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The Dynamics of Going Public

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  • M. Cecilia Bustamante

Abstract

This paper develops a real options model in which firms may use the timing of their initial public offerings (IPOs) to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares, and underprice more during cold markets, and that issuers are younger on average during hot markets. Copyright 2011, Oxford University Press.

Suggested Citation

  • M. Cecilia Bustamante, 2011. "The Dynamics of Going Public," Review of Finance, European Finance Association, vol. 16(2), pages 577-618.
    • Handle: RePEc:oup:revfin:v:16:y:2011:i:2:p:577-618
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    File URL: http://hdl.handle.net/10.1093/rof/rfr001
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    Cited by:

    1. Bustamante, Maria Cecilia, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
    2. Maria Cecillia Bustamante, 2011. "Strategic Investment, Industry Concentration and the Cross Section of Returns," FMG Discussion Papers dp681, Financial Markets Group.
    3. Steven Grenadier & Andrey Malenko & Ilya A. Strebulaev, 2012. "Investment Busts, Reputation, and the Temptation to Blend in with the Crowd," NBER Working Papers 17945, National Bureau of Economic Research, Inc.

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