Software Firm Cost Structure and Its Impact on IPOs in the E-Commerce Era

The first decade of the e-commerce era saw an increase in activity in the software development industries as new firms were created and existing firms made acquisitions. Many firms pursued a growth strategy and this growth required capital that was often obtained through an initial public offering (IPO) of equity. Software firm cost structures are very different from traditional physical goods firms because their marginal costs are much lower, but what is not known is whether this affects their financing strategies. In this study we compare software firm and traditional firm IPOs using data from 780 IPOs offered during the late dot-com era (1998-2002) to identify differences in firm and offer characteristics, investment risk, initial returns, and underwriting activity. We find that the characteristics and performance of software firm IPOs are significantly different from IPOs offered by traditional firms during this time period providing supporting for our conclusion that firm cost structure should be considered when analyzing IPOs and other strategic issues. DOI: 10.4018/978-1-61350-462-8.ch015