Ernst Maug
Duke University, Durham, NC 27708
ABSTRACT
The paper analyzes the determinants of the decision to go public, IPO underpricing and post-IPO monitoring for companies where the external provider of equity seeks a partial liquidation of its stake. This situation is found in venture capital backed companies or in reverse LBOs. The venture capitalist can enlist the information collection capacity of the stock market trough going public. Underpricing the IPO serves simultaneously as a price the venture capitalist has to pay for this service and a signal in which the market's information is revealed. The paper presents a new theory of underpricing for initial public offerings and links this to a theory of the decision to go public. The theory relies on a monitoring and an asymmetric information argument distinct from signalling and is consistent with current empirical evidence. It also provides new predictions which link IPO-underpricing to market liquidity and rationing in initial public offerings have not been tested so far.