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The Determinants Of The Going Public Decision: Evidence From The U.K

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  • Belén Gill de Albornoz

    ()
    (Universitat Jaume I)

  • Peter F. Pope

    ()
    (Lancaster University)

Abstract

Several theoretical papers have addressed the question of why firms raise public equity. However, direct empirical evidence on the characteristics of firms going public is scarce and limited to non-Anglo-Saxon contexts. Our research combines the analysis of ex ante and ex post characteristics of Initial Public Offering (IPO) companies to cast more light on the determinants of the going public decision in the UK. Some of our findings are consistent with prior empirical studies in other contexts: IPO probability depends positively on firm size and stock price levels. Results also suggest that a firm?s need to finance investments is not the main motive to go public, although this reason underlies the going public decision in a number of UK firms. Besides, contrary to the evidence shown by Pagano et al. (1998) for Italian IPOs, we find that UK firms do not go public to reduce debt since leverage is negatively related to the probability of going public. Finally, the relationship between profitability and the likelihood of an IPO for our whole IPO sample is negative and significant. Whether firms that go public have higher investment rates than other firms, as is the case of our survivor IPOs, the negative effect of profitability on the probability of going public may reflect the fact that these firms cannot yield sufficient internal funds to finance large investments. In fact, the relationship between profitability and the likelihood of an IPO becomes significantly positive for our acquired IPO group, where investment opportunities variables have no significant effect on the going public decision. This result is consistent with the portfolio rebalancing motive to go public.

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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2004-22.

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Length: 33 pages
Date of creation: Jun 2004
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2004-22

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Keywords: Initial Public Offerings; the Going Public Decision.;

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References

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  1. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
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