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Initial Public Offerings: An Analysis of Theory and Practice




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    • James C. Brau, Goldman Sachs Faculty Fellow, Finance Department, Marriott School, Brigham Young University, Provo, Utah. Stanley E. Fawcett, Business Management Department, Marriott School, Brigham Young University, Provo, Utah. The authors thank Vaughn Armstrong, Hal Heaton, Andy Holmes, Grant McQueen, Craig Merrill, Todd Mitton, Mike Pinegar, Jay Ritter, Keith Vorkink, an anonymous referee, the editor (Rob Stambaugh), and participants of Brigham Young University, University of Puerto Rico, and University of Utah seminars for helpful comments. We express appreciation to Greg Adams, Rock Adams, Tyler Brough, Will Gross, Bret Rasmussen, and Rich Wood for excellent research assistance and to Christine Roundy for outstanding administrative work. Jim Brau recognizes funding from the Goldman Sachs Faculty Fellowship and a Marriott School research grant. Stan Fawcett recognizes funding from the Staheli Professorship. Both authors acknowledge the BYU Silver Fund which paid for databases and research support. Also we acknowledge Intel for their gift of two research computer servers. Finally, we thank all the CFOs who shared their insights and made this study possible. All errors remain ours. Jim Brau is the contact author.


We survey 336 chief financial officers (CFOs) to compare practice to theory in the areas of initial public offering (IPO) motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is to facilitate acquisitions. CFOs base IPO timing on overall market conditions, are well informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm-specific characteristics. Finally, we find the main reason for remaining private is to preserve decision-making control and ownership.

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