee (1994). Ratio that is used for ROA takes into account the asset base of the firm and also measures “the income generated for each dollar of asset” (Dowling & McGee, 1994, p. 1670).

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Innovativeness

There are multiple methods for measuring the innovativeness (Storey & Greene, 2010). Taking into consideration the data availability in ORBIS, I have chosen only one measure for the innovativeness, which is the amount of the research and development (R&D) expenses of the company. R&D expenditures have been linked with better product innovations (Stock & Reiferscheid, 2014) and have been mentioned by many scholars as a measurement or indicator for innovativeness or innovative activities (Alegre & Pasamar, 2018; Storey & Green, 2009; Rosenbusch, Brinckmann & Bausch, 2011). The R&D expenses of the company are in US dollars and the more the R&D expenses are, the more is considered the company’s innovativeness. For those years that R&D expenses were not available in ORBIS, it was assumed that the company had 0 R&D expense for that year.

Firm’s age during IPO

The firm’s age during the IPO will be treated as an independent variable for testing my fourth and fifth hypotheses, while in case of the third hypothesis test it will be treated as a control variable. It is calculated by subtracting the date of incorporation from the year of conducting an IPO.

Control variables

There are five control variables used in this research. The first one is the industry. The industry is chosen as a control variable, because depending on it, the performance of the company may vary. Previous research suggests that in some industries the post-IPO performance was better and in others worse (Krishnan, Ivanov, Masulis & Singh, 2011), hence it is important to control the role of the industry in my Thesis. The ORBIS database provides information about the industry with NAICS2017 codes. Initially I received 167 NAICS codes for specific industries, which then were grouped based on the first two numbers of these codes, which are the main industry numbers. This led to the following 13 industries: i) Agriculture, ii) Manufacturing, iii) Information, iv) Finance, v) Professional services, vi) Mining, vii) Utilities, viii) Construction, ix) Trade, x) Transportation, xi) Real Estate, xii) Administrative support, xiii) other service. I have created dummy variables for these industries. Companies belonging to the industry will have value “1” for that particular industry dummy variable and “0” for the others.

The next control variable is for the size of the firm. It is important to control for it since depending on the size, the company can perform differently. In order to exclude such influence on my results I control for the size of the firm through its total assets in US dollars. Since the distribution is not normal, I have transformed the total asset value into its logarithm which will be used in the future analysis.

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such effect and to have better results I include the firm’s country as a control variable. In order to use it in the analysis, I have created dummy variables for each country and a company from one country will have a value of “1” for that specific country dummy variable and a “0” value for the others.

The next control variable is the year of doing an IPO. As mentioned earlier, I focus on the IPOs that have been conducted between 2009 to 2015. It is important to control for this, since depending on the year, there might have been different economic or financial conditions, situations or trends in the world or in the specific countries, which overall could affect the outcome of the IPO. Thus, I will control for the year of the IPO in order to reduce such influences on my results. I have created dummy variables for each year of the IPO and the companies that had an IPO in one year will have a value of “1” for that particular dummy variable, and a “0” value for the other dummy variables.

The next control variable is the number of companies in the corporate group. When a firm is a part of a corporate group it has more chances to receive support in terms of resources from other companies in that group. Since I consider that an IPO may help companies to gain more resources, which is one of my explanation how IPO can influence the performance and innovativeness, it is important to control for the number of companies that are in the same group with the IPO company. It is possible that the IPO company will share some of its resources with the other group members or vice versa.

The next control variable is the number of patents that the company has. Inspired by Cumming & Dai (2013), it is interesting to control for the quality of the firm. In this thesis I will consider the number of patents as an indicator for the quality of the company. It is important to control for this since depending on such quality some companies may perform better than the others or have a better innovativeness. Unfortunately, the ORBIS does not provide patent information on a yearly base, but only for the last available year. Nevertheless, overall the number of patents that the company has, can be indicator of the general quality.

3.3. Analysis

In order to summarize my data and give an overview about it, first I will present the descriptive statistics. This will be about means, standard deviations, minimum and maximum values of my variables. The correlation analysis will follow after, where it will be shown the associations between my variables.

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In order to conduct the event study, I need to determine the time period that I am interested in. For that reason, I have chosen to focus on the two years before the IPO and on the two years after the IPO (Figure 2). I determine for each company their IPO year (year “t”). Then I have named their ROA for the t+1 year as ROA_post1. For t+2 year I have named ROA_post2. I have named pre-IPO ROA as ROA_pre1 for the t-1 year and ROA_pre2 for the t-2 year. With the same logic I have named R&D expenses as RD_post1, RD_post2, RD_pre1 and RD_pre2. The total assets were named as TotalAssets_Post1, TotalAssets_Post2, TotalAssets_Pre1, TotalAssets_Pre2.

Furthermore, I have calculated the averages of (t-1) & (t-2) and (t+1) & (t+2). The result for the average of ROA_pre1 and ROA_pre2 is named ROA_preAverage and for the ROA_post1 and ROA_post2 the average is named ROA_postAverage. With the same logic the pre and post IPO averages of the total assets, R&D are named as TotalAssest_postAverage, TotalAssets_preAverage, RD_postAverage, RD_preAverage.

Considering that I am focusing on the changes of innovativeness and performance after the IPO, I have calculated the difference between pre and post averages. Thus, for example for ROA it is ROA_postAverage - ROA_preAverage, which is equal to ROA_Difference. With the same logic the differences of the averages are calculated for R&D and Total Assets and the results are consequently named as TotalAssets_Difference, RD_Difference. The list of variables and their description is summarized in the Table 1.

Table 1. The variables

Name Description

ROA_post1 The ROA number for the first year after the IPO.

ROA_pre1 The ROA number for the first year before the IPO.

ROA_post2 The ROA number for the second year after the IPO.

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ROA_preAverage The average of ROA_pre1 and ROA_pre2

ROA_postAverage The average of ROA_post1 and ROA_post2

ROA_Difference The difference between ROA_postAverage and ROA_preAverage

RD_post1 The R&D expenses for the first year after the IPO.

RD_pre1 The R&D expenses for the first year before the IPO.

RD_post2 The R&D expenses for the second year after the IPO.

RD_pre2 The R&D expenses for the second year before the IPO.

RD_postAverage The average of the RD_post1 and RD_post2

RD_preAverage The average of the RD_pre1 and RD_pre2

RD_Difference The difference between RD_postAverage and RD_preAverage

TotalAssets_post1 The value of the total assets in logarithms for the first year after the IPO.

TotalAssets_pre1 The value of the total assets in logarithms for the first year before the IPO.

TotalAssets_post2 The value of the total assets in logarithms for the second year after the IPO.

TotalAssets_pre2 The value of the total assets in logarithms for the second year before the IPO.

TotalAssets_postAverage The average of TotalAssets_post1 and TotalAssets_post2

TotalAssets_preAverage The average of the TotalAssets_pre1 and TotalAssets_pre2

TotalAssets_Difference The difference between TotalAssets_postAverage and TotalAssets_preAverage

IPO_Age The age of the company in the IPO year.

CorporateGroup_number The number of the companies in the corporate group.

Patents The number of the patents that the company has.

Bowman (1983) suggests determining whether the data distribution is normal or not, because depending on that the statistical test can be either parametric or nonparametric. I have conducted a test of normality on SPSS for my variables of R&D, Total Assets and ROA and the Shapiro-Wilk test was significant for all of them with the p value of 0.000. This means that my distribution is not normal and in order to test whether there was a change in performance or innovativeness before and after the IPO I shall conduct the Wilcoxon signed-rank test. The Wilcoxon signed-rank test is a non-parametric statistical test which is used to compare two related samples.

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4. RESULTS 4.1. Descriptive statistics and correlations

As mentioned earlier, my final sample consists of 353 companies. The average age of the companies is 19.2, while the average age during the IPO year is 11.88. Almost 50% of all the IPOs have been conducted in 2010. Table 2 shows the number of IPOs per each year of observation. Table 3 summarizes the descriptive statistics and the Table 4 is about correlations.

As we can see from the Table 3, the mean for the ROA_Difference is a negative number, which already indicates that on average the difference of post and pre IPO ROA was negative, thus meaning that on average the ROA worsened after the IPO. As for the R&D and Total Assets, we can notice positive numbers, which means that on average R&D and the total assets increased after the IPO.

Table 2. Number of IPOs per year

Year 2009 2010 2011 2012 2013 2014 2015

Number of IPOs

32 176 84 22 21 8 10

Table 3. Descriptive Statistics

Name Minimum Maximum Mean Std. deviation

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The role of the initial public offerings in SME’s performance and innovativeness TotalAssets_post2 5.52960 15.69667 11.3701671 1.54474626 TotalAssets_pre1 6.23387 15.59754 10.5192122 1.33584078 TotalAssets_pre2 5.23162 15.66975 10.2403823 1.38851532 TotalAssets_Difference -1.126 3 0.92823 0.719094 Table 4. Correlations 1 2 3 4 5 6 7 8 9 1 ROA_Difference 1 2 IPO_age .114* 1 3 RD_Difference .095 -.028 1 4 Patents -.121* -.032 .275** 1 5 TotalAssets_Difference -.342** -.245** .076 .217** 1 6 CorporateGroup_number .158** -.138** .000 -.64 -.086 1 7 RD_preAverage .237** -.01 .747** .212** .012 -.021 1 8 RD_postAverage .179** -.02 .932** .260** .046 -.011 .937** 1 9 ROA_preAverage -.714** -.47 -.144** .073 .395** -.087 -.361** -.272** 1 10 ROA_postAverage .125* .062 -.096 -.033 .171** .055 -.243** -.182** .606**

The table 4 above shows that there are high correlations mainly between those variables that are connected to each other due to calculations. For example, ROA_Difference was calculated by using ROA_preAverage and ROA_postAverage, thus there is a high correlation between ROA_Difference and ROA_preAverage. The same applies for the correlations between RD_preAverage and RD_Difference, RD_postAverage and RD_Difference. These variables are not used in the same regression model and the correlations between them is because of the corresponding calculations behind (as shown before). These variables were included in the correlation analysis in order to show their correlation with the rest of the variables.

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ROA_Difference. In order to find whether there is a collinearity, I have tested my variables for the Variance Inflation Factor (VIF), and the results showed no collinearity issue.

4.2. Wilcoxon Signed-Rank Test

In order to test whether performance of the company has been changed after the IPO and to see how it has been changed I have conducted the Wilcoxon Signed-Rank test with two related samples. The variables ROA_postAverage and ROA_preAverage are used for the test. The test statistics show that there is a statistically significant difference between pre-IPO average ROA and post IPO average ROA. The p value is .000 and the Z score is -13.403. In order to understand whether this difference is positive or not (i.e. whether ROA improved or not) we need to check the Ranks. Table 5 summarizes the results of the test. According to the results there have been 296 negative ranks and 57 positive ranks, which means that in majority of cases there was a negative difference between post IPO ROA and pre-IPO ROA. This means that the ROA of the company in general worsens after the IPO. Consequently, this means that performance of the company suffers after the IPO for at least the next two years (since I observe only two years before and after the IPO). Thus, my hypothesis 1 cannot be supported.

Table 5. Model 1. Wilcoxon Signed-Rank Test: Performance change

Variable Ranks ROA_postAverage – ROA_preAverage Sign N Mean Positive 57 192.41 Negative 296 97 Test Statistics Z -13.401 Sig. .000

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in general improves after conducting an IPO. This is in line with my theoretical argumentations and supports my second hypothesis.

Table 6. Model 2. Wilcoxon Signed-Rank Test: Innovativeness change

Variable Ranks RD_postAverage - RD_preAverage Sign N Mean Positive 55 39.6 Negative 16 23.63 Ties 282 Test Statistics Z -5.157 Sig. .000 4.3. Regression Analysis Model 3

In the third model I test my third hypothesis whether there is a positive relationship between pre-IPO innovativeness and firm performance. My dependent variable is ROA_Difference and my independent variable is RD_preAverage. Control variables are also included in the regression. In this model IPO_age is used as a control variable. The ANNOVA table in SPSS shows that my model is significant with a p value of .000 and F score of 3.582. The R2_{for my model is 0.384, which means that 38.4% of the total variations}

of ROA_Difference can be explained with my model. Table 7 summarizes the results of the regression.

Table 7. Model 3. Linear Regression for the relationship between pre-IPO innovativeness and firm performance

B Sign. Constant -6.706 .000 RD_preAverage .001 .021 IPO_age .034 .562 Patents -.009 .324 CorporateGroup_number -1.281E-5 .999 TotalAssets_Difference -2.818 .001

Country dummies (only sign.)

Denmark 21.25 .000

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The results of the regression show that pre-IPO R&D expenses are significant predictors for the ROA. In other words, the result show that the significance of RD_preAverage is high with p value of .000. The B number is 0.001, which means that for each pre-IPO R&D expense the ROA will be higher by 0.001 after the IPO. This finding is consistent with my assumptions that pre-IPO Innovativeness will help the companies to have a better performance after the IPO, although with a very low influence. Nevertheless, my hypothesis 3 is supported.

Regarding my control variables, only the total assets are significant. According to the results the ROA of the company will decrease by 2.818 for each total asset increase after the IPO. This can be explained by looking on how the ROA is calculated. As mentioned earlier it is calculated by dividing the net income on the total assets. Thus, the more are the total assets the less will be the results of the division (unless net income increases proportionally).

Regarding the industries, no industry was significant for the post IPO performance. That means that according to my findings it not significant whether the IPO company is from one industry or another.

Regarding the countries, only three of them had significant results. The results show that those companies which are from US, France and Denmark have higher performance after the IPO. For example, in the US the B score is 8.783, which means that US companies after the IPO have higher ROA by 8.783. These results about the countries can be explained by the economy, legislation and political situation of these countries.

Model 4

The second regression is about the relationship between the IPO age of the firm and the firm’s performance. The dependent variable in this regression is the ROA_Difference and the independent variable is the IPO_age. The control variables are also included. The model is significant with a p value of 0.000 and F number of 3.496. The R2_{for the model is 0.373, which means that 37.3% of the variations in the}

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Table 8. Model 4. Linear Regression for the relationship between the age of the firm during an IPO and the firm’s performance B Sign. Constant -6.96 0.000 IPO_age 0.025 0.649 Patents -0.004 0.616 CorporateGroup_number -0.002 0.784 TotalAssets_Difference -2.603 0.003

Denmark 26.134 0.000

France 8.537 0.017

Korea 17.95 0.038

Philippines 14.553 0.000

US 11.14 0.000

Industry dummies (only sign)

Finance -6.81 0.033

The results show that the age of the company during the IPO is not significant for the company performance. Thus, my fourth hypotheses cannot be supported. The TotalAssets_Difference is again significant with a negative B number, which is explained in the previous model. All other control variables show no significant results except for the country dummy variables for Denmark, France, Korea, Philippines and the US. That means that the performance of the company improves in these countries more than in the others after the IPO. As for the industry, only the Financial industry shows significant results, while the B score is negative. That means that in the Financial industry the performance worsens after the IPO.

Model 5

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which means that 27.6% of the variations of the RD_Difference can be explained by this model. The results of the regression are summarized in the Table 9.

Table 9. Model 5. Linear Regression for the relationship between the age of the firm during an IPO and the firm’s innovativeness B Sign. Constant -915.623 .021 IPO_age -5.654 .680 Patents 10.112 .000 CorportateGroup_number -1.526 .386 TotalAssets_Difference 563.952 .005

Brazil 6650.3 .001 Denmark 5261.9 .000 India 1695.9 .043 Korea 1446.9 .000 Vietnam 1240.5 0.002 US 3515.7 .000

Industry dummies (only sign)

Finance -1483.3 .042

Real Estate -1137.6 .008

The results show that the age of the company during the IPO is not significant for the Innovativeness. Thus, my fifth hypothesis is not supported. The possible explanations for this are presented in the next section.

The total assets are significant for the Innovativeness. The B score for TotalAssets_Difference is 563.9 and the p value is .005. This means that for each increase of total assets the R&D expenditures will increase by 563.9. This can be explained that once the total assets increase the company allocates more resources to R&D, hence the significance.

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Regarding the countries, the significant results were only for Brazil, Denmark, US, Vietnam, Korea and India. That means that the innovativeness in these countries improves more than in the other countries. This can be explained by the economy, legislation and political situation in these countries. Additionally, these countries can have more clusters, innovation laboratories and special policies that promote innovation.

Regarding the industries, the significance was only for Financial and Real Estate industries. However, the B score is negative for both of them, meaning that in these industries IPO negatively contributes to the Innovativeness. In the all regression models the year of IPO as a control variable had no significant results.

To summarize my results, it is found that my first hypothesis is not supported and moreover the significant results show that in fact the performance of the companies has worsened in comparison to their performance before the IPO. The second hypothesis is supported, and it was found that in fact the innovativeness of the companies increases after the IPO. The third hypothesis is also supported, and the pre-IPO innovativeness has a positive relation with the performance of the company. However, it was found that this positive relation is very small. The fourth and the fifth hypotheses are not supported as no significant results were found for the relationships between the company’s age during the IPO and their performance, and between the company’s age during the IPO and their innovativeness.

4.4. Robustness check

In order to check the reliability of my results, I have conducted a robustness check for my first hypothesis. In particular, instead of using the ROA I have used the ROE as a performance measure. Consequently, I have conducted the Wilcoxon Signed Rank test, where my variables were ROE_preAverage and ROE_postAverage. The results were similar to the previous test, which means that the difference of the ROE was significant before and after the IPO, and there were more negative ranks than positive ranks. That means that the ROE decreased after the IPO.

In order to check the reliability of the regression model 3, I have conducted a robustness check. Instead of using the ROA as a dependent variable, I have used ROE. Moreover, instead of having dummy variables for each country I have grouped them based on the continents. The results of robustness check show that the RD_preAverage is again significant (p value 0.044) and has a positive B number (0.001). Thus, for the pre IPO R&D expenses I have robust results in line with my previous regression analysis.

For the fourth regression model, instead of ROA I have used again ROE, however, the results showed no significance for the age during the IPO.

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robustness check for the fifth regression model and for the second model (Wilcoxon Signed Rank test) will not be conducted.

6. DISCUSSION

In the previous section I have tested my five hypotheses: two are supported, while the others are not. The first hypothesis is about the relationship between the IPO and firm performance. As it was argued, IPO can help companies to gain new resources such as legitimacy and financial resources. Moreover, IPO in general was considered as a risky decision, which, according to several authors (Rauch, Wiklund, Lumpkin & Frese, 2009; Miller & Friesen, 1982; Baird & Thomas, 1985; Lumpkin & Dess, 1996) can play a positive role for the company’s performance. However, my results show that these assumptions are not supported. Moreover, I have received significant results that the performance in fact decreases after the IPO.

There are multiple reasons to explain these results. Jain & Kini (1994) suggests that the post-IPO firm performance can decline due to the large amount of agency costs that the company had while transforming from the private firm to a public one. It may take several years to recover these costs, especially when the company has resource shortages as in case of many SMEs.

The second reason can be the ownership change and the conflict that may rise between the initial owners and the new owners (Jain & Kini, 1994). Such conflicts may slow the decision making process and the effectiveness of management. Another reason can be the attempt of the managers to “window-dress” the financial information of the firm before conducting an IPO (Jain & Kini, 1994). The motivation for such actions could be the intention to have a better IPO deal and to gain more investments and shareholders. However, such window-dressing soon will evaporate and can lead to a negative difference between pre-IPO and post-pre-IPO performance. Another reason for a poorer performance after an pre-IPO can be the choice of the management to conduct an IPO when there are unusually favorable conditions or circumstances for the firm (Jain & Kini, 1994). However, such favorable situations are temporary and may extinct shortly after the IPO. However, on the other side Mikkelson, Partch & Shah (1997) suggest that decline in performance should not take more than 10 years after the IPO, thus the future research needs to take this into consideration and conduct the research focusing on a longer time period after the IPO.

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The second hypothesis was supported and indeed it was found that the innovativeness of the company improves after conducting an IPO. This is in line with the previous argumentations that as a reflector of the risk propensity, the IPO can positively influence the Innovativeness of the company. In case of the companies with higher risk propensity, the newly gained resources are more likely to be spend on the R&D, which was shown in my results.

The third hypothesis was also supported; however, the influence of the pre-IPO innovativeness is very low. As mentioned earlier, companies may conduct an IPO at a certain stage of their development (Mikkelson, Partch & Shah (1997), where one of such stages can be a certain level of innovativeness. On the one hand there are many researchers claiming the positive relationships between innovativeness and performance of the company, however, they usually do not take into consideration several circumstances, such as the event of IPO. It is possible that companies invest a lot in the R&D for creating a good image for the investors (Jain & Kini, 1994). My findings showed that indeed there is a positive relationship between the pre-IPO innovativeness and firm performance. However, the influence that pre-IPO innovativeness has is very low. This is an interesting discovery, since that means that the resources spent on the R&D before the IPO are not very effective. In my opinion, this can have two possible explanations. First is that these investments prior the IPO were done mostly to create a positive image for the investors in order to attract them. The second reason is that probably the influence of the pre-IPO innovativeness is for a longer time frame and since I focused only on two years, my results did not show that influence. Thus, it is advisable for the future researchers to focus on a longer time frame to understand the long-term influence of the pre-IPO innovativeness.

The fourth and fifth hypotheses were about the relationship between the age of the firm during the IPO and its performance and innovativeness. Both hypotheses were not supported. Although according to several authors (Levitt & March, 1988; Loderer et al., 2017), the flexibility and higher learning capabilities of the firms are beneficial to their performance and innovativeness, and the age was linked to such flexibility and to the level of innovativeness, it was found that the role of the age during IPO was not significant either for the performance or for the innovativeness. This can have multiple explanations. One of them could be the small sample size of the research. In case of availability of a larger sample size, it would be possible to observe more SMEs with more variety of the ages during the IPO. Moreover, if I had a larger sample size and more availability of data (since I had only 10 years of data availability in ORBIS) I could observe more IPO years.

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7. CONCLUSIONS

In this research I was interested in the role of IPOs for the performance and innovativeness of SMEs. Particularly I have found that the innovativeness improves after doing an IPO. SMEs that receive new investments due to IPOs invest more on R&D, thus increasing their innovativeness.

On the other hand, contrary to what was initially hypothesized, it was found that the performance of the companies worsened after the IPO. There are multiple explanations for this such as the consequences of transactional and agency costs, issues with ownership change, “window dressing” of the companies and intentionally choosing favorable time to do an IPO. These are possible explanations; however, more research is required to understand deeper the reasons. This finding was not consistent with the RBV and the suggested benefits of risk propensity. However, this finding emphasized again that an IPO is a risky decision that can lead to unfavorable consequences for the company.

I was also interested whether pre-IPO innovativeness is beneficial for the company’s performance. Many authors (e.g. López-Nicolás & Meroño-Cerdán, 2011; Rosenbusch, Brinckmann & Bausch, 2011; Verhees & Meulenberg, 2004; Jiménez-Jiménez & Sanz-Valle, 2011) suggest the general benefits of innovativeness for the performance; however, pre-IPO innovativeness could be used merely to attract new investments after the IPO. I found that indeed there is a positive relationship between pre-IPO innovativeness, even though the influence is low. The can lead us to a conclusion that most of the pre-IPO R&D expenses are ineffective for performance at least for the next two years after the IPO.

The relationships between the age of the SME during the IPO and its performance and innovativeness was found not significant. This could be because of the data limitations but also because of the low influence of the age on the flexibility of the company. Nevertheless, it is suggested to focus on these relationships in the future research.

Overall, answering to my research questions, it can be concluded that IPO is beneficial for the innovativeness, while pre-IPO innovativeness has low influence on the SME’s performance. Moreover, it was found that the performance of the SMEs declines after doing an IPO, while the age during the IPO has no significant relationship with the performance and innovativeness of the SMEs.

8. LIMITATIONS AND FUTURE RESEARCH