Why Do Firms Go Public? The Role of the Product Market

28 Pages Posted: 3 Mar 2012

See all articles by Abe de Jong

Abe de Jong

affiliation not provided to SSRN

Carel Huijgen

University of Groningen - Faculty of Economics and Business

Teye A. Marra

University of Groningen - Faculty of Economics and Business

Peter Roosenboom

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Date Written: January/February 2012

Abstract

This paper investigates the effect of product market characteristics on the decision to go public. When firms decide to go public or remain private, they trade off product market related costs and benefits. Costs arise from the loss of confidential information to competitors, e.g., in the IPO prospectus and subsequent mandated public disclosures, while benefits emerge from raising capital allowing the firm to strengthen its position in the product market. Our results show that UK firms are more likely to go public when they operate in a more profitable industry and in an industry with lower barriers to entry. These firms are more likely to go public in order to improve their position in the product market and to deter new entrants into the industry. However, firms from more competitive industries and firms with smaller market share are less likely to go public. For these firms the loss of confidential information to rivals outweighs the benefits of going public.

Keywords: going public, initial public offering, product market competition, confidential information

Suggested Citation

Jong, Abe de and Huijgen, Carel A. and Marra, Teye A. and Roosenboom, Peter, Why Do Firms Go Public? The Role of the Product Market (January/February 2012). Journal of Business Finance & Accounting, Vol. 39, Issue 1‐2, pp. 165-192, 2012, Available at SSRN: https://ssrn.com/abstract=2015148 or http://dx.doi.org/10.1111/j.1468-5957.2011.02271.x

Abe de Jong (Contact Author)

affiliation not provided to SSRN

No Address Available

Carel A. Huijgen

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands
+3150 363 7206 (Phone)

Teye A. Marra

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Peter Roosenboom

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T09-56
3000 DR Rotterdam
Netherlands
+31 10 40 82255 (Phone)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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