We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena.

This paper models a family business as a household operating a production technology in which the household’s human capital is a special business skill. Each generation can either bequeath the business and the business skill to the next generation, or sell the business through a financial intermediary and bequeath the revenue. Using a dynamic model, we analyze how the imperfections in primary capital markets affects the evolution of a family business. Whether recourse to external financing exists or not, our model predicts that family businesses will tend to be bigger and last longer in economies with less developed primary capital markets. We provide some evidence that supports these predictions. An important stylized fact about family businesses is that they are the major form of business enterprise in the early stages of economic development. 1 Payne (1983), in a historical survey of family businesses in Britain, comes to the conclusion that the family firm was "the vehicle whereby the Industrial Revolution was accomplished. " In Japan, family businesses began as merchant houses during the Edo period (1603-1867) and, despite government prodded attempts to go public during the Meiji Restoration (1868) and

The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. We compare firms that go public in the two types of markets from 1982-93, examining them at the time of the IPO and in the following five years. We find that both hot and cold market IPOs are largely concentrated in the same narrow set of high-tech industries. We also find few distinctions in quality or long-term earnings potential. Our results are not consistent with the going public models that imply cold market IPOs are firms with few product innovations and lower growth prospects. Jean Helwege Department of Finance Ohio State University 812 Fisher Hall 2100 Neil Avenue Columbus, OH 43210 (614) 292-3217 (614) 292-2418 FAX helwege_1@cob.osu.edu Nellie Liang Board of Governors of the Federal Reserve System Division of Research and Statistics Capital Markets Section Mail Stop 89 Washington, DC 20551 (202) 452-2918 (202) 452-3819 FAX nliang@frb.gov For example, Ritter (1984) shows that most of the underpricing in the hot issue market of 1980-1981 is attributable to underpricing among IPOs in the natural resources sector. Also, see Lowry and Schwert (2000) on the relationship between underpricing and volume in hot and cold markets, as well as James and Krieshnick (1997).

Issuers. ” We are grateful for helpful comments from Soehnke Bartram, Ekkehart Boehmer,

We test recent theories of when companies go public which predict that 1) more companies will go public when outside valuations are high or have increased, 2) companies prefer going public when uncertainty about their future profitability is high, and 3) firms whose controlling shareholders enjoy large private benefits of control are less likely to go public. Our analysis tracks a set of 330 privatelyheld German firms which between 1984 and 1995 announced their intention to go public to see whether, when, and how they subsequently sold equity to outside investors. Controlling for private benefits, we find that the likelihood of firms completing an initial public offering increases in the firm’s investment opportunities and valuations. We also show that these effects are distinct from factors that increase firms ’ demand for outside capital more generally.

We argue that the number of firms going public changes over time in response to time variation in market conditions. We develop a model of optimal IPO timing in which IPO waves are caused by declines in expected market return, increases in expected aggregate profitability, or increases in prior uncertainty about the average future profitability of IPOs. We test and find support for the model's empirical predictions. For example, we find that IPO waves tend to be preceded by high market returns and followed by low market returns.

Empirical evidence on the decision to go public is sparse, as most private firms do not report their financial results. In this paper, we take advantage of the fact that a number of private firms in the U.S. have public bonds, and are thus required to release a substantial amount of information in SEC filings. Our sample of private firms consists of firms that are typically larger and more leveraged than public firms. Compared with public firms that also have issued bonds, we find they are younger, but still more levered and revealing fewer growth opportunities. Finally, the private firms in our sample that subsequently attempt an IPO are more likely to have already sold equity to outsiders (typical private equity specialists) and thus seem less concerned about giving up control. We also find that size, age, bond ratings, and market to book ratios are important but that measures of growth opportunities are weak factors at best. Evidence from Corporate Bond Issuers In the U.S., people often view initial public offerings (IPOs) of equity as a natural phase in the life cycle of a firm, so that all successful start-ups eventually go public as a matter of course. Even the seemingly perpetually private firms United Parcel Service and Goldman Sachs recently succumbed to the allure of the market.

In this paper we show that in a finitely liquid market with asymmetrically informed investors, both the benefits and the costs of diversification vary with the return and risk of the investment opportunities of the firm’s divisions. The benefits come from a reduced liquidity discount in the stock price of the merged firm when its shareholders anticipate less informed trading. The costs are the result of less efficient investment by the merged firm’s divisions due to a less informative stock price. Our results provide explanations for the life cycle of diversification strategies and implications for evaluating merger and spin-off candidates. 2

This paper was previously titled “The Decision to Go Public: Evidence from Mandatory

in Sydney for valuable comments. A Theory of IPO Underpricing, Issue Activity, and