The Dynamics of Going Public

Abstract

This paper develops a real options model in which firms may use the timing of their IPOs to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares and underprice more during cold markets, and that issuers are younger on average during hot markets.

Keywords: IPOs, SEOs, real options, signalling games

JEL Classification: G14, G31, G32