Lemons or Cherries? Growth Opportunities and Market Temptations in Going Public and Private

54 Pages Posted: 27 Jul 2009 Last revised: 11 Aug 2015

See all articles by Hadiye Aslan

Hadiye Aslan

Georgia State University - Department of Finance

Praveen Kumar

University of Houston - Department of Finance

Abstract

Is the decision to go public or private a stock market driven 'side-show' or does it have significant effects on investment and profitability‘ We address this issue using a comprehensive dataset of private and public companies in the UK during 1996-2006. Firms with high investment-financing needs, lower information production costs, and high industry market-to-book ratios are more likely to go public. In contrast to the literature, we find that capital investment and profitability increase substantially after the IPO. Consistent with the agency cost based theories of going private, firms decrease investment but increase profits after going private, especially firms bought out by private equity investors. By directly comparing ex ante characteristics of firms going public and private during the market bubble of 1996-2000 versus those doing so during 2001-2006, we highlight the importance of market conditions on the ownership structure decision.

Keywords: Going public and private, Investment, Financial constraints, Market timing

JEL Classification: G32, D23

Suggested Citation

Aslan, Hadiye and Kumar, Praveen, Lemons or Cherries? Growth Opportunities and Market Temptations in Going Public and Private. Journal of Financial and Quantitative Analysis, Vol. 46, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=1439755

Hadiye Aslan

Georgia State University - Department of Finance ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

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