In recent years, the so-called ‘IPO waves’ have captured the attention of finance and business. And for a good reason. They are, in fact, phenomena whereby several companies choose to go public at the same time and it is clearly worth investigating the conditions under which these occur. Until now, however, research has associated these waves mainly with the specific sector in which the companies operate, ignoring, at least in part, the geographical influence.

In the study ‘Local IPO waves, local shocks, and the going public decision’ (Baschieri, Carosi, Mengoli), published in the International Journal of Finance & Economics, the focus was precisely on ‘local IPO waves’, i.e. on those cases in which different companies from various sectors, but located in the same geographical area, choose to go public at the same time. The objective? To understand if and how these waves are driven by specific local factors and sudden positive changes in the economic conditions of the area.

The study examines the traditional concept of ‘industry IPO waves’, which, as anticipated, occur when several companies in the same industry enter the market during the same period, influenced by common factors such as favorable market valuations or productivity gains. However, the analysis which attributes, precisely, a local dimension to the phenomenon, also looked at the location of the companies, using a strict statistical definition and included in the concept of ‘IPO wave’ any period in which IPOs in a given region or sector exceed the 75th percentile of the local or sectoral time series.

The analysis made use of a large database, including data from 211 IPOs that took place in Italy from 1999 to 2017 and supplementing this information with data on over one million private companies. Through a probit model analysis, the determinants of the decision to go public were observed, considering both the market valuations of firms in the same sector and those of firms in neighboring regions.

The research further distinguished between the contribution of the local effect and that of the sector, considering three key variables:

• the market-to-book ratio (a financial indicator comparing the market value of a company with its book value) of listed companies in the same sector but located outside the region;
• the market-to-book ratio of companies in the same sector and in the same geographical area;
• the market-to-book ratio of companies listed in other regions but belonging to different sectors.

In line with previous studies, the findings indicate that IPOs at the beginning of a wave (both sectoral and local) tend to be more undervalued than those later in the wave. Indeed, companies listed in the first months of a wave showed an average undervaluation of around 13.9% compared to 3.8% for later IPOs, highlighting how the timing of entry has a substantial impact on the initial value of the stock.

Despite the short-term benefits associated with entering an IPO wave, firms that list during such periods tend to underperform in the long run compared to those that list outside the waves, suggesting that such IPOs may be driven by temporary factors, such as reaction to local economic shocks. Indeed, the study found that regions in which an IPO wave occurs show an increase in the number of new firms, employees, and aggregate sales in the period following the wave, indicating a sort of ‘positive wave’ for the local economy.

Using a differential approach, the study showed that regions impacted by a wave of IPOs experienced significant economic improvement compared to control regions, with indicators such as new hires up by 1.07% and aggregate sales up by 0.035%.

“Local IPO waves” are thus a complex phenomenon influenced by numerous external factors, not necessarily related to the industry sector, but rather to positive shocks affecting a given geographic area. These results pave the way for a new way of interpreting the IPO phenomenon, suggesting that companies react not only to sectoral market signals, but also to local economic conditions, thus generating listing cycles that reflect the economic vitality of their area.

The article emphasizes how firms, although operating in different sectors, respond to local economic stimuli and benefit from favorable conditions, such as improvements in infrastructure or local tax reductions, which drive greater entrepreneurial dynamism and encourage IPOs. This analysis broadens the understanding of IPO dynamics, offering insights into the role of local conditions and territorial economic policies in the development of financial markets.