why do firms go public? - Marriott School
why do firms go public? - Marriott School
why do firms go public? - Marriott School
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WHY DO FIRMS GO PUBLIC<br />
Forthcoming in the Oxford Handbook of Entrepreneurial Finance<br />
James C. Brau, PhD, CFA<br />
Professor of Finance<br />
Editor, Journal of Entrepreneurial Finance<br />
July 1, 2010<br />
Department of Finance<br />
<strong>Marriott</strong> <strong>School</strong><br />
Brigham Young University<br />
640 Tanner Building<br />
Provo, Utah 84602<br />
Phone: 801.318.7919<br />
Fax: 801.422.0741
WHY DO FIRMS GO PUBLIC<br />
Six months after he founded Netscape, Clark agitated for the<br />
company to <strong>go</strong> <strong>public</strong>. The company had few revenues, no profits, and a<br />
lot of new employees. No one else inside the company thought it should<br />
<strong>do</strong> anything but keep its head <strong>do</strong>wn and try to become a viable enterprise.<br />
"Jim was pressing for us to <strong>go</strong> <strong>public</strong> way before anyone else," recalls<br />
Marc Andreessen. It turned out there was a reason for this. He'd seen a<br />
boat called Juliet. He wanted one just like it, only bigger. To get it, he<br />
needed more money.<br />
By then the decision was not Clark's alone to make. The company<br />
had hired a big-name CEO, Jim Barksdale, and had a proper board of<br />
directors. Barksdale didn't want to <strong>go</strong> <strong>public</strong>. He thought the company had<br />
enough problems trying to figure out how to turn a profit without having<br />
to explain itself to irate shareholders. But this time Clark had power,<br />
through his equity stake. He called a meeting to discuss the initial <strong>public</strong><br />
offering (IPO), and stacked it with lawyers and bankers who stood to reap<br />
big fees from a <strong>public</strong> share offering and who were, as a result,<br />
enthusiastic about his initiative. At that meeting Barksdale finally<br />
capitulated. Eighteen months after Netscape was created, and before it had<br />
made a dime, Netscape sold shares in itself to the <strong>public</strong>. On the first day<br />
of trading the price of those shares rose from $12 apiece to $48. Three<br />
months later it was at $140. It was one of the most successful share<br />
offerings in the history of the US stock markets, and possibly the most<br />
famous.<br />
There was only one explanation for its success: the market now<br />
saw the future through Clark's eyes. "People started drinking my Kool-<br />
Aid," says Clark … What the IPO did was give anarchy credibility.<br />
Lewis (2001)<br />
INTRODUCTION<br />
Why entrepreneurs choose to conduct an IPO has received relatively little attention when<br />
compared to other IPO topics such as initial underpricing and the long-run performance of IPOs.<br />
In this chapter, I summarize, analyze, and expand the current discussion on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>.<br />
I begin by discussing the theoretical underpinnings and testable hypotheses offered thus far in the<br />
academic literature. I then discuss the empirical evidence for (and against) each of these potential<br />
explanations after presenting the intuition behind them. I focus on two types of empirical<br />
research: a) large-sample <strong>public</strong>ly-available financial and stock data and b) proprietary survey<br />
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data. When dealing with the topic of <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, both approaches to research contain<br />
their own challenges. Publicly available data sources typically <strong>do</strong> not contain detailed<br />
information on private <strong>firms</strong> (particularly in the US). Without private firm data, it is difficult to<br />
compare private and <strong>public</strong> <strong>firms</strong> to isolate the factors determining <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. In<br />
addition, it is problematic to ascertain motives for the factors observed in these types of studies.<br />
Survey data, on the other hand, has not been widely accepted in the Finance discipline<br />
and has its own challenges in collecting. After discussing the theories and traditional empirical<br />
research on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, I discuss four surveys that have either indirectly or directly<br />
addressed the motives for <strong>go</strong>ing <strong>public</strong>.<br />
After reviewing and discussing the existing evidence, I provide an in-depth analysis of<br />
the Brau and Fawcett (2006a) survey question, “How important were/are the following<br />
motivations for conducting an IPO” In the conclusion, I attempt to pull all of the theories<br />
together and argue that all of them are valid, in certain instances, for certain entrepreneurs. In<br />
some samples, specific theories have greater efficacy. In other samples, these same theories have<br />
weak explanatory power.<br />
THEORIES OF WHY FIRMS GO PUBLIC<br />
If entrepreneurs were asked <strong>why</strong> they took their <strong>firms</strong> <strong>public</strong>, they may not be as open as<br />
Jim Clark was in the opening quote. A typical reply might be, “We needed money.” The problem<br />
with such a non-discriminate reply is that it <strong>do</strong>es not allow for the separation of a number of<br />
theories that have been advanced in the academic literature to explain <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. On the<br />
other hand, if an empiricist finds correlation between <strong>firms</strong> that <strong>go</strong> <strong>public</strong>, and say post-IPO<br />
growth, they may conclude that the motive for the IPO was to finance that future growth. Take<br />
for example, Mikkelson, Partch, and Shah (1997) who <strong>do</strong>cument that US IPOs typically<br />
experience a large growth in assets after the IPO. The broad explanation that the reason for IPOs<br />
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is to fund growth <strong>do</strong>es not really answer the question of <strong>why</strong> the entrepreneurs chose an IPO to<br />
fund that growth. Why didn’t management choose to issue debt, presumably a cheaper source of<br />
financing than external equity Surely cash from debt can buy assets as well as cash from equity.<br />
Or, <strong>why</strong> didn’t the entrepreneurs choose to solicit private equity investment to fund its growth<br />
Had the firm already tapped out venture capital (VC) money Was the firm conducting an IPO<br />
according to an optimal capital structure theory or a pecking order of financing theory (both<br />
discussed below) It soon becomes apparent that when trying to ascertain the motives of issuing<br />
entrepreneurs, we must peel back several layers of the onion.<br />
In many cases, researchers studying the IPO hot market phenomenon (a.k.a. IPO waves of<br />
Ibbotson and Jaffe (1975) and Ritter (1984)) discuss motives for <strong>go</strong>ing <strong>public</strong> as determinants of<br />
waves. For example, Lowry and Schwert (2002), studying IPO market cycles, conclude that more<br />
<strong>firms</strong> <strong>go</strong> <strong>public</strong> after periods of high underpricing because positive information has been revealed<br />
through the previous IPOs; and, subsequent IPOs can raise more money than they had previously<br />
thought. Although a solid job of <strong>do</strong>cumenting the relationship between initial returns and IPO<br />
volume, this explanation for IPO clustering falls short of addressing the motives of insiders on<br />
<strong>why</strong> they are considering an IPO in the first place. Have they run out of cheaper debt financing<br />
Do their VCs want to cash out Do they think the high underpricing is a signal that the market is<br />
overvalued and they have a win<strong>do</strong>w of opportunity to exploit Does the founder want to buy a<br />
yacht The same questions can be raised for virtually all of the hot market empirical papers (as in<br />
this example of Lowry and Schwert (2002)) and the theoretical hot market papers, such as Pastor<br />
and Veronesi (2005) who find that insiders tend to <strong>go</strong> <strong>public</strong> after observing improving market<br />
conditions. Thus, the timing of IPOs and the motives of IPOs, though related, are separate<br />
questions.<br />
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I have found through surveys of, and interviews with CFOs, that questions must be<br />
carefully crafted to pinpoint the sometimes fine differences in academic theory. To help the reader<br />
identify these differences among theories, below, I detail the leading theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong><br />
<strong>public</strong>. Each of the theories begins with a bold heading. Within each heading, I discuss the<br />
intuition behind each theory, several leading studies in that thread of the literature, and the extant<br />
non-survey empirical evidence pertaining to that specific hypothesis. I choose this structure<br />
because most of the finance literature focuses on one explanation and then primarily tests that<br />
specific explanation. A notable exception is Pagano, Panetta, and Zingales (1998) who are able to<br />
test eight of the hypotheses in one paper (see their Table II, pg. 37) by using a sample of Italian<br />
IPOs. Specifically, Pagano et al. (1998) study 2,181 <strong>firms</strong> from 1982-1992, of which, 69 are IPOs<br />
(40 new listings and 29 carve-outs). The findings of Pagano et al. (1998) are therefore sprinkled<br />
through the 12 groups of theories that follow.<br />
Minimize cost of capital/Optimal capital structure<br />
Perhaps the earliest literature to address <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong> (at least indirectly) begins<br />
with the seminal capital structure literature of Modigliani and Miller (M&M 1958, 1963). M&M’s<br />
famous Proposition I states that “[t]he market value of any firm is independent of its capital<br />
structure …” (M&M 1958, p. 268). When corporate taxes are introduced, the tax shield of debt<br />
results in an optimal capital structure of 100% debt (M&M 1963). M&M lay the ground work for<br />
the theory of optimal capital structure in their 1958 and 1963 papers; but, it is the introduction of<br />
primarily bankruptcy costs that result in an optimal structure other than irrelevance or 100% debt.<br />
The work of Baxter (1967) and Stiglitz (1969) argues that if a firm obtains too much financing<br />
from debt, the increased bankruptcy (i.e., financial distress) costs begin to hurt the value of the<br />
firm. Thus, the introduction of bankruptcy costs results in an optimal mix of debt-to-equity to<br />
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minimize the weighted average cost of capital (WACC). In a discounted cash flow context,<br />
minimizing the WACC, ceteris paribus, maximizes the value of the firm.<br />
The crucial development of a theoretical optimal capital structure begins the debate on<br />
whether, and <strong>why</strong>, managers issue <strong>public</strong> equity. The early capital structure literature (e.g., Kraus<br />
and Litzenberger (1973) and Kim (1978)) offers the trade-off hypothesis that financial managers<br />
will issue equity when it will minimize their WACC, thus maximizing the value of the firm.<br />
Williamson (1988) extends this literature arguing that sometimes external equity is the cheapest<br />
option for financing certain assets. The WACC argument offers the hypothesis that managers<br />
issue <strong>public</strong> equity (i.e., <strong>go</strong> <strong>public</strong>) when the influx of IPO proceeds will decrease the overall<br />
company cost of capital, thereby maximizing firm value.<br />
The difficulty in testing this hypothesis directly is that the WACC is typically an internal<br />
measure computed within <strong>firms</strong>. Most <strong>firms</strong> have their own in-house method for computing the<br />
WACC. Although, Graham and Harvey (2001) find that 73.5% of the CFOs they survey use the<br />
capital asset pricing model (CAPM) to estimate the cost of equity, we <strong>do</strong> not know what these<br />
<strong>firms</strong> use for their inputs. Over how long of a period <strong>do</strong> they estimate beta for the CAPM What<br />
<strong>do</strong> they use for their risk-free rate Where <strong>do</strong> they get their market risk premium estimate<br />
Although data availability of firm WACC inhibits direct tests of the optimal cost of capital<br />
hypothesis, researchers have been able to test if the cost of debt has declined via an IPO. Because<br />
a decrease in the cost of debt <strong>do</strong>es not necessarily indicate a decrease in firm-level WACC, the<br />
next section <strong>do</strong>es not explicitly test the WACC hypothesis. Although the survey approach to<br />
research is discussed towards the end of this paper, it is possible to test the WACC question by<br />
asking IPO participants directly. Analysis of this hypothesis (and all of the others) will be<br />
included in the survey section.<br />
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To overcome borrowing constraints/Increase bargaining power with banks<br />
Pagano et al. (1998) argue that gaining access to a source of finance other than banks or<br />
venture capital “is probably the most cited benefit of <strong>go</strong>ing <strong>public</strong>, which is explicitly or implicitly<br />
present in most models” (pg. 38). Citing Basile (1988), Pagano et al. (1998) argue that access to<br />
<strong>public</strong> equity markets may reduce the cost of credit. Pagano et al. (1998) then argue that<br />
increased bargaining power can also help <strong>firms</strong> lower their cost of debt (Rajan (1992)). In turn,<br />
<strong>firms</strong> can increase their bargaining power by gaining access to <strong>public</strong> equity markets and<br />
increasing firm transparency with investors.<br />
To test the borrowing constraint hypothesis, Pagano et al. (1998) argue that <strong>firms</strong> with<br />
large current investments (PPE capital expenditure, CAPEX), future investments (industry<br />
market-to-book), high leverage (lagged value of total debt plus equity), and high growth (rate of<br />
sales growth) should be positively related to conducting an IPO. Pagano et al. (1998) Table III<br />
(pg. 44) reports that growth and industry market-to-book are both positively related to the<br />
probability of conducting an IPO for their overall sample, as predicted. CAPEX and leverage are<br />
not significantly related to the choice of IPO.<br />
Examining independent IPOs, CAPEX, growth, and industry market-to-book are all<br />
significantly related to <strong>go</strong>ing <strong>public</strong>. Here, the increase in new investment is consistent with the<br />
model of Chemmanur and Fulghieri (1999). For carve-outs, only industry market-to-book is<br />
significantly related to <strong>go</strong>ing <strong>public</strong>.<br />
Data from after the IPO (i.e., ex post data) allow for two additional predictions to test the<br />
borrowing constraint hypothesis in Pagano et al. (1998). First, new IPO <strong>firms</strong> should increase<br />
their investment or reduce debt. Second, new IPO <strong>firms</strong> should not increase their payout ratio.<br />
Their Table IV (pg. 48) shows mixed evidence for these two predictions. Post-IPO investment for<br />
independent <strong>firms</strong> actually decreases and is persistent. On the other hand, carve-outs show a short-<br />
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term increase in investment, but the increase <strong>do</strong>es not persist. As for leverage, independent <strong>firms</strong><br />
reduce their leverage immediately with persistence. On the other hand, carve-outs <strong>do</strong> not<br />
immediately reduce leverage, but <strong>do</strong> so in the long-run. For payout, no significant changes are<br />
detected after the IPO, in accordance with the prediction. Overall, Pagano et al (1998) provide<br />
mixed evidence for the borrowing constraint hypothesis. As we will see <strong>go</strong>ing forward, this mixed<br />
evidence conclusion will apply to all of the <strong>go</strong>ing <strong>public</strong> theories. The question soon becomes,<br />
which theories apply to which subsets of <strong>firms</strong><br />
To test the bank bargaining power hypothesis, Pagano et al. (1998) posit that <strong>firms</strong> facing<br />
higher interest rates and more concentrated credit sources should be more likely to <strong>go</strong> <strong>public</strong>.<br />
Credit cost is approximated with the ratio of the firm’s interest rate scaled by an average interest<br />
factor. Credit concentration is measured with a Herfindahl index of the lines of credit by all of its<br />
lenders. With post-IPO data, credit should become cheaper and more available for the newly<br />
<strong>public</strong> firm.<br />
Pagano et al. (1998) Table III (pg. 44) reports that neither the bank rate nor the credit<br />
concentration is a determining factor for the decision to <strong>go</strong> <strong>public</strong>. Using post-IPO data however,<br />
indicates that the cost of credit decreases for independent IPOs and the concentration of credit is<br />
reduced (particularly for independent IPOs). Thus, the IPO offering data <strong>do</strong>es not support the<br />
bargaining power hypothesis; but the post-IPO data <strong>do</strong>es.<br />
Asymmetric information/Pecking order of financing<br />
Based on asymmetric information between managers and investors and possible stock<br />
price misvaluation, Myers and Majluf (1984) and Myers (1984) argue for a pecking order of<br />
financing: internal equity, debt financing, and then external equity. This line of logic asserts that<br />
outside investors take the issuance of external equity as a negative signal, that management feels<br />
7
the firm is over-valued. Anticipating investor negative sentiment, management will <strong>do</strong> their best<br />
to grow the firm with internal equity (i.e., retained earnings) first, and then debt, and then with<br />
external equity as a last resort.<br />
The pecking order offers the hypothesis that managers will issue equity only after<br />
exhausting retained earnings and debt capacity. The inherent assumption of the pecking order<br />
theory is that the firm needs more financing. The signaling literature (e.g., Leland and Pyle<br />
(1977)) and the market timing literature (e.g., Schultz (2003) and Alti (2005)) both suggest<br />
validity for the asymmetric information underpinnings of the pecking order. However, the<br />
literature on IPO underpricing (e.g., Stoll and Curley (1970), Logue (1973)) suggests IPOs are<br />
often in high demand (priced above investment bank estimates of fair value) and the IPO long-run<br />
performance literature (e.g., Ritter (1991)) suggests that equity is often overvalued at issue. Both<br />
of these observations are contrary to the pecking order underlying logic. Admittedly, these<br />
inferences from other literature threads are not direct tests of the pecking order hypothesis;<br />
however, as with the WACC hypothesis, direct non-survey empirical tests here are very difficult.<br />
To establish a market price for subsequent sell-out<br />
The notion of a harvest or exit event for entrepreneurs has prompted several lines of<br />
literature addressing <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. This first line argues that IPO insiders are interested in<br />
<strong>go</strong>ing <strong>public</strong> to establish a market price for their firm as a first step in cashing out. The second<br />
step would then be a sell-out – selling the firm outright at the hopefully higher market value. This<br />
line of literature stems mainly from Zingales (1995) and Mello and Parsons (1998).<br />
This literature offers the hypothesis that IPO <strong>firms</strong> will become targets or insiders will<br />
transfer control fairly quickly after <strong>go</strong>ing <strong>public</strong>. The target hypothesis is based on risk-averse<br />
insiders having incentives to sell the firm shortly after establishing a market price. Studying 4,795<br />
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US IPOs from 1985-2003, Brau, Couch, and Sutton (2010) find that only 45 of the <strong>firms</strong> (3%)<br />
become targets within one year. Thus for 97% of the sample, this hypothesis is not supported (at<br />
least for the first year of being <strong>public</strong>).<br />
Using Italian data, Pagano et al. (1998) test the subsequent sell-out hypothesis by<br />
predicting a high incidence of control transfers after the firm <strong>go</strong>es <strong>public</strong>. They find that nearly<br />
14% of their IPO sample sells out the controlling stake to an outsider in the three years after the<br />
IPO. They report that this frequency of sell-out is significantly greater than a sample of privatelyheld<br />
<strong>firms</strong>, providing evidence that the IPO facilitated a first step of a sell-out for 14% of the<br />
sample. In addition, Pagano, Panetta, and Zingales (1996) show for a larger sample of Italian<br />
<strong>firms</strong> that 16.4% of the IPOs sell controlling ownership stakes in the three years following the<br />
IPO. Of course, the Brau, Couch, and Sutton (2010) and Pagano et al. (1996, 1998) papers cannot<br />
detect if the entrepreneurs in those samples of 3%, 14%, and 16% had planned to divest at the<br />
time of the IPO or if they had decided to divest sometime in the one or three years after the IPO<br />
(i.e., cannot explicitly call their findings a motive).<br />
Taken together, the Brau, Couch, and Sutton (2010) and Pagano et al. (1996, 1998) papers<br />
provide indirect evidence that for a small subsample of <strong>firms</strong>, the IPO may be a first step in a total<br />
sell-out (or at least transfer of control). For the other 84% of Italian <strong>firms</strong> and 97% of US <strong>firms</strong> in<br />
their samples, one of the other hypotheses is most likely driving the IPO decision. (Although not a<br />
<strong>do</strong>minant motivation for an IPO, see Brau, Sutton, and Hatch (2010) for a study of <strong>firms</strong> that<br />
conduct an IPO and then are shortly sold off.)<br />
As a tool to cash-out/Insider liquidity<br />
Continuing the idea of the IPO as a harvest, Black and Gilson (1998) argue that the IPO<br />
gives VCs the opportunity to exit, providing an attractive harvest strategy (see also Lerner (1994)).<br />
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Professional private equity investors such as VCs desire to generate returns for their investors by<br />
harvesting their investments. As discussed in Brau, Francis, and Kohers (2003) and in Brau,<br />
Sutton, and Hatch (2010) the IPO can provide such a cash-out for professional investors. Along<br />
with VCs, founders and other insiders can use the IPO to at least partially cash-out by selling<br />
secondary shares in the IPO (e.g., Ang and Brau (2003) and Brau, Li, and Shi (2007)). In the<br />
language of Pagano et al. (1998), the IPO provides original owner personal diversification (see<br />
also Pagano (1993)). The cash-out theory offers the hypothesis that VCs and other insiders will<br />
regularly sell personally-owned (i.e., secondary shares) in the IPO.<br />
This hypothesis is certainly consistent for a large portion of European IPOs in the 1980s<br />
and early 1990s. Jenkinson and Ljungqvist (2001) report that of IPOs in Germany, 23% contained<br />
all secondary shares. Furthermore, of IPOs in Portugal, a full 2/3 contained only secondary shares.<br />
When an issue contains only secondary shares, typically no new shares are created, and the raised<br />
proceeds <strong>go</strong> directly to existing, selling shareholders (and not for company investment). It seems to<br />
follow that for the 2/3 of Portuguese IPOs that sold only secondary shares, the motive was to allow<br />
insiders to cash out (at least partially).<br />
Parsing between <strong>firms</strong> that raise external equity (sell primary shares) and those that <strong>do</strong> not<br />
(sell secondary shares), Pagano et al. (1998) show that 41% of the time their sample <strong>firms</strong> sell<br />
primary shares and 41% of the time they sell secondary shares. Thus, they argue that for a subset<br />
of the <strong>firms</strong>, the insider liquidity hypothesis is supported.<br />
Kim and Weisbach (2005) examine nearly 17,000 IPOs from 1990-2003 for 38 countries<br />
and <strong>do</strong>cument that IPOs that include secondary shares seem to have varying motivations and are<br />
fundamentally different than IPOs that issue primary shares. Primary share-selling IPOs<br />
demonstrate a greater demand for new capital, increased investment, higher repayment of debt,<br />
increases in cash, and greater subsequent SEO activity. Kim and Weisbach find that 21% of the<br />
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IPO proceeds from their sample are from secondary shares. Examination of their Table II, Panel A<br />
(pg. 25 of their 2005 working paper version at http://ssrn.com/abstract=610988) shows that from<br />
1990-2003, nearly 31% of Argentinean IPOs, 30% of Portuguese IPOs, and 23% of Spanish IPOs<br />
consisted of all secondary shares. In these cases, it is clear that at least some insiders are cashing<br />
out. For other countries, such as Hong Kong (0.4%), Taiwan (0.4%), and Japan (0.6%), very few<br />
IPOs are all-secondary share issues. Interestingly however, Japan has the highest percentage of<br />
combined (primary and secondary shares offered) IPOs at 85.8%. The combined IPOs for Japan<br />
account for 53.4% of the primary proceeds and 34.3% of secondary proceeds (their Table II, Panel<br />
B) of all Japanese IPOs. As displayed nicely in Kim and Weisbach (2005) for a broad international<br />
panel of IPOs, the cash-out hypothesis is valid for some subsets and not for others.<br />
To allow more dispersion of ownership<br />
Chemmanur and Fulghieri (1999) argue that IPOs broaden the ownership base of the firm.<br />
In their model, the benefits of an IPO are contrasted with the lower information-production costs<br />
of being privately-held. Pagano et al. (1998) argue that the increased share liquidity of being<br />
<strong>public</strong> creates value for IPO insiders according to market microstructure literature. Benninga,<br />
Helmantel, and Sarig (2005) and Pastor, Taylor, and Veronesi (2009) present models in which the<br />
IPO decision is a balance of diversification benefits and private benefits. Bodnaruk, Kandel,<br />
Massa, and Simonov (2008) find empirical support for these models showing that <strong>firms</strong> with less<br />
diversified owners are more likely to <strong>go</strong> <strong>public</strong>.<br />
Pagano et al. (1998) test the dispersion hypotheses by arguing that riskier <strong>firms</strong> should be<br />
more likely to <strong>go</strong> <strong>public</strong> and that controlling shareholders should sell a large portion of their<br />
shares either in the IPO or shortly thereafter. (Note their second test also can apply to the cash-out<br />
hypothesis.) They find that controlling shareholders divest very little in the IPO (-3.2%) and<br />
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actually increase their ownership in the three years after the IPO (+0.2%). These Italian firm<br />
shareholders retain an average of 69% ownership at the IPO and 64% three years after the IPO.<br />
Using US data, Mikkelson et al. (1997) report a 44% ownership retention, and using UK data,<br />
Brennan and Franks (1997) report a 35% ownership retention. Pagano et al. (1996) find in a<br />
larger set of Italian <strong>firms</strong> than their 1998 study that the controlling block shareholders retain an<br />
average of 60% ownership. Though not a direct test of ownership dispersion, and despite the highretained<br />
ownership in these samples, these samples typically <strong>do</strong> display a broadening of<br />
ownership at the IPO.<br />
Pagano et al. (1998) report that the ownership base (number of shareholders) increases<br />
dramatically for Italian <strong>firms</strong> when they <strong>go</strong> <strong>public</strong> (an average of three shareholders before the<br />
IPO to 3,325 shareholders at the IPO). Evidence is provided that ownership is dispersed, as<br />
measured by the number of shareholders; however, it is hard to determine from this data if<br />
dispersion was the motivation of the insiders to conduct the IPO. It is essentially a tautology that<br />
when a firm <strong>go</strong>es <strong>public</strong>, the number of shareholders will increase; however, this increase is a<br />
necessary, but not sufficient condition for this hypothesis.<br />
Publicity/First-mover advantage<br />
Maksimovic and Pichler (2001) model that <strong>firms</strong> conduct IPOs in an attempt to capture a<br />
first-mover advantage and to increase the <strong>public</strong>ity or reputation of the firm. Their idea is that the<br />
IPO itself can serve to create buzz in the business community, increasing the reputation of the<br />
firm, and creating a first-mover advantage in the IPO’s niche. Further, Demers and Lewellen<br />
(2003) argue that IPO underpricing can serve to create interest in the firm. Thus, IPOs may serve<br />
as strategic moves. Pagano et al. (1998) argue that an IPO may increase investor recognition and<br />
that listing on a major exchange may get the attention of portfolio managers. Graham and Harvey<br />
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(2001) ask if issuing stock gives investors a better impression of the firm’s prospects than issuing<br />
debt. Finally, Aggarwal, Krigman, and Womack (2002) argue that extreme underpricing attracts<br />
greater media attention and generates <strong>public</strong>ity for the IPO firm. This line of logic offers the<br />
hypothesis that IPOs will experience an increase in name recognition/reputation or some other<br />
measure of popularity.<br />
Pagano et. al (1998) are unable to test this hypothesis with their data; but Demers and<br />
Lewellen (2003) use the clever metric of website traffic, as well as media reaction, to measure<br />
<strong>public</strong>ity. Their Table 2 (pg. 421) shows that both web traffic and media citations increase the<br />
month, of and the month after, an IPO. For example, average web traffic increases from 898 new<br />
visitors the month before the issue to 1,032 in the month of the IPO and then to 1,044 in the<br />
month after the IPO. Media articles increase from 2.7 the month prior to the IPO to 8.7 the month<br />
of the IPO and then to 3.4 the month after the IPO for the same <strong>firms</strong>. For a subset of business-toconsumer<br />
<strong>firms</strong>, the media coverage moves from 1.96 to 8.19 from the month before to the month<br />
of the IPO.<br />
Exploring not just the event of an IPO but the degree of underpricing, Demers and<br />
Lewellen (2003) find that underpricing is significantly correlated with website traffic for a set of<br />
internet IPOs. Specifically, they find that a one percent increase in underpricing generates 1,754<br />
unique visitors on average. They compute that each unique visitor costs $450 of underpricing and<br />
then give examples of how this price is similar to banner ads and other forms of advertisement.<br />
Demers and Lewellen then <strong>go</strong> on to examine the number of media cites in the month of the IPO<br />
and find it also correlated with underpricing for a sample of internet and non-internet IPOs. They<br />
conclude that IPO underpricing, as well as the IPO itself, provides <strong>public</strong>ity to internet and noninternet<br />
<strong>firms</strong>.<br />
13
To create <strong>public</strong> market so the firm has the currency of shares for acquisitions<br />
Brau, Francis, and Kohers (2003) argue that IPOs may be important because they create<br />
<strong>public</strong> shares for a firm that may be used as “currency” in either acquiring other companies or in<br />
being acquired in a stock deal. The acquisition currency theory offers the hypothesis that M&A<br />
activity after the IPO should be brisk, particularly with stock deals. Note the overlap between this<br />
hypothesis and the Zingales (1995) and Mello and Parsons (1998) idea that an IPO is the first<br />
stage of a sell-out. The Brau, Francis, and Kohers (2003) notion of currency can be separated<br />
from the two-stage sell-out hypothesis if it were found that most IPOs become acquirers and not<br />
targets.<br />
As discussed above, Brau, Couch, and Sutton (2010) find that only 3% of the <strong>firms</strong> in their<br />
sample become targets within one year of the IPO. In addition, using non-survey data, Brau and<br />
Fawcett (2006a) find that 141 of their sample <strong>firms</strong> that went <strong>public</strong> between 2000 and 2002<br />
became acquirers by July 2004; whereas only 18 of them became targets. In addition, they find<br />
that new IPO <strong>firms</strong> become acquirers significantly more frequently than a non-IPO matched<br />
benchmark sample. Finally, they find that the IPO sample did not become targets more frequently<br />
than a non-IPO matched benchmark sample. The overall evidence supports the acquisition<br />
hypothesis for a portion of IPOs (and the target hypothesis for a much smaller portion of IPOs).<br />
To create an analyst following/Increase monitoring<br />
Bradley, Jordan, and Ritter (2003) argue that having an analyst following can increase the<br />
reputation of a firm and create shareholder value (e.g., with favorable analyst recommendations).<br />
Pagano et al. (1998) argue that an IPO increases the monitoring of executives vis-à-vis hostile<br />
takeovers and increased transparency of managerial decisions. The resulting hypothesis is that<br />
<strong>firms</strong> may <strong>go</strong> <strong>public</strong> to initiate analyst coverage and to increase monitoring. Pagano et al. (1998)<br />
14
are unable to test the monitoring hypothesis; however, Bradley et al. (2003) use US data to show<br />
that analysts typically offer very optimistic reports for newly-minted IPO <strong>firms</strong>. Examining 1,611<br />
IPOs from 1996-2000, they find that 76% of their sample receives analyst coverage immediately<br />
after the quiet period ends, almost always consisting of a buy or strong buy recommendation.<br />
They find that these initiated <strong>firms</strong> experience a positive five-day abnormal return of 4.1%,<br />
compared with non-initiated <strong>firms</strong> which experience a 0.1% return. (See also Bradley, Jordan, and<br />
Ritter (2008) for a follow-on paper pertaining to analyst coverage after the IPO.) In addition to<br />
the work of Bradley et al. (2003), Rajan and Servaes (1997) study 2,725 US IPOs from 1975-1987<br />
and show that more IPOs are completed during optimistic analyst periods and that analysts are<br />
generally overoptimistic about earning potential and long-term growth of recent IPOs.<br />
These empirical studies are compelling, yet once again, they <strong>do</strong> not actually answer<br />
whether analyst following was the motivation for the entrepreneurs to <strong>go</strong> <strong>public</strong>. If it were the<br />
motivation, then it must be the case that the entrepreneurs a) knew they would receive an analyst<br />
following, b) were confident their ratings would be favorable, and c) knew that favorable analyst<br />
following would create value for the firm (and them). For a subset of savvy entrepreneurs (or<br />
those who listen to their investment bankers), this may well be the case. At this point, however,<br />
we are left to wonder.<br />
Win<strong>do</strong>ws of Opportunity<br />
At times, the IPO market becomes “frothy” and strong investor demand may over-inflate<br />
the price of IPO shares. Ritter (1991), Loughran and Ritter (1995), Pagano et al. (1998), Baker<br />
and Wurgler (2002), and Lowry and Schwert (2002), among others, argue that such win<strong>do</strong>ws of<br />
opportunity exist, and IPO insiders take advantage of them to issue over-priced shares. Lucas and<br />
McDonald (1990) argue win<strong>do</strong>ws are driven by information asymmetry, and <strong>firms</strong> wait until a<br />
15
<strong>go</strong>od news release so they <strong>do</strong> not sell at undervalued prices. If such win<strong>do</strong>ws <strong>do</strong> exist, the<br />
testable hypothesis is that IPOs that issue during these win<strong>do</strong>ws should underperform a riskmatched<br />
benchmark after the IPO. That is, the market will eventually realize the new <strong>public</strong> firm<br />
is overvalued and the price will adjust <strong>do</strong>wnward to reflect his revelation.<br />
Ritter (1991), in his seminal paper on the long-run performance of IPOs is among the first<br />
to show that IPOs average negative, risk-adjusted long-run returns. Ritter (1991) has spawned an<br />
entire literature attempting to a) <strong>do</strong>cument whether IPO <strong>firms</strong> actually <strong>do</strong> underperform and b) if<br />
they underperform, <strong>why</strong> One of the primary explanations for the poor long-run IPO returns is<br />
that insiders (with the help of investment bankers and VCs) can time the market to exploit<br />
win<strong>do</strong>ws of opportunity. As further evidence, these “over-priced” IPOs typically experience a<br />
first-day underpricing jump caused by excess demand in the primary and secondary markets.<br />
Thus, the voluminous collection of IPO underpricing and long-run literature provides at least<br />
indirect evidence for the win<strong>do</strong>ws hypothesis.<br />
Non-long-run tests of the win<strong>do</strong>ws hypothesis include Pagano et al. (1998) and Rajan and<br />
Servaes (2003). Pagano et al. (1998) test the win<strong>do</strong>ws hypothesis by examining high market-tobook<br />
industry IPOs and their post-IPO behavior. They reason if new IPOs <strong>do</strong> not invest at an<br />
abnormal rate and <strong>do</strong> not earn large profits after the IPO, then this is evidence of exploiting<br />
win<strong>do</strong>ws. They find that profitability declines after the IPO and investment declines as well.<br />
Thus, the win<strong>do</strong>ws hypothesis receives empirical support from their Italian data.<br />
Using US data from 1975-1987, Rajan and Servaes (2003) find support for the win<strong>do</strong>ws<br />
hypothesis showing that more <strong>firms</strong> conduct IPOs when <strong>public</strong> same-industry <strong>firms</strong> are trading at<br />
high multiples. (They then show that these new IPOs underperform after the IPO.)<br />
Finally, the hot market phenomenon in which IPOs issue in volume and price waves (e.g.,<br />
Ritter (1984), Lerner (1994)) also lends circumstantial evidence for the win<strong>do</strong>ws hypothesis.<br />
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In contrast to the preceding research, Schiozer, Oliveira, and Saito (2010) show for<br />
Brazilian IPOs from 2005-2007, the decision to <strong>go</strong> <strong>public</strong> cannot be explained by a markettiming<br />
function. Instead, Schiozer et al. show that greater growth opportunities (relative to<br />
competitors) drives the decision to <strong>go</strong> <strong>public</strong>.<br />
Having discussed the win<strong>do</strong>ws hypothesis, it is important to note that it should actually<br />
be viewed, at least partly, as a timing issue, not a motive issue. Suppose entrepreneurs see the<br />
frothy market and they feel it is a great time to issue, so they <strong>do</strong>. Did they issue then so they<br />
would have overpriced equity to fuel growth Did they issue then because the overpriced equity<br />
decreased their WACC Did they issue then because they could cash-out amid the market frenzy<br />
and become deca-millionaires Because the win<strong>do</strong>ws hypothesis can be thought of as a timing<br />
issue, Brau and Fawcett (2006a) includes the market timing question in the timing survey section<br />
and not the motive section. The responding CFOs’ top two reasons for the timing of their IPOs<br />
supports the win<strong>do</strong>ws hypothesis, with 83% agreeing “overall market conditions” were a factor<br />
in the timing and 70% agreeing “industry conditions” were a timing factor.<br />
Create shares for compensation<br />
Holmstrom and Tirole (1993) and Schipper and Smith (1986) argue that <strong>public</strong>ly traded<br />
stock allows for efficient compensation programs. This hypothesis suggests that <strong>firms</strong> will offer<br />
more stock-based compensation schemes after the IPO. Because pre-IPO compensation data is<br />
very difficult to come by, the direct test of this hypothesis with non-survey data is nearly<br />
impossible. However, Graham and Harvey (2001) ask if issuing equity is motivated for providing<br />
shares to employee bonus/stock option plans in their survey, covered subsequently.<br />
Because other <strong>firms</strong> in the same industry have <strong>go</strong>ne/Are <strong>go</strong>ing <strong>public</strong><br />
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The IPO hot issues/cycles phenomenon literature (e.g., Ibbotson and Jaffe (1975), Ritter<br />
(1984) and Lowry and Schwert (2002)) provides evidence that <strong>firms</strong> herd when they issue new<br />
equity. In addition, the model of Maksimovic and Pichler (2001) predicts herding in IPOs in a<br />
subset of <strong>firms</strong> – those where new-entry risk is significant. On the other hand, in industries with<br />
primarily technology risk, their model predicts non-herding in IPOs.<br />
As discussed previously, the motivation behind herding is unclear. Is it because the market<br />
is overvalued Is it because there are more growth opportunities for the average firm than normal<br />
Is it because credit markets have tightened and the average firm can’t obtain more debt financing<br />
Again, it is difficult to ascertain motivation without survey data. Subsequently, we will cover<br />
survey data by Pinegar and Wilbricht (1989), Graham and Harvey (2001), Brau, Ryan, and<br />
Degraw (2006), and Brau and Fawcett (2006a).<br />
Summary of theories<br />
Having briefly discussed the leading theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, I now summarize here by<br />
listing each theory and the primary empirical predictions:<br />
• Minimize cost of capital/Optimal capital structure: IPO <strong>firms</strong> will experience a<br />
decrease in their WACC after an IPO.<br />
• To overcome borrowing constraints or increase bargaining power with banks: IPO<br />
<strong>firms</strong> will experience lower interest rates or less credit concentration after the<br />
IPO.<br />
• Asymmetric Information/Pecking order of financing: IPO <strong>firms</strong> will offer <strong>public</strong><br />
equity only after exhausting retained earnings and debt capacity.<br />
• To establish a market price for subsequent sell-out: Frequent acquisitions of IPO<br />
<strong>firms</strong> will be observed in the after-market shortly after an IPO (e.g., 1-3 years).<br />
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• As a tool to cash-out: IPO <strong>firms</strong>, especially those with VCs, will frequently include<br />
secondary shares in the IPO.<br />
• To allow more dispersion of ownership: IPO <strong>firms</strong> will experience an increase in<br />
the ownership base after the IPO.<br />
• Publicity/First-Mover Advantage: IPO <strong>firms</strong> will experience a significant increase<br />
in press coverage or other <strong>public</strong>ity during and after the IPO process.<br />
• To create <strong>public</strong> market so the firm has the currency of shares for acquisitions:<br />
Many IPO <strong>firms</strong> will participate in the M&A market shortly after <strong>go</strong>ing <strong>public</strong>,<br />
especially as acquirers (to separate from the two-stage sell-out hypothesis).<br />
• To create an analyst following: IPO <strong>firms</strong> will experience a favorable analyst<br />
following, on average.<br />
• Win<strong>do</strong>ws of Opportunity: IPOs that issue during opportunistic win<strong>do</strong>ws will<br />
underperform after the IPO (e.g., 1, 3, 5 years).<br />
• Create shares for compensation: IPO <strong>firms</strong> will offer more stock-based<br />
compensation schemes after the IPO.<br />
• Because other <strong>firms</strong> in the same industry have <strong>go</strong>ne/Are <strong>go</strong>ing <strong>public</strong>: IPO <strong>firms</strong><br />
will herd, particularly in industries.<br />
• In Netscape’s case, to buy a boat: Jim Clark will be able to buy his yacht after the<br />
IPO.<br />
SURVEY EVIDENCE OF GOING PUBLIC THEORIES<br />
As demonstrated above, the challenge of empirically testing the motives of <strong>why</strong> insiders<br />
in <strong>firms</strong> <strong>go</strong> <strong>public</strong> is the limitation of proxies to accurately measure motives. Researchers have<br />
thus worked hard to identify appropriate instruments in attempts to disentangle the theories<br />
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discussed above. As an example of this challenge, suppose it is observed after an IPO that a) the<br />
firm’s WACC decreased, b) the firm had worked through the pecking order of financing prior to<br />
issuing, c) a sizable portion of the shares in the IPO were secondary shares, d) press coverage<br />
increased around the IPO, e) the IPO received preferable analyst treatment, f) the firm performed<br />
under a risk-matched benchmark for a year, and then finally g) the firm was acquired. These<br />
seven observations support at least seven of our hypotheses above. The researcher has been able<br />
to provide support for seven possible motivations, but she is left to wonder which of the seven,<br />
or which combination of the seven, actually motivated the entrepreneurs to conduct the IPO.<br />
This limitation of <strong>public</strong>ly available data is what motivates the use of survey-based<br />
metho<strong>do</strong>logy. Although not as widely accepted in Finance as in other disciplines, survey<br />
methods add a new dimension to exploring the question of <strong>why</strong> entrepreneurs choose to <strong>go</strong><br />
<strong>public</strong>. Prior to discussing the extant survey data on the topic, and some new data that has not yet<br />
been published, a discussion of <strong>public</strong>ly available data in IPO research is appropriate (or at least<br />
an interesting aside).<br />
PUBLICLY AVAILABLE DATA<br />
In the early days of IPO finance research, scholars were forced to hand-pick data from<br />
sources such as the Investment Dealers’ Digest (IDD) and the Dow Jones Broad Tape. As late as<br />
1997, I had to drive over 150 miles to access IDD at a university library in a different town to<br />
extract secondary shares sold in IPOs for my dissertation. (It wouldn’t have been too bad, but the<br />
Florida Gators managed to beat the Florida State Seminoles in football with only two minutes<br />
left in the game at the very time I was extracting data. With the win, the Gators stopped the<br />
Seminoles from <strong>go</strong>ing to the national championship game. The roars from the Swamp still haunt<br />
me.)<br />
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Jay Ritter became one of the pioneers in IPO research by compiling a database of 2,609<br />
IPOs from 1975-1984. He used a subset of 1,526 of these IPOs that were listed on CRSP for his<br />
seminal 1991 Journal of Finance article (Ritter (1991)). Professor Ritter now offers <strong>public</strong><br />
access to the complete database on his webpage.<br />
In the mid to late 90’s, Compact Disc Disclosure offered IPO prospectuses (SEC S-1<br />
<strong>do</strong>cuments) for researchers to scour. Around the same time, Securities Data Company (SDC)<br />
was marketing its New Issues database in DOS-style format which streamed over the internet.<br />
The advent and expansion of SDC provided a catalyst for IPO researchers. Although errors have<br />
been <strong>do</strong>cumented in SDC along the way by scholars such as Alexander Ljungqvist and Jay Ritter<br />
(corrections available on their respective webpages), the easy access to IPO data via SDC has<br />
been a boon to researchers. Since SDC, various other data providers continue to provide richer<br />
and richer data on IPOs.<br />
The existence of these computer-readable data opened up a large literature testing IPO in<br />
the three IPO phenomena of underpricing, long-run returns, and hot markets along with newer<br />
discoveries as well. As a side note, the availability of IPO data also increased competition for new<br />
anomalies. For example, at one point in time, at least five teams of researchers were all working on<br />
the lockup expiry effect simultaneously (earliest known working paper dates: Brau, Carter,<br />
Christophe, and Key (1999), Brav and Gompers (1999), Bradley, Jordan, Roten, and Yi (1999),<br />
Field and Hanka (1999), Ofek and Richardson (2000)). Field and Hanka won the lockup expiry<br />
race with their article that was published in the Journal of Finance (Field and Hanka (2001)). The<br />
Bradley team focused their paper on VC-effects in lockups and published their paper in the<br />
Journal of Financial Research (Bradley et al. (2001)). Brav and Gompers focused on the front-end<br />
of the lockup paper and published their revised paper in the Review of Financial Studies (Brav and<br />
Gompers (2003)). The Brau et al. paper on lockup expiry was published in Managerial Finance<br />
21
(Brau et al. (2004)) and a follow-on analysis of the lockup front-end explanation was published in<br />
the Journal of Financial and Quantitative Analysis (Brau, Lambson, and McQueen (2005)). As<br />
can be seen, the availability of <strong>public</strong> IPO data, coupled with Compustat and CRSP, increases the<br />
possibility of competition and scooping among researchers.<br />
Although the existence of SDC and other IPO data providers has spurred brisk competition<br />
and increased volume studying many IPO issues, as mentioned previously, the topic of <strong>why</strong> <strong>firms</strong><br />
<strong>go</strong> <strong>public</strong> has received relatively little empirical study. The obvious reason for this is lack of data.<br />
If researchers desire to determine the factors of <strong>go</strong>ing <strong>public</strong> empirically, they must not only have<br />
data on <strong>public</strong>ly traded <strong>firms</strong> but also on privately-held <strong>firms</strong>. One can envision modeling the<br />
choice of IPO as either a probit or logit model, with the binary dependent variable being either<br />
<strong>go</strong>ing <strong>public</strong> or staying private. The lack of financial data for private <strong>firms</strong>, particularly in the US,<br />
limits such empirical modeling. In fact, acknowledging the difficulty of using US data to test<br />
extant theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, Bharath and Dittmar (2006) use the novel approach of<br />
testing reverse predictions of the IPO decision by studying <strong>firms</strong> that <strong>go</strong> private. The study of<br />
Italian data by Pagano et al. (1998), which I cite profusely throughout the discussion above, is one<br />
of the few articles able to conduct such a binary model approach. It is this lack of data and<br />
difficulty in creating instruments to detect motivation that provides the catalyst for survey<br />
research.<br />
SURVEY DATA<br />
Pinegar and Wilbricht (1989) were among the first to employ survey sampling techniques<br />
in Finance (and perhaps the first on the topic of capital structure). (For some predecessors, see<br />
Lintner (1956) on dividend policy, Gitman and Forrester (1977) on capital budgeting, and Baker,<br />
Farrelly, and Edelman (1985) on dividend policy.) Pinegar and Wilbricht (1989) survey the<br />
22
Fortune 500 <strong>firms</strong> for 1986 as classified in April, 1987. They received 176 useable surveys, for a<br />
35% response rate. Pinegar and Wilbricht’s intent is to ask managers with which academic<br />
theories pertaining to capital structure they agree. (Their nine question survey is available at the<br />
back of their article.) Although they <strong>do</strong> not ask specifically <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, they <strong>do</strong> ask,<br />
“Rank the following sources of long-term funds in order of preference for financing new<br />
investments (1 = first choice, 6 = last choice).” This specific question at least partially addresses<br />
the pecking order hypothesis of Myers and Majluf (1984), although the majority of these CFOs<br />
most likely have seasoned equity offerings (SEOs) in mind (and not IPOs) because they are<br />
pre<strong>do</strong>minantly <strong>public</strong> <strong>firms</strong>.<br />
Pinegar and Wilbricht report that nearly 69% of managers held a preference for the<br />
pecking order of financing, where 84% of respondents listed retained earnings as their most<br />
favored source of financing, and 72% listed straight debt as their second favored source. Next<br />
was convertible debt, followed by external common equity. Only preferred stock (straight and<br />
convertible) ranked lower than common stock. From these results, we can conclude that<br />
managers at least have preferences that align with the pecking order hypothesis.<br />
A second survey paper focusing on corporate finance in a broader sense is Graham and<br />
Harvey (2001). Graham and Harvey survey over 4,000 CFOs and receive 392 usable surveys<br />
(i.e., 9% response rate). Graham and Harvey construct a comprehensive survey that covers<br />
capital budgeting, cost of capital, and capital structure. Although they <strong>do</strong> not directly ask, “What<br />
motivates <strong>firms</strong> to <strong>go</strong> <strong>public</strong>,” they <strong>do</strong> ask, “Has your firm seriously considered issuing common<br />
stock If ‘yes,’ what factors affect your firm’s decisions about issuing common stock” (see their<br />
Table 8, pg. 216 and Figure 7, pg. 230; also see Graham and Harvey (2002) Figure 5, pg. 16).<br />
Graham and Harvey have a column in their Table 8 which reports the survey replies for private<br />
23
<strong>firms</strong>. Of the 392 <strong>firms</strong> that replied to their survey, 37%, or 145 are privately-held. For these<br />
<strong>firms</strong>, their question can be interpreted as consideration for an IPO (since they are private <strong>firms</strong>).<br />
Ranked by the average response (0 = not important through 4 = very important), the first<br />
five reasons given for issuing equity (perhaps <strong>go</strong>ing <strong>public</strong>) by private <strong>firms</strong> are: providing<br />
shares for compensation (2.72), high stock price (1.83), sufficient profits to fund activities (1.80),<br />
misvaluation of stock (1.78), and maintaining target debt-to-equity (1.73). First, note that only<br />
one of the top five (and total 13 choices) is over a score of 2. So in the aggregate, none of the<br />
reasons for <strong>go</strong>ing <strong>public</strong> (i.e., issuing equity) is overly compelling to privately-held CFOs. Even<br />
with the low scores, the clear winner of this question for private <strong>firms</strong> is to provide shares for<br />
compensation schemes. The possible replies that deal with the classical arguments of optimal<br />
capital structure of cost of capital, rank no higher than the fifth most important reason. Related<br />
questions such as “common stock is our cheapest source of funds” (1.46) and “inability to obtain<br />
funds using debt, convertibles, or other sources” (1.42) receive much lower ratings. Thus,<br />
Graham and Harvey’s survey for their private-firm subset would suggest that the stock<br />
compensation theory is supported the most by practitioners.<br />
The next survey, one that gets closer to asking <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, is Brau, Ryan, and<br />
DeGraw (2006). They survey 984 IPO <strong>firms</strong> from 1996-1998 and 2000-2002 in two rounds of<br />
surveys and receive 438 usable surveys for a response rate of 44.5%. In their Table 1 (pg. 487)<br />
Brau et al. (2006) list 12 possible theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>, breaking them <strong>do</strong>wn into lifecycle<br />
and market-timing theories (following Ritter and Welch, 2002). As can be seen in the Brau<br />
et al. (2006) Table 3 (pp. 492-494), the surveyed CFOs were not asked directly <strong>why</strong> they went<br />
<strong>public</strong>, but were instead asked if certain aspects of the IPO were advantages or disadvantages or<br />
to answer yes or no to various statements. The construction of the <strong>go</strong>ing-<strong>public</strong> theories (their<br />
24
Table 1) was actually created after the survey data had been collected. As such, the authors were<br />
able to only get partially to the question, “Why <strong>do</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>”<br />
[Insert Table 1 about here.]<br />
A modified version of Brau et al. (2006) Table 3 is our Table 1. Only three survey<br />
questions received at least 75% agreement as an advantage of conducting an IPO: to gain<br />
financing for long-term growth (86.8%), to gain financing for immediate growth (86.8%), and to<br />
increase liquidity (82.5%). Note that although the two most popular questions are consistent with<br />
the empirical work of Mikkelson et al. (1997), they still <strong>do</strong> not directly address <strong>why</strong> the firm<br />
chose external equity for immediate and long-term growth and not some other cheaper financing<br />
source. Brau et al. (2006) Table 7 (pg. 506) shows that in regressions, <strong>firms</strong> that replied that<br />
immediate growth was a benefit were actually correlated with negative and significant 1-year<br />
abnormal returns. Perhaps the “immediate growth” response indicated “strapped for cash” which<br />
did not turn around over the year after the IPO.<br />
On the other end of the response ranking, only 3.8% of the CFOs agreed that “a benefit of<br />
the IPO was that it allowed for the retirement of the original owner.” The surprising low<br />
agreement to this question most likely points out one of the main criticisms of survey research.<br />
Even if the original founders used the IPO as a harvest strategy, the survey responder may feel a<br />
duty to cover for them. Perhaps, the worry is lawsuits. Perhaps, the worry is a negative signal.<br />
Critics of survey research have a valid point when they argue that survey participants may not<br />
always be truthful. Of course, if the survey data can be linked to insider sales data at the time of<br />
the IPO and in the following months, the survey replies could be cross-checked. For example, in<br />
the Brau, Ryan, and Degraw (2006) survey, SDC data is used to examine how many of the 181<br />
25
<strong>firms</strong> that indicate they plan to issue an SEO in the next two years following the IPO actually<br />
did. It turns out 21% of these <strong>firms</strong> actually completed an SEO in this time period. The fact that<br />
only one in five completed an SEO <strong>do</strong>es not necessarily mean that the other 4/5 of the<br />
respondents were lying. These respondents may have intended to conduct an SEO, but were<br />
unable to <strong>do</strong> so based on market conditions or some other factor.<br />
The remainder of the data in Table 1 are left to the reader’s inspection. In sum, Brau et al.<br />
(2006) offer some tangential evidence on what motivates <strong>firms</strong> to <strong>go</strong> <strong>public</strong>; but it wasn’t until<br />
Brau and Fawcett (2006a) that the direct question was asked of practitioners.<br />
A CLOSER LOOK AT BRAU AND FAWCETT (2006a)<br />
The first survey to explicitly ask CFOs how important various motivations are for<br />
conducting an IPO is Brau and Fawcett (2006a). We tried our best to craft survey questions that<br />
could separate the main theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. For example, we did not provide a<br />
reply of “to get money” to their motive for <strong>go</strong>ing <strong>public</strong> question. Instead, we chose answers<br />
such as “our company has run out of private equity,” “debt is becoming too expensive,” or “to<br />
minimize our cost of capital” in an effort to test the pecking order (first two examples) and the<br />
WACC (third example). Inherently, if a CFO said the primary motive of the IPO (raising<br />
external equity) was because debt was becoming too expensive, it was understood that the firm<br />
needed more capital. I have received calls from other researchers asking <strong>why</strong> we didn’t have a<br />
reply that simply stated, “because we needed money.” Each time, I’ve offered the explanation<br />
above and it seems to have been adequate. I hope it is adequate here to explain <strong>why</strong> we chose the<br />
specific replies we did. In hindsight, especially after writing this chapter, I’m sure some of the<br />
replies could have been better than they are in the 2006 survey; but at the time, they seemed like<br />
the best replies.<br />
26
The replies, reported in Brau and Fawcett (2006a) Table II (pg. 407) surprised the<br />
authors. The number one motivation for an IPO revealed by CFOs (in the aggregate) was to<br />
create <strong>public</strong> shares for use in future acquisitions (nearly 60% agreeing) – see also Brau and<br />
Fawcett (2006b) Figure 1 (pg. 108). This possibility was motivated by discussions with Professor<br />
James Ang when I was one of his students around 1997. I included it as a hypothesis in Brau,<br />
Francis, and Kohers (2003), which led to Brau and Fawcett (2006a), which in turn led to Brau,<br />
Couch, and Sutton (2010). (Just a note, Kohers and Sutton are the same coauthor, Ninon’s<br />
maiden name is Kohers.) Graham and Harvey (2001) <strong>do</strong> report that nine of their surveyed <strong>firms</strong><br />
indicated that they issued common stock because it is the preferred currency for making<br />
acquisitions (pg. 210); however, this represents only 2.3% of their sample (of private and <strong>public</strong><br />
<strong>firms</strong>).<br />
In the aggregate, Brau and Fawcett report that the following motivations for an IPO<br />
received “low support”: minimize cost of capital/optimal capital structure, pecking order of<br />
financing, and to create an analyst following (see their Appendix C). The following received<br />
“moderate support”: as a cash-out tool, to increase the <strong>public</strong>ity/reputation of the firm, and to<br />
allow more dispersion of ownership. Along with creating <strong>public</strong> shares for acquisitions, to<br />
establish a market value for the firm received “strong support.” These conclusions are all based<br />
on aggregate responses. Brau and Fawcett (2006a) also parse the data based on IPO status<br />
(withdrawn, successful, not tired), size of the firm (revenues), age of the firm, high-tech status of<br />
the firm, underwriter prestige, venture capital backing, insider ownership decrease, overhang,<br />
IPO demand, and initial return hotness. For the aggregate sample, Brau and Fawcett report the<br />
mean of each CFO response and the percentage of CFOs who reply either 4 or 5. For all of the<br />
subgroups, they report only the means.<br />
27
[Insert Table 2 about here.]<br />
Table 2 (herein) reports the survey findings in greater detail than Brau and Fawcett<br />
(2006a,b) for the first time. Here, I include the complete frequency of replies to the “<strong>why</strong> <strong>do</strong><br />
<strong>firms</strong> <strong>go</strong> <strong>public</strong>” question. Panels A and B detail these results. Panel A reports in the first column<br />
the possible responses to, “How important were/are the following motivations for conducting an<br />
IPO” in the order they were given in the survey instrument. Actual counts are reported for each<br />
of the possible replies of one through five with the total number of replies summed in the last<br />
column. Panel B sorts the responses based on the highest to lowest mean reply and reports the<br />
percentage of CFO replies instead of counts as in Panel A. Again, the inspection of the details<br />
are left to the inquisitive reader. Here, I provide highlights. Note that the top selection, to create<br />
<strong>public</strong> shares for acquisitions, not only receives the most 5 rankings, but also is tied for the most<br />
4 rankings. The top four replies experience a monotonic increase from ranking 1 through 4, but<br />
all of them have a 5 rating that is less than the 4 rating. The bottom two reasons, “our company<br />
has run out of private equity” and “debt is becoming too expensive” show a monotonically<br />
decreasing scaling.<br />
Panels C-E further break <strong>do</strong>wn the aggregate sample into the three sub-samples in Brau<br />
and Fawcett (2006a,b) – <strong>firms</strong> that filed for an IPO and then withdrew prior to issue (Panel C),<br />
<strong>firms</strong> that filed for and completed an IPO (Panel D), and <strong>firms</strong> that have never filed for an IPO<br />
but are interested (Panel E). Panels C-E demonstrate that the IPO experience of the CFO results<br />
in differing motivations for <strong>go</strong>ing <strong>public</strong>. CFOs of withdrawn IPOs feel that the most important<br />
motivation for an IPO is to create <strong>public</strong> shares to use in future acquisitions (mean=4.00). Next,<br />
they feel an IPO enhances the reputation of the firm (mean=3.62). Establishing a market price for<br />
the firm (3.54), minimizing the cost of capital (3.30), and broadening the base of ownership<br />
28
(3.16) round out the top five reasons. The bottom two reasons for withdrawn IPOs are that the<br />
company has run out of private equity (2.41) and that debt is becoming too expensive (1.86).<br />
Note that not a single withdrawn CFO ranked creating <strong>public</strong> shares for acquisitions as not<br />
important (a rank of 1). On the other hand, over 50% reported that “debt is becoming too<br />
expensive” as a 1.<br />
Panel D reports that CFOs of successful IPO <strong>firms</strong> feel the top five motivations for an<br />
IPO are to allow VCs to cash-out (3.57), minimize cost of capital (3.48), attract analysts’<br />
attention (3.44), the firm has run out of private equity (3.28), and to create <strong>public</strong> shares for<br />
future acquisitions (3.02). Interestingly, to establish a market price/value for the firm (40% rated<br />
1), to allow principals to diversify (35%), and to enhance the firm reputation (32%) received<br />
very high percentages of 1 ratings. The fact that establishing a market price for the firm ranked<br />
second overall (Panel B) and last among the successful IPOs (Panel D) demonstrates that the<br />
motivations for IPOs differ across <strong>firms</strong> and CFOs. Note that the motivation second from the<br />
bottom is to let principals diversify personal holdings (i.e., at least a partial cash-out). This<br />
observation, along with the highest ranking of VCs to cash-out raises an interesting point. It<br />
suggests that CFOs view at least two classes of insiders – founders and professional investors.<br />
Successful CFOs see the IPO as a tool for VCs to cash out but not founders. The relatively low<br />
frequency and volume of secondary shares in US IPOs is consistent with the latter point.<br />
Panel E consists of CFOs of <strong>firms</strong> who have not tried to <strong>go</strong> <strong>public</strong> but who expressed<br />
interest in <strong>do</strong>ing so. Only three motivations obtained a mean greater than three: to broaden the<br />
base of ownership (3.43), minimize cost of capital (3.37), and create <strong>public</strong> shares for use in<br />
future acquisitions. Nearly 60% of the never-tried CFOs rank “to allow one or more of the<br />
principals to diversify personal holdings” as a 1.<br />
29
Because other chapters in this text cover the topic of VC financing, I’ve included Panels<br />
F and G, which report survey results for <strong>firms</strong> without and with VC-backing, respectively. I <strong>do</strong><br />
so to emphasize the point that different subsamples of IPOs have different motives for <strong>go</strong>ing<br />
<strong>public</strong>. (If I provided the full data (which is available upon request) cut on all of the demographic<br />
dimensions included in Brau and Fawcett (2006a), this conclusion would become overly<br />
redundant.) Panel F reports that the top two reasons for non-VC-backed IPOs are to create<br />
shares for acquisitions (3.47) and to establish a firm value (3.45). Note that the lowest motive, to<br />
allow VCs to cash-out has 60% of CFOs replying the reason is not important (1), which makes<br />
sense as they <strong>do</strong> not have VC backing. In contrast, Panel G reports that allowing VCs to cash-out<br />
has the second highest frequency for the 5 rating (very important), although overall it ranks as<br />
the fifth popular reason. Note also 1/3 of the non-VC IPOs state that “debt is becoming too<br />
expensive” is ranked 1 (not important), whereas over 1/2 of VC IPOs rank it as 1. The debt rating<br />
again highlights how different samples are driven by varying motives. In this case, it makes<br />
sense that IPOs that have tapped private equity markets are not as strained in the debt markets.<br />
SUMMARY AND CONCLUSIONS<br />
Since my study of finance began in grad school in 1994, I have always been intrigued<br />
with how much academic theory actually jives with what practitioners <strong>do</strong> on a daily basis. As<br />
such, financial surveys have always been of personal interest. While I was a <strong>do</strong>ctoral student<br />
working on my dissertation, the idea of an IPO survey constantly nagged me. Graham and<br />
Harvey (2001) proved to me that it could be <strong>do</strong>ne, and Brau and Fawcett (2006a) was the result.<br />
Brau and Fawcett (2006a) has helped us to understand the motives of a sample of CFOs for<br />
conducting an IPO (among other questions), but it has not uncovered a definitive single answer<br />
for <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. The contrast of the economic models of M&M and the reality of the<br />
30
opening quote about the Netscape IPO demonstrate corner solutions to the question of <strong>why</strong> <strong>firms</strong><br />
<strong>go</strong> <strong>public</strong>. At least ten other theories fit in between these two endpoints.<br />
Like traditional empirical studies, the survey evidence suggests that motives for <strong>go</strong>ing<br />
<strong>public</strong> vary far and wide, depending on the entrepreneur and firm. In this chapter I have<br />
summarized and organized the extant theories on <strong>why</strong> <strong>firms</strong> <strong>go</strong> <strong>public</strong>. Depending on the sample,<br />
method, intent, and perhaps desire of the researcher, all of the theories have been supported<br />
through argument and empirics at least once. Several theories are supported by one study and<br />
disputed by another. Within my own research, in fact, within one of my single papers, this has<br />
been the case. The researcher (and investor) is left to ask not which theory is correct, but which<br />
theories apply to which samples of <strong>firms</strong> that <strong>go</strong> <strong>public</strong>.<br />
31
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38
Table 1. Survey of 984 IPO CFOs from 1996-1998 and 2000-2002<br />
Strongly<br />
agree or<br />
agree/Yes<br />
Strongly<br />
or mildly<br />
disagree/<br />
No<br />
Panel A. General Life-Cycle Theory<br />
A benefit of the IPO was that it allowed our company to gain additional financing for<br />
immediate growth. 82.60% 7.90%<br />
A benefit of the IPO was that it allowed our company to gain additional financing for<br />
long-term growth. 86.80% 4.20%<br />
Yes, No, or Don't Know<br />
Smaller companies are less likely to <strong>go</strong> <strong>public</strong>. 55.80% 32.40%<br />
Younger companies are less likely to <strong>go</strong> <strong>public</strong>. 49.50% 37.60%<br />
High-tech companies are less likely to <strong>go</strong> <strong>public</strong>. 1.90% 86.60%<br />
Riskier companies are more likely to <strong>go</strong> <strong>public</strong>.<br />
11.50% 59.80%<br />
Panel B. Capital Structure / Cost of Capital<br />
A benefit of the IPO was to decrease the total cost of capital. 38.20% 34.40%<br />
Yes, No, or Don't Know<br />
We plan to issue more debt within two years. 33.70% 38.80%<br />
Our present debt/equity mix is optimal.<br />
49.50% 43.30%<br />
Panel C. Pecking Order<br />
A benefit of the IPO was that it allowed our company to reduce its debt. 44.40% 37.70%<br />
A benefit of the IPO was to reduce open bank loans. 37.40% 43.30%<br />
Yes, No, or Don't Know<br />
Highly leveraged companies are more likely to <strong>go</strong> <strong>public</strong>. 47.90% 21.50%<br />
Companies with higher interest rates are more likely to <strong>go</strong> <strong>public</strong>. 37.30% 27.50%<br />
Panel D. Change Control<br />
A benefit of the IPO was that it allowed our company increase options to 22.20% 46.70%<br />
change control of company.<br />
Panel E. VC Harvest<br />
A benefit of the IPO was that it allowed the venture capitalist to sell their interest and<br />
move on. 16.30% 65.30%<br />
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Panel F. Optimal Dispersion<br />
A benefit of the IPO was that it allowed original owners to diversify their interests. 46.00% 38.10%<br />
A benefit of the IPO was that it allowed the sale of some of the owner’s shares. 30.20% 54.20%<br />
A benefit of the IPO was that it increased liquidity. 82.50% 4.90%<br />
A benefit of the IPO was that it improved our secondary market. 40.30% 17.70%<br />
Yes, No, or Don't Know<br />
Our company has made a secondary offering since the IPO. 10.90% 88.50%<br />
Our company plans a secondary offering within two years.<br />
48.30% 19.20%<br />
Panel G. Control Issues<br />
A disadvantage of the IPO was that it reduced control. 38.20% 25.20%<br />
A benefit of the IPO was that it increased the alliance of shareholders and management. 23.30% 35.70%<br />
Panel H. Founder Cash-Out<br />
A benefit of the IPO was that it allowed for the retirement of the original owner. 3.80% 82.70%<br />
Panel I. Increased Reputation<br />
A benefit of the IPO was that it improved market perception of stock. 48.70% 20.20%<br />
A benefit of the IPO was prestige of being on an exchange. 39.60% 25.00%<br />
A benefit of the IPO was the enhancement of media attention. 28.50% 33.20%<br />
Panel J. Public Scrutiny<br />
A disadvantage of the IPO was that it made our company suddenly open to <strong>public</strong><br />
scrutiny. 68.90% 10.90%<br />
Panel K. Market Timing Theories<br />
A benefit of our IPO was that the market was undervalued when we went <strong>public</strong>. 36.70% 33.20%<br />
A benefit of the IPO was that the market was strong at the time of IPO. 59.20% 25.50%<br />
Yes, No, or Don't Know<br />
Companies with higher market to book ratios are more likely to <strong>go</strong> <strong>public</strong>. 49.20% 17.00%<br />
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Table 2. A Closer Look at Brau and Fawcett (2006a) Motivation Question for IPOs from 2000-2002<br />
Panel A.<br />
How important were/are the following motivations for conducting an IPO Not Important<br />
Very<br />
Important<br />
1 2 3 4 5 Total Reply<br />
a. To minimize our cost of capital 24 35 37 39 32 167<br />
b. Debt is becoming too expensive 66 49 29 17 7 168<br />
c. Our company has run out of private equity 59 32 30 26 20 167<br />
d. To create <strong>public</strong> shares for use in future acquisitions 11 24 34 60 41 170<br />
e. To allow one or more principals to diversify personal holdings 38 27 30 49 26 170<br />
f. To allow venture capitalists (VCs) to cash-out 68 20 26 30 24 168<br />
g. To enhance the reputation of our company 19 23 44 59 24 169<br />
h. To establish a market price/value for our firm 12 23 48 60 27 170<br />
i. To broaden the base of ownership 31 22 39 53 25 170<br />
j. To attract analysts' attention 35 40 43 39 11 168<br />
Panel B.<br />
How important were/are the following motivations for conducting an IPO Not Important<br />
Very<br />
Important<br />
1 2 3 4 5 Mean<br />
d. To create <strong>public</strong> shares for use in future acquisitions 6% 14% 20% 35% 24% 3.56<br />
h. To establish a market price/value for our firm 7% 14% 28% 35% 16% 3.39<br />
g. To enhance the reputation of our company 11% 14% 26% 35% 14% 3.27<br />
a. To minimize our cost of capital 14% 21% 22% 23% 19% 3.12<br />
i. To broaden the base of ownership 18% 13% 23% 31% 15% 3.11<br />
e. To allow one or more principals to diversify personal holdings 22% 16% 18% 29% 15% 2.99<br />
j. To attract analysts' attention 21% 24% 26% 23% 7% 2.71<br />
f. To allow venture capitalists (VCs) to cash-out 40% 12% 15% 18% 14% 2.54<br />
c. Our company has run out of private equity 35% 19% 18% 16% 12% 2.50<br />
b. Debt is becoming too expensive 39% 29% 17% 10% 4% 2.11<br />
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Panel C. Withdrawn IPOs<br />
How important were/are the following motivations for conducting an IPO Not Important<br />
Very<br />
Important<br />
1 2 3 4 5 Mean<br />
d. To create <strong>public</strong> shares for use in future acquisitions 0% 11% 11% 46% 32% 4.00<br />
g. To enhance the reputation of our company 5% 11% 16% 51% 16% 3.62<br />
h. To establish a market price/value for our firm 3% 11% 35% 32% 19% 3.54<br />
a. To minimize our cost of capital 11% 19% 22% 27% 22% 3.30<br />
i. To broaden the base of ownership 14% 14% 35% 19% 19% 3.16<br />
j. To attract analysts' attention 16% 11% 38% 30% 5% 2.97<br />
f. To allow venture capitalists (VCs) to cash-out 30% 8% 19% 27% 16% 2.92<br />
e. To allow one or more principals to diversify personal holdings 32% 14% 24% 19% 11% 2.62<br />
c. Our company has run out of private equity 43% 14% 16% 14% 14% 2.41<br />
b. Debt is becoming too expensive 51% 24% 11% 14% 0% 1.86<br />
Panel D. Successful IPOs<br />
How important were/are the following motivations for conducting an IPO Not Important<br />
Very<br />
Important<br />
1 2 3 4 5 Mean<br />
f. To allow venture capitalists (VCs) to cash-out 7% 8% 28% 36% 22% 3.57<br />
a. To minimize our cost of capital 9% 15% 21% 29% 26% 3.48<br />
j. To attract analysts' attention 9% 12% 24% 35% 20% 3.44<br />
c. Our company has run out of private equity 17% 9% 20% 37% 17% 3.28<br />
d. To create <strong>public</strong> shares for use in future acquisitions 21% 18% 19% 20% 21% 3.02<br />
i. To broaden the base of ownership 22% 21% 17% 25% 15% 2.91<br />
b. Debt is becoming too expensive 16% 25% 21% 28% 9% 2.89<br />
g. To enhance the reputation of our company 32% 19% 19% 15% 14% 2.61<br />
e. To allow one or more principals to diversify personal holdings 35% 16% 19% 15% 14% 2.56<br />
h. To establish a market price/value for our firm 40% 31% 15% 9% 5% 2.08<br />
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Panel E. Never Tried<br />
Very<br />
Not Important<br />
Important<br />
How important were/are the following motivations for conducting an IPO 1 2 3 4 5 Mean<br />
i. To broaden the base of ownership 15% 9% 13% 43% 20% 3.43<br />
a. To minimize our cost of capital 7% 15% 26% 39% 13% 3.37<br />
d. To create <strong>public</strong> shares for use in future acquisitions 4% 28% 28% 26% 13% 3.15<br />
f. To allow venture capitalists (VCs) to cash-out 11% 26% 24% 37% 2% 2.93<br />
c. Our company has run out of private equity 24% 20% 20% 30% 7% 2.76<br />
j. To attract analysts' attention 20% 20% 37% 22% 2% 2.67<br />
g. To enhance the reputation of our company 35% 24% 17% 17% 7% 2.37<br />
h. To establish a market price/value for our firm 28% 30% 26% 9% 7% 2.35<br />
e. To allow one or more principals to diversify personal holdings 59% 7% 7% 15% 13% 2.17<br />
b. Debt is becoming too expensive 33% 33% 24% 9% 2% 2.15<br />
Panel F. No VC-Backing<br />
Very<br />
Not Important<br />
Important<br />
How important were/are the following motivations for conducting an IPO 1 2 3 4 5 Mean<br />
d. To create <strong>public</strong> shares for use in future acquisitions 12% 12% 16% 35% 24% 3.47<br />
h. To establish a market price/value for our firm 10% 10% 29% 27% 24% 3.45<br />
a. To minimize our cost of capital 21% 15% 13% 23% 28% 3.21<br />
g. To enhance the reputation of our company 17% 15% 21% 27% 21% 3.21<br />
i. To broaden the base of ownership 27% 8% 20% 31% 14% 2.98<br />
e. To allow one or more principals to diversify personal holdings 24% 24% 12% 20% 18% 2.84<br />
j. To attract analysts' attention 30% 19% 17% 23% 11% 2.66<br />
b. Debt is becoming too expensive 33% 25% 19% 15% 8% 2.40<br />
c. Our company has run out of private equity 38% 21% 17% 11% 13% 2.38<br />
f. To allow venture capitalists (VCs) to cash-out 60% 9% 17% 11% 4% 1.91<br />
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Panel G. VC-Backing<br />
Very<br />
Not Important<br />
Important<br />
How important were/are the following motivations for conducting an IPO 1 2 3 4 5 Mean<br />
d. To create <strong>public</strong> shares for use in future acquisitions 3% 13% 20% 31% 33% 3.79<br />
g. To enhance the reputation of our company 1% 10% 24% 47% 17% 3.69<br />
h. To establish a market price/value for our firm 3% 7% 33% 40% 17% 3.61<br />
i. To broaden the base of ownership 10% 13% 27% 31% 19% 3.36<br />
f. To allow venture capitalists (VCs) to cash-out 17% 17% 21% 23% 21% 3.14<br />
a. To minimize our cost of capital 14% 20% 26% 20% 19% 3.09<br />
j. To attract analysts' attention 9% 21% 31% 31% 7% 3.07<br />
e. To allow one or more principals to diversify personal holdings 26% 14% 24% 26% 10% 2.80<br />
c. Our company has run out of private equity 32% 14% 20% 17% 16% 2.71<br />
b. Debt is becoming too expensive 51% 30% 10% 9% 0% 1.77<br />
44