Pre‑Ipo Operational and Financial Decisions

Management Science, Vol. 50, No. 7, pp. 935-948, July 2004

Posted: 31 May 2006

See all articles by Volodymyr Babich

Volodymyr Babich

McDonough School of Business, Georgetown University

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Abstract

Many owners of growing privately-held firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: What is the right time to make an IPO and How should operational and financial decisions be coordinated to increase the likelihood of a successful IPO Financial and operational decisions in this problem are linked because adequate financial capital is crucial for operational decisions to be feasible and operational decisions affect the firm's access to financial resources. The IPO event is treated as a stopping time in an infinite-horizon discounted Markov decision process. Unlike traditional stopping time models, at every stage the model includes other decisions such as production, sales and loan size. The results include (1) characterization of an optimal capacity-expansion policy, (2) sufficient conditions for a monotone threshold rule to yield an optimal IPO decision, and (3) algorithmic implications of results in (1) and (2).

Keywords: joint operational and financial decisions, capacity expansion, stopping time, start-up, monotone threshold policies

JEL Classification: C60, C61, C63, G31, G32, L21

Suggested Citation

Babich, Volodymyr and Sobel, Matthew J. and Sobel, Matthew J., Pre‑Ipo Operational and Financial Decisions. Management Science, Vol. 50, No. 7, pp. 935-948, July 2004, Available at SSRN: https://ssrn.com/abstract=905134

Volodymyr Babich (Contact Author)

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

Matthew J. Sobel

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,015
PlumX Metrics