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

Published online by Cambridge University Press:  10 December 2010

Hadiye Aslan  and
Praveen Kumar
Hadiye Aslan
Affiliation:
Bauer College of Business, University of Houston, 334 Melcher Hall, Houston, TX 77204. haslan@uh.edu
Praveen Kumar
Affiliation:
Bauer College of Business, University of Houston, 334 Melcher Hall, Houston, TX 77204. pkumar@uh.edu
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 489 - 526
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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