Going Public: The Theory and Evidence on How Companies Raise Equity Finance

Abstract

Revised edition surveys and synthesizes the academic research on initial public offerings (IPOs), drawing evidence from different countries. Introduces the main stages involved in conducting an IPO. Focuses on explaining three puzzling empirical regularities: first-day trading prices of IPOs typically exceed the price at which shares were offered to investors; there are cycles both in the extent of such underpricing and in the volume of IPOs over time; and the long-run performance of IPOs seems to be poor. Summarizes the asymmetric information literature on the underpricing of IPOs. Considers institutional reasons why firms may wish, or be forced, to underprice their IPOs. Examines two models that draw attention to ownership and control and use agency-cost considerations to rationalize the underpricing phenomenon. Assesses theoretical explanations for the tendency of new issues to underperform in the long run, considering suggestions that it is an equilibrium phenomenon arising from asymmetric information or institutional peculiarities; the result of irrational behavior by the investing public; or an illusion arising from problems in measurement or methodology. Addresses privatizations as a particular class of IPOs. Identifies which classes of theories provide the most insights and speculates on possible future developments in the way firms go public and on the roles of the intermediaries involved in the IPO process. Jenkinson is Reader in Business Economics at the Said Business School and Fellow of Keble College at Oxford University. Ljungqvist is Assistant Professor of Finance at the Stern School of Business at New York University. Index

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