Why Do Firms Go Public?
Oxford Handbook of Entrepreneurial Finance, Forthcoming
45 Pages Posted: 28 Jul 2010
Date Written: July 1, 2010
Why entrepreneurs choose to conduct an IPO has received relatively little attention when compared to other IPO topics such as initial underpricing and the long-run performance of IPOs. In this chapter, I summarize, analyze, and expand the current discussion on why firms go public. I begin by discussing the theoretical underpinnings and testable hypotheses offered thus far in the academic literature. I then discuss the empirical evidence for (and against) each of these potential explanations after presenting the intuition behind them. I focus on two types of empirical research: a) large-sample publicly-available financial and stock data and b) proprietary survey data. When dealing with the topic of why firms go public, both approaches to research contain their own challenges. Publicly available data sources typically do not contain detailed information on private firms (particularly in the US). Without private firm data, it is difficult to compare private and public firms to isolate the factors determining why firms go public. In addition, it is problematic to ascertain motives for the factors observed in these types of studies.
Survey data, on the other hand, has not been widely accepted in the Finance discipline and has its own challenges in collecting. After discussing the theories and traditional empirical research on why firms go public, I discuss four surveys that have either indirectly or directly addressed the motives for going public.
After reviewing and discussing the existing evidence, I provide an in-depth analysis of the Brau and Fawcett (2006a) survey question, “How important were/are the following motivations for conducting an IPO?” In the conclusion, I attempt to pull all of the theories together and argue that all of them are valid, in certain instances, for certain entrepreneurs. In some samples, specific theories have greater efficacy. In other samples, these same theories have weak explanatory power.
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