Articlegreen2010

Lemons or Cherries? Growth Opportunities and Market Temptations in Going Public and Private

110 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Private Equity and Venture Capital

Abstract

Abstract Is the decision to go public or private a stock-market-driven “sideshow” or does it have significant effects on investment and profitability? We address this issue using a comprehensive data set of private and public companies in the U.K. during 1996–2006. Firms with high investment-financing needs, lower information-production costs, and high industry market-to-book ratios are more likely to go public. In contrast to the literature, we find that capital investment and profitability increase substantially after the initial public offering (IPO). Consistent with the agency-cost-based theories of going private, firms decrease investment but increase profits after going private, especially firms bought out by private equity investors. Our analysis also highlights the effects of market conditions on the ownership structure decision.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1970The Market for "Lemons": Quality Uncertainty and the Market Mechanism 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1933The Modern Corporation and Private Property 1995What Do We Know about Capital Structure? Some Evidence from International Data 1987A Simple Model of Capital Market Equilibrium with Incomplete Information 1995Firms, Contracts, and Financial Structure

Cited by

2014Family Business Performance from a Governance Perspective: A Review of Empirical Research 2013Why do companies delist voluntarily from the stock market?2017Venture capital and private equity financing: an overview of recent literature and an agenda for future research 2016Alliance Formation in the Midst of Market and Network: Insights From Resource Dependence and Network Perspectives 2015Multiple lead underwriter IPOs and firm visibility 2011

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