To Be (Public) or Not to Be (Public): A New Test

Abstract

We propose a new test of motives to be a public firm that is based on the observation that firms can become public by issuing either equity or debt. Thus, one can examine the determinants of the private-public decision by comparing firms that are public with equity to firms that are public with debt. The advantage of this approach is the availability of standardized COMPUSTAT data about both types of public firms.

We find that there are many firms that are public only with debt (Public Debt firms) and that they are significantly different from firms that are public only with Equity (Public Equity firms). Specifically, Public Equity firms have higher sales volatility, volatility of returns on assets, and R&D intensity, and lower fraction of assets in place than Public Debt firms. This suggests that Public Equity firms are exposed to more information asymmetry than Public Debt firms. We find the same differences for financially unconstrained firms. We also find that firms with significant investments and R&D intensity are more likely to be public with equity than with debt. Examining firms around the time they transition from being private to being public, we find that transitioning firms have abundant cash and pay significant dividends both before and after the transition. Lastly, Public Debt firms are more profitable than Public Equity firms. We interpret our results as indicating that agency and information collection motives dominate information asymmetry considerations in the private-public decision.

Keywords: Public ownership, private ownership, IPO, agency costs, information collection

JEL Classification: G29, G32, G34