Why Do Firms Go Public

Topics: Corporate finance, Stock market, Initial public offering Pages: 41 (14046 words) Published: June 7, 2013
WHY DO FIRMS GO PUBLIC?
Forthcoming in the Oxford Handbook of Entrepreneurial Finance

James C. Brau, PhD, CFA Professor of Finance Editor, Journal of Entrepreneurial Finance

July 1, 2010

Department of Finance Marriott School Brigham Young University 640 Tanner Building Provo, Utah 84602 Phone: 801.318.7919 Fax: 801.422.0741

Electronic copy available at: http://ssrn.com/abstract=1649008

WHY DO FIRMS GO PUBLIC?

Six months after he founded Netscape, Clark agitated for the company to go public. The company had few revenues, no profits, and a lot of new employees. No one else inside the company thought it should do anything but keep its head down and try to become a viable enterprise. "Jim was pressing for us to go public way before anyone else," recalls Marc Andreessen. It turned out there was a reason for this. He'd seen a boat called Juliet. He wanted one just like it, only bigger. To get it, he needed more money. By then the decision was not Clark's alone to make. The company had hired a big-name CEO, Jim Barksdale, and had a proper board of directors. Barksdale didn't want to go public. He thought the company had enough problems trying to figure out how to turn a profit without having to explain itself to irate shareholders. But this time Clark had power, through his equity stake. He called a meeting to discuss the initial public offering (IPO), and stacked it with lawyers and bankers who stood to reap big fees from a public share offering and who were, as a result, enthusiastic about his initiative. At that meeting Barksdale finally capitulated. Eighteen months after Netscape was created, and before it had made a dime, Netscape sold shares in itself to the public. On the first day of trading the price of those shares rose from $12 apiece to $48. Three months later it was at $140. It was one of the most successful share offerings in the history of the US stock markets, and possibly the most famous. There was only one explanation for its success: the market now saw the future through Clark's eyes. "People started drinking my KoolAid," says Clark … What the IPO did was give anarchy credibility. Lewis (2001)

INTRODUCTION 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

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Electronic copy available at: http://ssrn.com/abstract=1649008

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...

References: Table 2. A Closer Look at Brau and Fawcett (2006a) Motivation Question for IPOs from 2000-2002
Panel A
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