why do firms go public? - Marriott School

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term increase in investment, but the increase does not persist. As for leverage, independent firms reduce their leverage immediately with persistence. On the other hand, carve-outs do not immediately reduce leverage, but do so in the long-run. For payout, no significant changes are detected after the IPO, in accordance with the prediction. Overall, Pagano et al (1998) provide mixed evidence for the borrowing constraint hypothesis. As we will see going forward, this mixed evidence conclusion will apply to all of the going public theories. The question soon becomes, which theories apply to which subsets of firms To test the bank bargaining power hypothesis, Pagano et al. (1998) posit that firms facing higher interest rates and more concentrated credit sources should be more likely to go public. Credit cost is approximated with the ratio of the firm’s interest rate scaled by an average interest factor. Credit concentration is measured with a Herfindahl index of the lines of credit by all of its lenders. With post-IPO data, credit should become cheaper and more available for the newly public firm. Pagano et al. (1998) Table III (pg. 44) reports that neither the bank rate nor the credit concentration is a determining factor for the decision to go public. Using post-IPO data however, indicates that the cost of credit decreases for independent IPOs and the concentration of credit is reduced (particularly for independent IPOs). Thus, the IPO offering data does not support the bargaining power hypothesis; but the post-IPO data does. Asymmetric information/Pecking order of financing Based on asymmetric information between managers and investors and possible stock price misvaluation, Myers and Majluf (1984) and Myers (1984) argue for a pecking order of financing: internal equity, debt financing, and then external equity. This line of logic asserts that outside investors take the issuance of external equity as a negative signal, that management feels 7
the firm is over-valued. Anticipating investor negative sentiment, management will do their best to grow the firm with internal equity (i.e., retained earnings) first, and then debt, and then with external equity as a last resort. The pecking order offers the hypothesis that managers will issue equity only after exhausting retained earnings and debt capacity. The inherent assumption of the pecking order theory is that the firm needs more financing. The signaling literature (e.g., Leland and Pyle (1977)) and the market timing literature (e.g., Schultz (2003) and Alti (2005)) both suggest validity for the asymmetric information underpinnings of the pecking order. However, the literature on IPO underpricing (e.g., Stoll and Curley (1970), Logue (1973)) suggests IPOs are often in high demand (priced above investment bank estimates of fair value) and the IPO long-run performance literature (e.g., Ritter (1991)) suggests that equity is often overvalued at issue. Both of these observations are contrary to the pecking order underlying logic. Admittedly, these inferences from other literature threads are not direct tests of the pecking order hypothesis; however, as with the WACC hypothesis, direct non-survey empirical tests here are very difficult. To establish a market price for subsequent sell-out The notion of a harvest or exit event for entrepreneurs has prompted several lines of literature addressing why firms go public. This first line argues that IPO insiders are interested in going public to establish a market price for their firm as a first step in cashing out. The second step would then be a sell-out – selling the firm outright at the hopefully higher market value. This line of literature stems mainly from Zingales (1995) and Mello and Parsons (1998). This literature offers the hypothesis that IPO firms will become targets or insiders will transfer control fairly quickly after going public. The target hypothesis is based on risk-averse insiders having incentives to sell the firm shortly after establishing a market price. Studying 4,795 8
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: To overcome borrowing constraints/I
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 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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