1. Identification of spillovers
Local Economic Spillover Effects of Stock Market Listings
Forthcoming at JFQA
Alexander W. Butler
Larry Fauver
Ioannis Spyridopoulos
Rice University
University of Tennessee
American University
House by Rose Alice Design from the Noun Project
home loan by ProSymbols from the Noun Project
employment by Nithinan Tatah from the Noun Project
Shops by Made by Made from the Noun Project
Credit Card by Rediffusion from the Noun Project
We show that IPOs have non-trivial positive spillover effects on local labor markets, business environments, consumer spending, real estate, and migration. We mitigate endogeneity concerns about unobserved heterogeneity with restrictive geographic fixed effects coupled with a matching procedure. We show that it is the listing decision, which encompasses both a wealth and liquidity shock, that induces economic spillovers. Conditional on an IPO occurring, an additional $10 million in IPO proceeds is associated with an extra 41 jobs and 0.7 new establishments locally.
Abstract
Identification of spillovers
Motivation: the Facebook IPO’s spillover
The Facebook IPO was enormous:
Raised over $16 billion
Made liquid the wealth that employees had in previously illiquid stock.
It created a thousand new millionaires and a dozen new billionaires.
Not really new, though: those people already had the wealth, they just did not know exactly how much…and it was illiquid. After the IPO, many employees purchased homes, driving real estate prices up by more than 15% in the six months following the IPO. Our paper asks whether the economic spillovers from an IPO are isolated to this example and find that they are not.
We use two-year post-event averages for the following outcomes:
House price changes (Federal Housing Agency, Zillow)
Mortgage origination (Home Mortgage Disclosure Act (HMDA))
Employment, Establishments (ZIP code Business Patterns from Census)
Credit card expenditures, Migration (Experian)
Gross income, Wages (IRS)
Covariates:
Within-county matched observations are at the ZIP-year level and the regressions use county-year fixed effects.
Covariates: Ln(population), Ln(population density), Ln(establishments), Ln(employment), Ln(wage income)
Identifying assumption:
Firms’ selection of the particular ZIP code for their headquarters is as good as random within a given county with respect to subsequent long-term economic development of that ZIP relative to nearby ZIPs.
Data and methodology
Magnitudes of the spillovers
IPOs have a positive spillover effect on the local economy where they are headquartered, and it is along many dimensions. Specifically on real estate (home prices, mortgage activity), the real economy (employment, establishments), and consumer spending. The effect is coming from investor wealth and liquidity. The effect is not a raising capital effect like seasoned equity offerings, but is coming from the change in listing status of the IPO firm.
Conclusion
Alex Butler:
Larry Fauver:
Ioannis Spyridopoulos:
Paper PDF: