Selected Journal Publications

29.06.2017

Ensuring Corporate Longevity

Firm Mortality and Natal Financial Care
BHATTACHARYA, Utpal | BORISOV, Alexander | YU, Xiaoyun
Journal of Financial and Quantitative Analysis, 2015, vol 50, 66-88

If your new public company survives the first three years of life – the chances are that you are well on the way to success in the corporate world. So how can you help avoid “corporate mortality” in those early years? Financial intermediaries play a more important role than you think.

One of the distinct advantages of corporations over other business forms is their potential for unlimited life. Nevertheless, a great majority of publicly traded firms live for fewer than 20 years. So why do some firms “die” sooner than others? While the mortality of a public firm can be the result of various economic reasons, some of which are inherent to the firm and its management, researchers Utpal Bhattacharya, Alexander Borisov and Xiaoyun Yu focused on a specific external dimension: the role of financial intermediaries. In particular, they explored to what extent certain intermediaries present at the early stage of a firm’s public life affect its mortality.

The authors started by computing age-specific mortality rates – the incidences of involuntary death of public firms such as liquidation, delisting and permanent trading halts, conditional on firms having survived this far – for US public firms between 1985 and 2006. They found that mortality rates initially increase, peaking at three years after a firm goes public, and then decrease with age, in contrast to the earlier literature that documented survival risk decreasing with aging.  

The next step was to investigate whether financial intermediaries involved around the public birth of a firm affect its subsequent mortality, namely venture capitalists (VCs), which provide financing before IPOs, and underwriters, which serve as gatekeepers during the IPO process and provide investment banking services and support for firms after their IPO. After controlling for usual determinants of survival – leverage, size, age and growth opportunities – they found that VCs and reputable underwriters are associated with a significantly lower probability of involuntary death. While the effect is most pronounced during the early critical years, it can last up to seven years.

The observed reduction in mortality rates by financial intermediaries can arise from their ability to simply pick the “right” firms to take public – in other words, selection – or from their ability to add value through involvement and interaction with the firm –  which the researchers termed “treatment”. The study explored, for each financial intermediary, the relative importance of its selection to treatment effort in improving a firm’s post-IPO survival chances. It found that while both selection and treatment by each intermediary affected mortality, VCs improved a firm’s survival chances more through treatment. By contrast, the observed lower mortality rates of firms associated with high-quality underwriters arose mainly from their selection efforts.

This study differs from previous research by focusing on the influence of both VCs and underwriters on reducing mortality of public firms. The researchers’ approach allowed them to explore the difference in the importance of selection and treatment in affecting mortality rates. They were the first to show that the reasons depended on the type of intermediary, and among the first to document the decaying effect of high-reputation underwriters on reducing mortality of public firms.


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