why do firms go public? - Marriott School

The replies, reported in Brau and Fawcett (2006a) Table II (pg. 407) surprised the
authors. The number one motivation for an IPO revealed by CFOs (in the aggregate) was to
create public shares for use in future acquisitions (nearly 60% agreeing) – see also Brau and
Fawcett (2006b) Figure 1 (pg. 108). This possibility was motivated by discussions with Professor
James Ang when I was one of his students around 1997. I included it as a hypothesis in Brau,
Francis, and Kohers (2003), which led to Brau and Fawcett (2006a), which in turn led to Brau,
Couch, and Sutton (2010). (Just a note, Kohers and Sutton are the same coauthor, Ninon’s
maiden name is Kohers.) Graham and Harvey (2001) do report that nine of their surveyed firms
indicated that they issued common stock because it is the preferred currency for making
acquisitions (pg. 210); however, this represents only 2.3% of their sample (of private and public
firms).
In the aggregate, Brau and Fawcett report that the following motivations for an IPO
received “low support”: minimize cost of capital/optimal capital structure, pecking order of
financing, and to create an analyst following (see their Appendix C). The following received
“moderate support”: as a cash-out tool, to increase the publicity/reputation of the firm, and to
allow more dispersion of ownership. Along with creating public shares for acquisitions, to
establish a market value for the firm received “strong support.” These conclusions are all based
on aggregate responses. Brau and Fawcett (2006a) also parse the data based on IPO status
(withdrawn, successful, not tired), size of the firm (revenues), age of the firm, high-tech status of
the firm, underwriter prestige, venture capital backing, insider ownership decrease, overhang,
IPO demand, and initial return hotness. For the aggregate sample, Brau and Fawcett report the
mean of each CFO response and the percentage of CFOs who reply either 4 or 5. For all of the
subgroups, they report only the means.
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