Fast forward? Time compression attempts and post-IPO performance

Abstract

Research Summary: An initial public offering (IPO) expands a firm's access to funding and enables future-oriented strategic investments. Though aggressive investments can open new opportunities and speed the construction of relative advantage, this aggression risks time compression diseconomies and maladaptive learning from rushed experiences. We propose a firm's investment tempo and industry velocity combine to affect the trajectory of a firm's post-IPO performance. Agent-based simulation modeling suggested that aggressive, up-tempo investment sped the construction of relative advantage in low-velocity industries. Empirical analyses of multiyear post-IPO windows in real firms supported this. In contrast, simulations and analyses of real firms suggested up-tempo investment was maladaptive in high-velocity industries as the combination of fast investment and fast industry change was often more than boundedly rational agents could cognitively handle. Managerial Summary: Congratulations! By taking your firm public, you can now finance strategic investments in R&D and CAPX that would have been impossible when your company was private. Rapid investment can open new opportunities, sharpen your firm's skills, and build competitive advantage. However, rapid investment is risky because you can waste time recovering from hastily made mistakes and learn bad habits when new experiences arrive too quickly for managers to assimilate. We found the relationship between investment speed and firm profitability depended on industry velocity. Counterintuitively, rapid investment was ill advised in high-velocity industries because the combination of fast investment and fast industry change was often more than managers could cognitively handle. In contrast, rapid investment worked well in low-velocity industries, which placed fewer strains on decision makers.