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