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Do IPOs Hurt Innovation?

A new study comes to just that conclusion


The IPO market is a source of breakout companies — and great investments. You don’t think so? Well, just imagine if you bought shares in the early days of companies like Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) or Microsoft (NASDAQ:MSFT).

A new study, though, isn’t so hot on IPOs. Shai Bernstein, a professor at the Stanford Business School, says that an IPO can actually be an enemy of innovation. Bernstein studied public offerings from 1985 to 2003 and analyzed about 40,000 patents. The result: there was a 40% drop in the “quality” of the patents after an IPO.

Facebook Special Event Likely to Disappoint
Facebook Special Event Likely to Disappoint

Why? Bernstein points out that there is often a departure of key employees after an offering. After all, they are usually wealthy and want to pursue other activities. Plus, there is a lot of pressure on public companies to produce consistent quarterly results, which can mean less focus on long-term projects.

Interestingly enough, many top companies — like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) — waited quite a while before coming public. Undoubted, a big reason is that these companies wanted to keep up their innovative edge. It also is probably why other top companies, like Twitter, are in no rush to come public either.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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