Bret Rasmussen and Dr. James C. Brau, Business Management
Initial Public Offerings, or IPO’s, were on a dramatic rise in the 1990’s. Management of companies were becoming overnight millionaires from completing an IPO. One cannot deny that going public can be a fiscally wise decision for those holding stock in the company. Though the personal rewards can be large, going public also provides much needed capital to a promising, high-growth company. But, a company does not need to go public in order to raise capital.
Theory teaches many reasons and rationales for going public. The difficulty with relying on theory is that the real world does not always prove theory correct. A lot of research has been performed in the Finance field to more fully understand and explore the true reasons a company would go public. Despite all the research, the conclusions have been, at times, contradicting and different.
The aim of the research in which I participated is to consolidate all current, reasonable theories about IPOs into one research project. Hopefully, through exploring many theories in one project, we will be able to better understand the real-world reasons for conducting an IPO. The primary questions the research aims to answer includes:
1. Why do firms go public or choose to stay private?
2. Why is the offering price of an IPO usually less than the market price of the stock at the end of the first day?
3. What issues impact the timing of when firms choose to go public?
4. Why do IPOs tend to underperform in the long-run?
5. How does certification impact IPOs?
6. What actions by insiders are considered positive and negative signals within the IPO process?
7. What role do lockups serve in the IPO process?
8. Additional issues addressed in IPO literature.i
In order to answer the above questions, I took part in collecting data about hundreds of companies and their attitudes towards IPOs. We chose to survey the CFOs of the subject companies. We felt that the CFO would have a good understanding of the financial ramifications of conducting an IPO and its influence on the company. As a result, we mailed surveys to three categories of companies: those who have successfully completed an IPO, those who filed with the SEC to conduct an IPO, but withdrew, and private companies who could IPO, but choose not to. We gathered 1,854 subject companies and mailed the surveys to the subject CFOs. To increase our response rate we mailed the survey, if applicable, three times to each CFO. This resulted in a response rate of approximately 18%.
Once we completed our mailings, the response data was entered into an excel spreadsheet and was statistically analyzed. Unexpectedly, we found the two top reasons a company would IPO was to create public shares that could be used to acquire other companies and to establish the market price, or value of the firm. Though there is research that supports these findings ii, these are not the findings one would expect. Traditionally, one would expect the main reasons for going public would include to cash out, to reduce the cost of capital, or other reasons. Though these reasons did show up in the survey responses, they weren’t as important.
Additionally, current stock market conditions and the need for capital to support growth influenced the timing of an IPO more than any other reason. When these companies chose to IPO, they chose their underwriter, or Investment Bank, primarily on reputation, quality of research, and industry experience.iii
The above are just of the few findings found in the research in which I participated. The analysis of the research is still being performed by my mentor, James Brau and by Stanley Fawcett. Through this research, I have learned many things about the IPO process. Not only will this research most likely be published, but it has taught me a lot about business, IPOs, and what drives management of companies to make the decisions they do.
I have now graduated from BYU and am working full-time at a start-up company. Being an entrepreneur and liking to grow businesses, I may one day use the knowledge I gained through this research and apply it in my own professional career.
References
- Brau, J. Fawcett, S. 2004, Initial Public Offerings: An Analysis of Theory and Practice. Working Paper.
- Zingales, L., 1995, Insider Ownership and the Decision to go Public, Review of Economic Studies 60, 425-448.
- Brau, J. Fawcett, S. 2004, Initial Public Offerings: An Analysis of Theory and Practice. Working Paper