Impact of public listing on the profitability of emerging market SME: counterfactual evidence from India

Purpose We aim to understand the impact of the choice of listing on profitability of emerging market SME versus their comparable unlisted peers. To probe the interplay of firm characteristics and listing status of emerging market SME, we hypothesize that (H1) Firm characteristics significantly influence the choice of public listing; (H2) Profitability of listed SME significantly change post listing and (H3) Pre and posting listing profitability of SME are significantly different compared to their unlisted peers. We present a nuanced understanding of how listed SME would have performed if they chose not to list, by providing counterfactual empirical evidence from their unlisted peers. Design/methodology/approach The study employs quantitative methods with a quasi-experimental research design to evaluate the impact of public listing of SME on their profitability. We commence with an initial OLS estimator of listing status of 4,806 SME, with firm characteristics as regressors. Thereafter, to provide counterfactual evidence of potential outcome of listing by comparing listed versus unlisted SME, we employ propensity score matching (PSM) to derive and analyse 1,228 matched pairs with similar firm characteristics. Using a random-forest model with firm characteristics as classifiers for listing status, we present a machine-learning driven robustness check of PSM matches. We employ fixed-effect logit regression, capturing temporal within effects of listing year and industry group, to analyse the influence of firm characteristics on SME's choice of listing, within the treatment (listed) and control (unlisted) groups. Finally, we use paired sample t-test to compare distinct measures of profitability and liquidity of matched firms at each time point within an event window of T–3 to T+3, where T0 represents the year of listing. Findings With firm characteristics as predictors of listing status, lesser emerging market SME are likely to get listed. Contrary to prevailing assumptions, public listing does not significantly improve net profit margins or returns for SME in emerging markets. Unlisted firms often demonstrate higher pre-listing profitability. Although listing does improve liquidity, post-listing compliance burden may negatively impact operating margins. Unlike developed markets, when compared with their unlisted peers, firm size, in terms of the total income and assets of the company, plays a significant negative role in listing decisions. Relatively younger firms may be more likely to explore public listing options. Originality/value We contribute to the limited empirical literature on disaggregated analysis of SME public listing in emerging markets, offering a unique matched-pair analysis for counterfactual evidence from comparable unlisted firms. We present evidence of higher efficiency of unlisted SME and challenge the common assumptions about the benefits of listing. We present a novel holistic theoretical contribution by finding synergy between the pecking order theory and the life cycle theory for SME. Our research shows that emerging market SME may not have evident post-listing advantage in terms of tangible financial performance.