why do firms go public? - Marriott School

IPO proceeds from their sample are from secondary shares. Examination of their Table II, Panel A
(pg. 25 of their 2005 working paper version at http://ssrn.com/abstract=610988) shows that from
1990-2003, nearly 31% of Argentinean IPOs, 30% of Portuguese IPOs, and 23% of Spanish IPOs
consisted of all secondary shares. In these cases, it is clear that at least some insiders are cashing
out. For other countries, such as Hong Kong (0.4%), Taiwan (0.4%), and Japan (0.6%), very few
IPOs are all-secondary share issues. Interestingly however, Japan has the highest percentage of
combined (primary and secondary shares offered) IPOs at 85.8%. The combined IPOs for Japan
account for 53.4% of the primary proceeds and 34.3% of secondary proceeds (their Table II, Panel
B) of all Japanese IPOs. As displayed nicely in Kim and Weisbach (2005) for a broad international
panel of IPOs, the cash-out hypothesis is valid for some subsets and not for others.
To allow more dispersion of ownership
Chemmanur and Fulghieri (1999) argue that IPOs broaden the ownership base of the firm.
In their model, the benefits of an IPO are contrasted with the lower information-production costs
of being privately-held. Pagano et al. (1998) argue that the increased share liquidity of being
public creates value for IPO insiders according to market microstructure literature. Benninga,
Helmantel, and Sarig (2005) and Pastor, Taylor, and Veronesi (2009) present models in which the
IPO decision is a balance of diversification benefits and private benefits. Bodnaruk, Kandel,
Massa, and Simonov (2008) find empirical support for these models showing that firms with less
diversified owners are more likely to go public.
Pagano et al. (1998) test the dispersion hypotheses by arguing that riskier firms should be
more likely to go public and that controlling shareholders should sell a large portion of their
shares either in the IPO or shortly thereafter. (Note their second test also can apply to the cash-out
hypothesis.) They find that controlling shareholders divest very little in the IPO (-3.2%) and
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