Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

Thequestion of whethera growing and successful private
companyshouldgopublicdoesinvolvetrade-offs.Itistrue
that publiclytraded firms havemoreaccess to capitaland
providemoreliquiditytotheirowners.Itisalsotruethatthe
ownersofprivate businesseshavefarmorecontrolonhow
much information they reveal to markets and how their
businesses get run. This trade-off between illiquidity and
controlwilldeterminewhetherfirmswillgopublicinthefirst
place.


Giventhatgoingpublicallowsinvestorstotradeonafirm’s
equity,andineffectreducetheilliquiditydiscountonvalue,
wecandrawthefollowingconclusionsabouttheincentivesto
go public in different sectors and variations over time:



  • Researcherswho trackinitial publicofferings have
    noted thephenomenon of hot and cold periods in
    publicofferings.In someyearstherearedozens of
    publicofferings,andinotherstherearealmostnone.
    If,aswenotedearlier,themarketpriceofilliquidity
    varies over time, you would expect more public
    offerings by small companies when the market
    premiumforilliquidityissmallest(leadingtohigher
    valuesforthesecompanies),which alsohappensto
    coincide with market upswings.

  • Itisalsoworthnotingthatpublicofferingsinperiods
    are often clustered in a few sectors, though the
    sectors themselves may vary across time. One
    possibleexplanation(ofmany)forthis clusteringis
    thatyouaremorelikelytoseecompaniesgopublic
    in sectors where the illiquidity discount is largest.
    Thereareboththeoreticalandempiricalreasonsfor
    believing this is most likely to occur in volatile

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