why do firms go public? - Marriott School

More documents

Recommendations

Info

Fortune 500 firms for 1986 as classified in April, 1987. They received 176 useable surveys, for a 35% response rate. Pinegar and Wilbricht’s intent is to ask managers with which academic theories pertaining to capital structure they agree. (Their nine question survey is available at the back of their article.) Although they do not ask specifically why firms go public, they do ask, “Rank the following sources of long-term funds in order of preference for financing new investments (1 = first choice, 6 = last choice).” This specific question at least partially addresses the pecking order hypothesis of Myers and Majluf (1984), although the majority of these CFOs most likely have seasoned equity offerings (SEOs) in mind (and not IPOs) because they are predominantly public firms. Pinegar and Wilbricht report that nearly 69% of managers held a preference for the pecking order of financing, where 84% of respondents listed retained earnings as their most favored source of financing, and 72% listed straight debt as their second favored source. Next was convertible debt, followed by external common equity. Only preferred stock (straight and convertible) ranked lower than common stock. From these results, we can conclude that managers at least have preferences that align with the pecking order hypothesis. A second survey paper focusing on corporate finance in a broader sense is Graham and Harvey (2001). Graham and Harvey survey over 4,000 CFOs and receive 392 usable surveys (i.e., 9% response rate). Graham and Harvey construct a comprehensive survey that covers capital budgeting, cost of capital, and capital structure. Although they do not directly ask, “What motivates firms to go public,” they do ask, “Has your firm seriously considered issuing common stock If ‘yes,’ what factors affect your firm’s decisions about issuing common stock” (see their Table 8, pg. 216 and Figure 7, pg. 230; also see Graham and Harvey (2002) Figure 5, pg. 16). Graham and Harvey have a column in their Table 8 which reports the survey replies for private 23
firms. Of the 392 firms that replied to their survey, 37%, or 145 are privately-held. For these firms, their question can be interpreted as consideration for an IPO (since they are private firms). Ranked by the average response (0 = not important through 4 = very important), the first five reasons given for issuing equity (perhaps going public) by private firms are: providing shares for compensation (2.72), high stock price (1.83), sufficient profits to fund activities (1.80), misvaluation of stock (1.78), and maintaining target debt-to-equity (1.73). First, note that only one of the top five (and total 13 choices) is over a score of 2. So in the aggregate, none of the reasons for going public (i.e., issuing equity) is overly compelling to privately-held CFOs. Even with the low scores, the clear winner of this question for private firms is to provide shares for compensation schemes. The possible replies that deal with the classical arguments of optimal capital structure of cost of capital, rank no higher than the fifth most important reason. Related questions such as “common stock is our cheapest source of funds” (1.46) and “inability to obtain funds using debt, convertibles, or other sources” (1.42) receive much lower ratings. Thus, Graham and Harvey’s survey for their private-firm subset would suggest that the stock compensation theory is supported the most by practitioners. The next survey, one that gets closer to asking why firms go public, is Brau, Ryan, and DeGraw (2006). They survey 984 IPO firms from 1996-1998 and 2000-2002 in two rounds of surveys and receive 438 usable surveys for a response rate of 44.5%. In their Table 1 (pg. 487) Brau et al. (2006) list 12 possible theories on why firms go public, breaking them down into lifecycle and market-timing theories (following Ritter and Welch, 2002). As can be seen in the Brau et al. (2006) Table 3 (pp. 492-494), the surveyed CFOs were not asked directly why they went public, but were instead asked if certain aspects of the IPO were advantages or disadvantages or to answer yes or no to various statements. The construction of the going-public theories (their 24
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 and 20: The IPO hot issues/cycles phenomeno
Page 21 and 22: discussed above. As an example of t
Page 23: (Brau et al. (2004)) and a follow-o
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

why do firms go public? - Marriott School

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?