By Bruce Rudy & Jason Cavich

For a private firm, going public is often the culmination of years, or even decades, of hard work. The initial public offering (IPO) process is complex, with many stakeholders in addition to the firm that is going public, including potential investors, investment bankers, and lawyers. Most, if not all, of these stakeholders are focused on maximizing the value of the firm’s stock the day it begins trading publicly. However, accurately assessing the firm’s market value on the day of the IPO continues to vex investors because they typically don’t have all of the information required to appropriately value the firm. Firms attempt to help these potential investors by signaling their underlying value using traditional market-oriented measures of performance, such as financial growth, customer acquisition rates, or partnerships with established, reputable firms. This information is valuable to be sure, but falls short when pricing the firm’s market value when it goes public because it is incomplete. Perhaps these players need to expand their view of what signals underlying value in these firms?

Indeed, in this research , we find that the market rewards firms that engage in political activity, with significantly better performance on the day of their IPO. When a firm engages in political activity, it is building relationships with policy makers and attempting to influence the direction of future legislation. Moreover, when a private firm engages in political activity, it is sending a clear signal to the market that it recognizes that its competitive advantage in the marketplace can be impacted by this activity as it may influence policy, as well as policymakers, that could help the firm. Our findings suggest lessons for two important actors: private firms and investors. Firstly, private firms need not wait to become public to begin investing in politics. Secondly, the savvy investor needs to be paying attention to this valuable, albeit less obvious, signal of value underlying the firm seeking to become publicly traded. Remember, a firm’s true value can be communicated to the market in a multitude of ways.

Reference:

Rudy, B.C., & Cavich, J. 2020. Nonmarket Signals: Investment in Corporate Political Activity and the Performance of Initial Public Offerings, Business & Society, 59(3).