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Unformatted text preview: by James C. Brau and Stanley E. Fawcett, Brigham Young University 1 any privately held companies aspire to go public through an initial public offering (IPO). There are two obvious beneFts: ¡irst, an IPO can put a great deal of capital into the company’s coffers. Second, a successful IPO can generate tremendous wealth for company insiders and pre-IPO investors. In recent years, IPOs have raised billions of dollars for issuing Frms, created a multitude of millionaires, and generated considerable excitement among the media. But going public is not an easy process, nor is it without costs. Many companies have begun the IPO process only to withdraw the offering, often confused and frustrated by the experience. To improve decision-making—and to mitigate many of the uncertainties—managers need a clear picture of the core issues involved in the IPO process. With this as motivation, we constructed a theoretical-based survey instrument and surveyed 336 C¡Os to get their insights into the IPO process. We studied six speciFc aspects of the IPO process: (1) motives for going public; (2) the timing of IPOs; (3) criteria for choosing an underwriter; (4) IPO underpricing; (5) IPO signaling; and (6) reasons to stay private. Where possible we also attempted to add extra insight by stepping outside of the survey data to test managerial behavior. By surveying C¡Os to obtain a real-world perspective of the IPO process, we can also compare their beliefs and experiences to both academic theory and the Fndings of empirical research. Doing so allows us to identify the gaps between theory and practice, and to begin to bridge those gaps through better communication and more targeted research. In many areas, we Fnd harmony between C¡O beliefs and academic theory. But in several key areas, we Fnd that C¡O perceptions diverge in signiFcant ways from traditional academic theory. The main Fndings from the survey are summarized below: • The primary motive for going public is to fund growth opportunities. More speciFcally, IPOs create a currency— publicly-traded shares—that can be used to grow through acquisitions. • C¡Os strongly base the timing of their IPOs on overall stock market conditions, while paying least attention to IPO market conditions. Yet empirical evidence shows that IPO market conditions, particularly within industry, are strongly related to timing. • C¡Os choose underwriters based on their overall reputation and the underwriter’s industry expertise. Surpris- ingly, issuers were not very concerned about the underwriter fee structure, perhaps indicating general acceptance of the typical 7% spread. • C¡Os view underpricing mainly as a means of compensating investors for taking on the risk of the IPO....
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- Spring '10