why do firms go public? - Marriott School

In contrast to the preceding research, Schiozer, Oliveira, and Saito (2010) show for
Brazilian IPOs from 2005-2007, the decision to go public cannot be explained by a markettiming
function. Instead, Schiozer et al. show that greater growth opportunities (relative to
competitors) drives the decision to go public.
Having discussed the windows hypothesis, it is important to note that it should actually
be viewed, at least partly, as a timing issue, not a motive issue. Suppose entrepreneurs see the
frothy market and they feel it is a great time to issue, so they do. Did they issue then so they
would have overpriced equity to fuel growth Did they issue then because the overpriced equity
decreased their WACC Did they issue then because they could cash-out amid the market frenzy
and become deca-millionaires Because the windows hypothesis can be thought of as a timing
issue, Brau and Fawcett (2006a) includes the market timing question in the timing survey section
and not the motive section. The responding CFOs’ top two reasons for the timing of their IPOs
supports the windows hypothesis, with 83% agreeing “overall market conditions” were a factor
in the timing and 70% agreeing “industry conditions” were a timing factor.
Create shares for compensation
Holmstrom and Tirole (1993) and Schipper and Smith (1986) argue that publicly traded
stock allows for efficient compensation programs. This hypothesis suggests that firms will offer
more stock-based compensation schemes after the IPO. Because pre-IPO compensation data is
very difficult to come by, the direct test of this hypothesis with non-survey data is nearly
impossible. However, Graham and Harvey (2001) ask if issuing equity is motivated for providing
shares to employee bonus/stock option plans in their survey, covered subsequently.
Because other firms in the same industry have gone/Are going public
17