Doug
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"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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