why do firms go public? - Marriott School

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• As a tool to cash-out: IPO firms, especially those with VCs, will frequently include secondary shares in the IPO. • To allow more dispersion of ownership: IPO firms will experience an increase in the ownership base after the IPO. • Publicity/First-Mover Advantage: IPO firms will experience a significant increase in press coverage or other publicity during and after the IPO process. • To create public market so the firm has the currency of shares for acquisitions: Many IPO firms will participate in the M&A market shortly after going public, especially as acquirers (to separate from the two-stage sell-out hypothesis). • To create an analyst following: IPO firms will experience a favorable analyst following, on average. • Windows of Opportunity: IPOs that issue during opportunistic windows will underperform after the IPO (e.g., 1, 3, 5 years). • Create shares for compensation: IPO firms will offer more stock-based compensation schemes after the IPO. • Because other firms in the same industry have gone/Are going public: IPO firms will herd, particularly in industries. • In Netscape’s case, to buy a boat: Jim Clark will be able to buy his yacht after the IPO. SURVEY EVIDENCE OF GOING PUBLIC THEORIES As demonstrated above, the challenge of empirically testing the motives of why insiders in firms go public is the limitation of proxies to accurately measure motives. Researchers have thus worked hard to identify appropriate instruments in attempts to disentangle the theories 19
discussed above. As an example of this challenge, suppose it is observed after an IPO that a) the firm’s WACC decreased, b) the firm had worked through the pecking order of financing prior to issuing, c) a sizable portion of the shares in the IPO were secondary shares, d) press coverage increased around the IPO, e) the IPO received preferable analyst treatment, f) the firm performed under a risk-matched benchmark for a year, and then finally g) the firm was acquired. These seven observations support at least seven of our hypotheses above. The researcher has been able to provide support for seven possible motivations, but she is left to wonder which of the seven, or which combination of the seven, actually motivated the entrepreneurs to conduct the IPO. This limitation of publicly available data is what motivates the use of survey-based methodology. Although not as widely accepted in Finance as in other disciplines, survey methods add a new dimension to exploring the question of why entrepreneurs choose to go public. Prior to discussing the extant survey data on the topic, and some new data that has not yet been published, a discussion of publicly available data in IPO research is appropriate (or at least an interesting aside). PUBLICLY AVAILABLE DATA In the early days of IPO finance research, scholars were forced to hand-pick data from sources such as the Investment Dealers’ Digest (IDD) and the Dow Jones Broad Tape. As late as 1997, I had to drive over 150 miles to access IDD at a university library in a different town to extract secondary shares sold in IPOs for my dissertation. (It wouldn’t have been too bad, but the Florida Gators managed to beat the Florida State Seminoles in football with only two minutes left in the game at the very time I was extracting data. With the win, the Gators stopped the Seminoles from going to the national championship game. The roars from the Swamp still haunt me.) 20
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 and 10: the firm is over-valued. Anticipati
Page 11 and 12: Professional private equity investo
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: The IPO hot issues/cycles phenomeno
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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