The Interplay of IPO Capital Allocation, Shareholder Activism, and Innovation Performance: Evidence from Dynamic Panel Data Analysis

Abstract

This study investigates the dynamic interrelationship between internal capital allocation, shareholder activism, and innovation performance in firms undergoing Initial Public Offerings (IPOs).  Resource-based theory and agency theory, hence, are the bases from which this study draws inspiration as it utilizes a robust econometric framework of dynamic panel data models and the GMM to analyze 400 U.S.-based firms from 2020-2023. The findings suggest that strategic use of IPO proceeds toward R&D enhances the innovation outcomes to a large extent as captured by elevated R&D intensity. Shareholder activism, however, shows dualistic effects, where it sometimes acts as a catalyst for better governance and sometimes constrains long-term investments in innovation. Financial metrics like Return on Equity and Dividend Payout Ratio have a negative impact on R&D investments and thus bring forth the trade-offs between profitability and innovation. This study contributes to the corporate finance and governance literature by explaining the subtle interplay between IPO capital allocation and external oversight in determining innovation performance. The theoretical, managerial, and policy implications are discussed to encourage sustainable innovation in public firms.

Keywords: Initial Public Offering (IPO), Innovation Performance, Shareholder Activism, Internal Capital Allocation, Dynamic Panel Data, R&D Investment, Corporate Governance and Agency Theory