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A Theory of the Going-Public Decision

Posted: 6 Dec 1998  

Thomas J. Chemmanur

Boston College - Carroll School of Management

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

Abstract

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 trade-off 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.

JEL Classification: G31, G32

Suggested Citation

Chemmanur, Thomas J. and Fulghieri, Paolo, A Theory of the Going-Public Decision. Review of Financial Studies, Vol. 12, Issue 2. Available at SSRN: https://ssrn.com/abstract=140409

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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