The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

• Published in: Review of quantitative finance and accounting Vol. 37; no. 3; pp. 325 - 361
• Main Authors: Mantecon, Tomas, Thistle, Paul D.
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01-10-2011; Springer Nature B.V
• Subjects: Accounting/Auditing; Acquisitions & mergers; Adverse selection; Bargaining; Corporate Finance; Econometrics; Economic theory; Economics and Finance; Equity; Finance; Financing methods; Firm value; Going public; Initial public offering; Initial public offerings; Mergers; Operations Research/Decision Theory; Original Research; Private enterprises; Private equity; Public enterprises; Sales; Securities analysis; Studies; Valuation; Screening; Merger; G32; Adverse selection; IPO; G34; Private equity
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-010-0207-y

The main purpose of this paper is using a unique data set from IPO filings to study the IPO market as a screening device and the going public decision. We find that private firms that are less likely to have the option to access public equity markets receive 54 cents for each dollar they expected to raise in an IPO, whereas firms that are more likely to have the option to go public but sell privately sell at $1.11 for each dollar they expected to receive at the IPO. This result suggests that the lower valuation for firms sold in private markets compared to firms sold in public markets can be at least partially explained by the lower relative bargaining power of private firms. However, owners that took their firms public before selling received, on average, 40% larger payoffs than owners that had the option to go public but decided to sell privately. The results in this study indicate that these differences in valuation are not fully explained by existing theoretical models on the decision to sell privately or in two stages.