Ownership Structure and the Life-Cycle of the Firm: A Theory of the Decision to Go Public

Abstract

This paper presents a theory of initial public offerings based on the idea that the optimal ownership structure of a company changes over the life cycle of the firm. Insiders take the company public when they have lost the comparative advantage over outsiders in gathering information to evaluate the firm's growth prospects. The size of the share sold to the public depends on the relative abilities of the market and insiders to gather this information and on the frictions in the going-public process. Intermediaries help to reduce these frictions and lead to a more efficient allocation if IPOs are conducted more frequently. Discrimination between different classes of investors may be beneficial. Learning by the market about projects in a new industry can lead to a clustering of new issues (hot issue markets).

Keywords: Initial public offerings, going public, underwriting

JEL Classification: G24, G32