Ernst Maug
Duke University, Durham, NC
ABSTRACT
This paper presents a comprehensive theory of initial public offerings based on the idea that the optimal ownership structure of a company changes during the stages of its lifecycle. In those stages where firm-specific information is critical (start-up, restructuring) it is optimal for the company to be privately held. If information relevant to the industry is more important, it is optimal for the company to go public and enlist the information collection capacity of the stock market to improve capital budgeting decisions. Private blockholders decide to take the company public whenever this reduces their monitoring costs sufficiently to justify the loss from underpricing. This leads companies to go public inefficiently late. The process may be improved by using bookbuilding or best effort offerings, and by employing an intermediary, and thereby reducing the delay in going public. If investors learn about a new industry, going public creates an externality for other firms that may lead to a clustering of issues in 'hot issue markets'. The model generates a number of of empirical predictions about the relationship between ownership structure, IPO underpricing, and post-IPO operating performance.