Empirics
Bernstein, S. (2015). Does going public affect innovation?. The Journal of Finance, 70(4), 1365-1403.
This paper investigates the effects of going public on innovation by comparing the innovation activity of firms that go public with firms that withdraw their initial public offering (IPO) filing and remain private. NASDAQ fluctuations during the bookbuilding phase are used as an instrument for IPO completion. Using patent-based metrics, I find that the quality of internal innovation declines following the IPO, and firms experience both an exodus of skilled inventors and a decline in the productivity of the remaining inventors. However, public firms attract new human capital and acquire external innovation. The analysis reveals that going public changes firms’ strategies in pursuing innovation.
Black, B.S. and Gilson, R.J. (1998) ‘Venture capital and the structure of capital markets: banks versus stock markets’, Journal of Financial Economics, 47(3), pp. 243–277.
The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.
Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. The Journal of Finance, 61(1), 399-436.
We survey 336 chief financial officers (CFOs) to compare practice to theory in the areas of initial public offering (IPO) motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is to facilitate acquisitions. CFOs base IPO timing on overall market conditions, are well informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm-specific characteristics. Finally, we find the main reason for remaining private is to preserve decision-making control and ownership.
Doidge, C., Karolyi, G.A. and Stulz, R.M. (2017) ‘The U.S. listing gap’, Journal of Financial Economics, 123(3), pp. 464–487.
Relative to other countries, the U.S. now has abnormally few listed firms. This “U.S. listing gap” is consistent with a decrease in the net benefit of a listing for U.S. firms. Since the listing peak in 1996, the propensity to be listed is lower for all firm size categories and industries, the new list rate is low, and the delist rate is high. The high delist rate accounts for 46% of the listing gap and the low new list rate for 54%. The high delist rate is explained by an unusually high rate of acquisitions of publicly listed firms.
Ewens, M. and Farre-Mensa, J. (2020) ‘The Deregulation of the Private Equity Markets and the Decline in IPOs’, The Review of Financial Studies, 33(12), pp. 5463–5509.
The deregulation of securities laws—in particular the National Securities Markets Improvement Act (NSMIA) of 1996—has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an initial public offering (IPO) market failure. Rather, founders are using their increased bargaining power vis-à-vis investors to stay private longer.
Maksimovic, V. and Pichler, P. (2001) ‘Technological Innovation and Initial Public Offerings’, The Review of Financial Studies, 14(2), pp. 459–494.
This article shows how both technological and competitive risks affect the timing of private and initial public offerings in an emerging industry. Early private financing occurs in industries that are perceived to be risky, with high development costs and low probability of being displaced by technologically superior rivals. Early public financing occurs in industries perceived to be viable, with low development costs and low probability of displacement. Due to feedback effects between financial and product markets, the value of investors’ proprietary information is greater in private than in initial public offerings. This has implications for underpricing.
Pagano, M., Panetta, F. and Zingales, L. (1998) ‘Why Do Companies Go Public? An Empirical Analysis’, The Journal of Finance, 53(1), pp. 27–64.
Using a large database of private firms in Italy, we analyze the determinants of initial public offerings (IPOs) by comparing the ex ante and ex post characteristics of IPOs with those of private firms. The likelihood of an IPO is increasing in the company’s size and the industry’s market-to-book ratio. Companies appear to go public not to finance future investments and growth, but to rebalance their accounts after high investment and growth. IPOs are also followed by lower cost of credit and increased turnover in control.
Huang, Rongbing, Jay R. Ritter, and Donghang Zhang. “IPOs and SPACs: Recent Developments,” January 6, 2023. Annual Review of Financial Economics
After two decades of low initial public offering (IPO) activity and a number of regulatory changes, the number of IPOs of both operating companies and special purpose acquisition companies (SPACs) boomed in the U.S. in 2021 before collapsing in 2022. In recent years, surging valuations have resulted in many private companies achieving “unicorn” status, a valuation of $1 billion or more, partly fueled by investments from mutual funds. Many of the unicorns that have gone public have done so with dual-class share structures. We compare three alternative mechanisms for going public, including traditional IPOs, mergers with SPACs, and direct listings. The most common exit for successful venture capital-backed companies, however, continues to be by merging with a larger company.
Zingales, L. (1995) ‘Insider Ownership and the Decision to Go Public’, The Review of Economic Studies, 62(3), pp. 425–448.
This paper focuses on the role of an initial public offering (IPO) in maximizing the proceeds an initial owner obtains in selling his company. In deciding whether to undertake an IPO, and what fraction of ownership to retain, the initial owner must balance two factors. By selling to dispersed shareholders, he maximizes his proceeds from the sale of cash flow rights. However, by directly bargaining with a potential buyer, he maximizes his proceeds from the sale of control rights. Whether a company should be private or public, as well as the insider’s ownership in public companies, depends on the particular combination of majority control and dispersed ownership which maximizes the incumbent’s wealth. The model provides implications on the strategy to be followed in selling a company as well as on the timing of IPOs and going-private transactions.
Theory
Chemmanur, T.J. and Fulghieri, P. (1999) ‘Theory of the Going-Public Decision’, The Review of Financial Studies.
We address the question: At what stage in its life should a firm go public rather than undertake its projects using private equity financing? In our model a firm may raise external financing either by placing shares privately with a risk-averse venture capitalist or by selling shares in an IPO to numerous small investors. The entrepreneur has private information about his firm’s value, but outsiders can reduce this informational disadvantage by evaluating the firm at a cost. The equilibrium timing of the going-public decision is determined by the firm’s tradeoff between minimizing the duplication in information production by outsiders (unavoidable in the IPO market, but mitigated by a publicly observable share price) and avoiding the risk-premium demanded by venture capitalists. Testable implications are developed for the cross-sectional variations in the age of going public across industries and countries.
Ferreira, D., Manso, G. and Silva, A. (2014) ‘Incentives to Innovate and the Decision to Go Public or Private’, The Review of Financial Studies.
We model the impact of public and private ownership structures on firms incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early.