What a relief: How do firms respond to competitors' listing delays?

Abstract

We examine the effect of product market competitors' listing delays on incumbent firms' defensive strategies, including efforts in customer retention and acquisition as well as merger and acquisition (M&A) activities. To establish causality, we use four regulation-induced IPO suspensions in China that expose firms already approved for an IPO to indeterminate listing delays. Using a difference-in-differences design, we find that incumbent firms reduce efforts in customer retention and acquisition, as manifested in an increase in accounts receivable turnover and a decrease in selling expenses. Incumbent firms also reduce M&A activities, including high-premium and horizontal ones. The effects are stronger for incumbent firms that are subject to more intensive competition from the suspended firm, face larger competitive pressure from existing public firms, and are more financially constrained. Additionally, incumbent firms' managers reduce competition-related disclosures, and the firms' financial performance improves after competitors' listing delays. Consistent with the findings based on listing delays, we find that incumbent firms increase efforts in customer retention and acquisition and M&As surrounding competitors' IPO application and approval. Our paper sheds new light on the IPO peer effect, especially on how incumbent firms respond to the product market competitor's capital market entry.