why do firms go public? - Marriott School

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US IPOs from 1985-2003, Brau, Couch, and Sutton (2010) find that only 45 of the firms (3%) become targets within one year. Thus for 97% of the sample, this hypothesis is not supported (at least for the first year of being public). Using Italian data, Pagano et al. (1998) test the subsequent sell-out hypothesis by predicting a high incidence of control transfers after the firm goes public. They find that nearly 14% of their IPO sample sells out the controlling stake to an outsider in the three years after the IPO. They report that this frequency of sell-out is significantly greater than a sample of privatelyheld firms, providing evidence that the IPO facilitated a first step of a sell-out for 14% of the sample. In addition, Pagano, Panetta, and Zingales (1996) show for a larger sample of Italian firms that 16.4% of the IPOs sell controlling ownership stakes in the three years following the IPO. Of course, the Brau, Couch, and Sutton (2010) and Pagano et al. (1996, 1998) papers cannot detect if the entrepreneurs in those samples of 3%, 14%, and 16% had planned to divest at the time of the IPO or if they had decided to divest sometime in the one or three years after the IPO (i.e., cannot explicitly call their findings a motive). Taken together, the Brau, Couch, and Sutton (2010) and Pagano et al. (1996, 1998) papers provide indirect evidence that for a small subsample of firms, the IPO may be a first step in a total sell-out (or at least transfer of control). For the other 84% of Italian firms and 97% of US firms in their samples, one of the other hypotheses is most likely driving the IPO decision. (Although not a dominant motivation for an IPO, see Brau, Sutton, and Hatch (2010) for a study of firms that conduct an IPO and then are shortly sold off.) As a tool to cash-out/Insider liquidity Continuing the idea of the IPO as a harvest, Black and Gilson (1998) argue that the IPO gives VCs the opportunity to exit, providing an attractive harvest strategy (see also Lerner (1994)). 9
Professional private equity investors such as VCs desire to generate returns for their investors by harvesting their investments. As discussed in Brau, Francis, and Kohers (2003) and in Brau, Sutton, and Hatch (2010) the IPO can provide such a cash-out for professional investors. Along with VCs, founders and other insiders can use the IPO to at least partially cash-out by selling secondary shares in the IPO (e.g., Ang and Brau (2003) and Brau, Li, and Shi (2007)). In the language of Pagano et al. (1998), the IPO provides original owner personal diversification (see also Pagano (1993)). The cash-out theory offers the hypothesis that VCs and other insiders will regularly sell personally-owned (i.e., secondary shares) in the IPO. This hypothesis is certainly consistent for a large portion of European IPOs in the 1980s and early 1990s. Jenkinson and Ljungqvist (2001) report that of IPOs in Germany, 23% contained all secondary shares. Furthermore, of IPOs in Portugal, a full 2/3 contained only secondary shares. When an issue contains only secondary shares, typically no new shares are created, and the raised proceeds go directly to existing, selling shareholders (and not for company investment). It seems to follow that for the 2/3 of Portuguese IPOs that sold only secondary shares, the motive was to allow insiders to cash out (at least partially). Parsing between firms that raise external equity (sell primary shares) and those that do not (sell secondary shares), Pagano et al. (1998) show that 41% of the time their sample firms sell primary shares and 41% of the time they sell secondary shares. Thus, they argue that for a subset of the firms, the insider liquidity hypothesis is supported. Kim and Weisbach (2005) examine nearly 17,000 IPOs from 1990-2003 for 38 countries and document that IPOs that include secondary shares seem to have varying motivations and are fundamentally different than IPOs that issue primary shares. Primary share-selling IPOs demonstrate a greater demand for new capital, increased investment, higher repayment of debt, increases in cash, and greater subsequent SEO activity. Kim and Weisbach find that 21% of the 10
Page 1 and 2: WHY DO FIRMS GO PUBLIC Forthcoming
Page 3 and 4: data. When dealing with the topic o
Page 5 and 6: I have found through surveys of, an
Page 7 and 8: To overcome borrowing constraints/I
Page 9: the firm is over-valued. Anticipati
Page 13 and 14: actually increase their ownership i
Page 15 and 16: To create public market so the firm
Page 17 and 18: good news release so they do not se
Page 19 and 20: The IPO hot issues/cycles phenomeno
Page 21 and 22: discussed above. As an example of t
Page 23 and 24: (Brau et al. (2004)) and a follow-o
Page 25 and 26: firms. Of the 392 firms that replie
Page 27 and 28: firms that indicate they plan to is
Page 29 and 30: [Insert Table 2 about here.] Table
Page 31 and 32: Because other chapters in this text
Page 33 and 34: REFERENCES Aggarwal, R., L. Krigman
Page 35 and 36: Brau, J. C., N. Sutton, and N. Hatc
Page 37 and 38: Lowry, M, and G. W. Schwert. 2002.
Page 39 and 40: Schultz, P. 2003. “Pseudo Market
Page 41 and 42: Panel F. Optimal Dispersion A benef
Page 43 and 44: Panel C. Withdrawn IPOs How importa
Page 45: Panel G. VC-Backing Very Not Import

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