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Why Do Firms Go Public? The Role of the Product Market
Author(s) -
Jong Abe de,
Huijgen Carel A.,
Marra Teye A.,
Roosenboom Peter
Publication year - 2012
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2011.02271.x
Subject(s) - prospectus , initial public offering , business , competitor analysis , product market , position (finance) , product (mathematics) , order (exchange) , market share , public offering , industrial organization , confidentiality , commerce , marketing , economics , finance , market economy , geometry , mathematics , incentive , political science , law
This paper investigates the effect of product market characteristics on the decision to go public. When firms decide to go public or remain private, they trade off product market related costs and benefits. Costs arise from the loss of confidential information to competitors, e.g., in the IPO prospectus and subsequent mandated public disclosures, while benefits emerge from raising capital allowing the firm to strengthen its position in the product market. Our results show that UK firms are more likely to go public when they operate in a more profitable industry and in an industry with lower barriers to entry. These firms are more likely to go public in order to improve their position in the product market and to deter new entrants into the industry. However, firms from more competitive industries and firms with smaller market share are less likely to go public. For these firms the loss of confidential information to rivals outweighs the benefits of going public.