What determines the survival of internet IPOs?

This paper investigates the determinants of survival, acquisition and non-survival for internet firms that have gone public at the NASDAQ stock exchange from December 1996 through February 2001. We analyze two models, survivors versus non-survivors and survivors versus acquired firms with the help of the Cox proportional hazard method. We have selected all internet firms that went public during the internet bubble. The paper presents a model that includes a number of new and earlier examined, explanatory variables simultaneously that are often studied separately and for noninternet firms in other studies. The key issue of the study is that our models provide a prediction of the rate of non-survival or acquisition of internet firms. The empirical results provide evidence that compared to both acquired firms and nonsurvivors, survivors’ owners retain a larger share in the firm at IPO. Our study presents a number of novel findings. Survivors differ significantly from non-survivors in the number of risk factors in the IPO prospectus and underwriter reputation. Furthermore, our results are consistent with risk factors indicating the economic fundamentals of an internet IPO rather than being a mechanism against legal liability. Although internet firms belong to a relatively young branch of industry, the outcome provides evidence that top bracket lead managers are successful in selecting high quality internet IPOs. Also, our empirical results document that during the last phase of the internet bubble the industry was turning into a hot market with weaker firms going public due to reduced scrutiny of investors. Our findings hold under a number of robustness checks.