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Pre-IPO Operational and Financial Decisions

Author

Listed:
  • Volodymyr Babich

    (Industrial and Operations Engineering Department, University of Michigan, Ann Arbor, Michigan 48109)

  • Matthew J. Sobel

    (Department of Operations, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

Abstract

Many owners of growing privately held firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an initial public offering (IPO). We ask: ÜWhat is the right time to make an IPO?Ý and ÜHow should operational and financial decisions be coordinated to increase the likelihood of a successful IPO?Ý Financial and operational decisions in this problem are linked because adequate financial capital is crucial for operational decisions to be feasible and operational decisions affect the firm's access to financial resources. The IPO event is treated as a stopping time in an infinite-horizon discounted Markov decision process. Unlike traditional stopping-time models, at every stage the model includes other decisions such as production, sales, and loan size. The results include (1) characterization of an optimal capacity-expansion policy, (2) sufficient conditions for a monotone threshold rule to yield an optimal IPO decision, and (3) algorithmic implications of results in (1) and (2).

Suggested Citation

  • Volodymyr Babich & Matthew J. Sobel, 2004. "Pre-IPO Operational and Financial Decisions," Management Science, INFORMS, vol. 50(7), pages 935-948, July.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:935-948
    DOI: 10.1287/mnsc.1040.0252
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    References listed on IDEAS

    as
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