Why Do Firms Go Public? The Role of the Product Market

Authors

  • Abe de Jong,

    1. The first and fourth authors are from the Rotterdam School of Management, Erasmus University, The Netherlands. The second and third authors are from the University of Groningen, The Netherlands. They gratefully acknowledge comments from Lammertjan Dam, Douglas DeJong, Reggy Hooghiemstra, Robert Lensink, Piet Moerland, Robert Scapens, Jeroen Suijs, Hans van Ees, Adri Verboven, Greg Waymire and workshop participants at the 2005 EAA annual congress in Goteborg and the University of Groningen. An anonymous referee and Andrew Stark (editor) provided valuable comments that substantially improved earlier versions of this paper. (Paper received July 2009, revised version accepted September 2011)
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  • Carel A. Huijgen,

    1. The first and fourth authors are from the Rotterdam School of Management, Erasmus University, The Netherlands. The second and third authors are from the University of Groningen, The Netherlands. They gratefully acknowledge comments from Lammertjan Dam, Douglas DeJong, Reggy Hooghiemstra, Robert Lensink, Piet Moerland, Robert Scapens, Jeroen Suijs, Hans van Ees, Adri Verboven, Greg Waymire and workshop participants at the 2005 EAA annual congress in Goteborg and the University of Groningen. An anonymous referee and Andrew Stark (editor) provided valuable comments that substantially improved earlier versions of this paper. (Paper received July 2009, revised version accepted September 2011)
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  • Teye A. Marra,

    1. The first and fourth authors are from the Rotterdam School of Management, Erasmus University, The Netherlands. The second and third authors are from the University of Groningen, The Netherlands. They gratefully acknowledge comments from Lammertjan Dam, Douglas DeJong, Reggy Hooghiemstra, Robert Lensink, Piet Moerland, Robert Scapens, Jeroen Suijs, Hans van Ees, Adri Verboven, Greg Waymire and workshop participants at the 2005 EAA annual congress in Goteborg and the University of Groningen. An anonymous referee and Andrew Stark (editor) provided valuable comments that substantially improved earlier versions of this paper. (Paper received July 2009, revised version accepted September 2011)
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  • Peter Roosenboom

    Corresponding author
    1. The first and fourth authors are from the Rotterdam School of Management, Erasmus University, The Netherlands. The second and third authors are from the University of Groningen, The Netherlands. They gratefully acknowledge comments from Lammertjan Dam, Douglas DeJong, Reggy Hooghiemstra, Robert Lensink, Piet Moerland, Robert Scapens, Jeroen Suijs, Hans van Ees, Adri Verboven, Greg Waymire and workshop participants at the 2005 EAA annual congress in Goteborg and the University of Groningen. An anonymous referee and Andrew Stark (editor) provided valuable comments that substantially improved earlier versions of this paper. (Paper received July 2009, revised version accepted September 2011)
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Teye A. Marra, Faculty of Economics, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands. e-mail: t.a.marra@rug.nl

Abstract

Abstract:  This paper investigates the effect of product market characteristics on the decision to go public. When firms decide to go public or remain private, they trade off product market related costs and benefits. Costs arise from the loss of confidential information to competitors, e.g., in the IPO prospectus and subsequent mandated public disclosures, while benefits emerge from raising capital allowing the firm to strengthen its position in the product market. Our results show that UK firms are more likely to go public when they operate in a more profitable industry and in an industry with lower barriers to entry. These firms are more likely to go public in order to improve their position in the product market and to deter new entrants into the industry. However, firms from more competitive industries and firms with smaller market share are less likely to go public. For these firms the loss of confidential information to rivals outweighs the benefits of going public.

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