going public

Doug Henwood dhenwood at panix.com
Tue May 19 08:59:26 PDT 1998


One possible take on Rakesh's question about stock markets the other day (which I was too lazy to answer).

Doug

----

"The Stock Market as a Screening Device and the Decision to

Go Public"

BY: TORE ELLINGSEN

Stockholm School of Economics

KRISTIAN RYDQVIST

Norwegian School of Management

SSRN ELECTRONIC DOCUMENT DELIVERY:

http://papers.ssrn.com/paper.taf?abstract_id=75358

Date: Undated

Contact: Tore Ellingsen

E-Mail: MAILTO:gte at hhs.se

Postal: Stockholm School of Economics, Box 6501,

Department of Economics, S-113 83 Stockholm

Sweden

Phone: 46-8 736 9260

Fax: 46-8 31 3207

We argue that many firms become publicly traded on a stock

exchange as the first stage of a longer term divestment

plan. Making a direct sale of unlisted stock may be

associated with great adverse selection costs. The publicly

listed stock price reduces adverse selection by aggregating

the information of several investors, and this market

valuation, rather than the cash infusion, could be the main

benefit of an initial public offering. This theory provides

a unified treatment of a whole range of empirical

observations, in particular why initial owners frequently

exit completely subsequent to an initial public offering

(IPO) and why the number of stock market introductions

increases with the stock price level. The model also

reformulates the "sweet taste" explanation of IPO

underpricing in a way which is consistent with recent

evidence. Finally, we argue that the number of firms which

go public is inefficiently large.

JEL Classification: G32, G14

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