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Selling out or going public? A real options signaling approach

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  • Nishihara, Michi

Abstract

We examine a dynamic model in which a firm chooses between selling out and going public under asymmetric information. Suppose that the firm prefers to sell out under symmetric information. Under asymmetric information, we have a separating equilibrium in which the high-growth firm goes public earlier while the low-growth firm follows the first-best sales policy because the high-growth firm signals to market investors by doing an IPO. This result is consistent with the empirical evidence. The model also yields implications about the effects of asymmetric information and cash flow volatility on the decisions.

Suggested Citation

  • Nishihara, Michi, 2017. "Selling out or going public? A real options signaling approach," Finance Research Letters, Elsevier, vol. 22(C), pages 146-152.
    • Handle: RePEc:eee:finlet:v:22:y:2017:i:c:p:146-152
    DOI: 10.1016/j.frl.2017.04.003
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    Cited by:

    1. Chen, Zhuming & Chen, Can & Lin, Tao & Chen, Xiaoguo, 2021. "The dynamic investment and exit decisions of venture capitals," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    2. Michi NISHIHARA, 2021. "How should a startup respond to acquirers? A real options analysis," Discussion Papers in Economics and Business 20-24, Osaka University, Graduate School of Economics.
    3. Yanzhao Li & Ju'e Guo & Yongwu Li & Xu Zhang, 2021. "Optimal exit decision of venture capital under time-inconsistent preferences," Papers 2103.11557, arXiv.org.

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    More about this item

    Keywords

    IPO; Signaling; Real options; Asymmetric information; Acquisition; Earnout;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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