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Evidence on What CFOs Think About the IPO Process: Practice, Theory, and Managerial Implications


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     This article draws on and uses the same dataset as our paper “Initial Public Offerings: An Analysis of Theory and Practice,” Journal of Finance, Vol. 61 (2006).


Many privately held companies aspire to go public through an initial public offering. But the IPO process is time-consuming, expensive, and fraught with uncertainty. With the aim of shedding light on the process and reducing at least some of the uncertainty, the authors asked several hundred CFOs to share their experiences and perceptions with regard to six specific aspects of the IPO process: (1) motives for going public; (2) the timing of IPOs; (3) criteria for choosing an underwriter; (4) cause of IPO underpricing; (5) IPO signaling; and (6) reasons to stay private.

The main findings from the survey are summarized below:

  • The primary motive for going public is to create a currency-publicly traded shares-that can be used to fund acquisitions.
  • CFOs strongly base the timing of their IPOs on overall stock market conditions, while paying relatively little attention to IPO market conditions.
  • CFOs choose underwriters based on their overall reputation and industry expertise. Somewhat surprisingly, issuers did not express much concern about the underwriter fee structure.
  • CFOs view underpricing mainly as a means of compensating investors for taking on the risk of IPOs in the after-market.
  • The two strongest perceived positive signals for issuer quality are a history of strong earnings and the use of a reputable investment bank. The strongest negative signal is the sale of insider shares in the IPO.
  • The primary reason for staying private cited by the CFOs of private companies is the desire to maintain decision-making control.
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