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Executive
Summary
Determinants of Going-Public
Decision in an Emerging Market:
Evidence from India
Manas Mayur and Manoj Kumar
During the past two decades, numerous Indian firms have gone public by undertaking Initial Public Offerings (IPOs) of their equity shares. Yet, many other Indian firms
have intentionally chosen to remain private even though they fulfill the eligibility
criteria of going public. This raises the question as to what are the determinants of
firms going-public decision.
While researchers have propounded several theories to explain the firms going-public decision, yet the empirical studies conducted to test the proposed theories are still
scarce, mainly due to lack of data on privately held firms necessary for a direct investigation of the choice between going public and remaining private. None of the existing studies have assessed the determinants of Indian firms going-public decision.
Besides, no consistent stylized facts have so far emerged. Rather contradictory findings have been reported in some of the existing studies. Further these individual studies have not been comprehensive as each of them has focused only on a limited number
of determinants.
This study investigates the determinants of going-public decision of the Indian firms,
juxtaposing the following two related research issues:
What ex-ante (pre-IPO) characteristics of going-public Indian firms differentiate
them from those Indian firms that continue to remain private even though they
fulfill the eligibility criteria of going public?
What ex-post consequences of IPOs on firm characteristics influence their goingpublic decision?
KEY WORDS
Initial Public Offerings
Going-Public Decision
Emerging Market
India
The preceding research issues are examined using two independent analyses. First, a
panel probit regression analysis is done to identify the ex-ante characteristics of going-public Indian firms that differentiate them from those Indian firms that continue to
remain private even though they fulfill the eligibility criteria of going public. This
analysis reveals that going-public Indian firms tend to be younger, riskier, transparent, more profitable, experiencing higher sales growth, and larger-sized than firms
that decide to remain private. Also if a firm belongs to retail trade sectors, it increases
its probability to go public. In the second analysis, ex-post consequences of IPOs on
firm characteristics are examined by comparing pre-IPO characteristics of IPO firms
with their post-IPO characteristics using Wilcoxon two-sample signed rank test. This
analysis suggests that Indian firms go public to:
65
The research design of these studies has mostly been probit analysis. This study uses a similar research design. There is another set of
research studies which has used survey research design (Brau &
Fawcett, 2006; Brau, Ryan & DeGraw, 2005, etc). This study does
not follow survey research design.
66
LITERATURE REVIEW
Finance literature documents two major approaches to
find out the determinants of going-public decision. The
first approach is to examine managerial perceptions of
determinants of going-public decision by conducting surveys of companies managers. The second approach is to
statistically analyse the fundamental financial data of
companies and macro-economic variables to know the
determinants of their going-public decision. The results
of survey-based studies are discussed first, followed by
the discussion on the results of studies based on fundamental financial data of companies and macro-economic
variables.
Survey-Based Studies
Brau and Fawcett (2006) conducted a managerial survey
of 336 CFOs of the US firms which hitherto either (a) had
successfully completed their IPO; or (b) had initiated their
IPO process but later on chose to call off their IPO; or (c)
and indirect costs related to going public were major concerns for CFOs in IPO.
Marchisio and Ravasi (2001) conducted a survey on family-owned companies of Italy. The result of the study was
based on the responses of 54 family-owned firms (with
73% response rate) who went public during 1996-2001.
The research question of the study was, Why do familyowned firms do IPO? Specifically, authors investigated
strategic motives behind going-public decision. The survey revealed that beside the usual financial motives, family-owned firms go public to increase the visibility and to
expand and strengthen the network of relationships that
can sustain entrepreneurial activity.
Block (2004) carried out a survey on the US firms that
went private between January 2001 and July 2003. Out of
a total of 236 firms that went private, 110 firms participated in the survey (response rate 46.65%). The study
investigated the reasons behind going private decision
of the firms and found that the following factors can motivate a company to become private again: (a) the costs
associated with being a public company in terms of pressure and time constraint on top management, (b) absence
of liquidity, and (c) threat of delisting by the stock exchange.
Park (1990) carried out a survey on Korean companies.
The study showed that while the most important benefits
of going public were easy access to a source of funding
and gaining market credibility, fear of loss of control was
considered as one of the critical obstacles for Korean companies.
Though the research question was not exactly the same
with the present study, there are a few surveys done on
issues related to IPOs. For example, Eije, Witte and Zwaan
(2000) conducted a survey of Dutch companies which
went public between 1987 and 1997 and found that IPO
could cause changes within a company like effectiveness,
planning and control, capital budgeting, internal communication, etc., and that the changes could contribute
positively to the long-term performance of a company.
67
68
or other equity investments; Chaebol subsidiaries experienced a fall in interest rates after the IPO which was consistent with IPO motive of lowering the cost of capital to
fund takeovers.
Boehmer and Ljungqvist (2004) examined 330 German
firms that went public between 1984 and 1995. The result
of the study was based on a hazard analysis of factors
influencing the timing of IPOs. Authors argued that the
probit and logit models, used by most of the studies, do
not analyse the time factor associated with the variables,
which according to them can be incorporated using a
hazard model. The firms were observed from the date of
IPO announcement to the date of their IPO. Following
factors were found to be positively affecting the likelihood of IPO: sales, profit margins (relative to other firms
in its industry) and stock market returns of the firms in
the same industry, and uncertainty about the future profitability. To preserve the private benefits of control was
found to be a major motivation behind staying private.
Albornoz and Pope (2004) analysed 830 public firms that
were listed on London Stock Exchange. The research design of the study was similar to Pagano et al (1998). They
found that going public decision of companies was related: (a) positively to their size, stock market valuation of
other companies within the same industry; and (b) negatively to their leverage levels and profitability. Based on
the analysis of post-IPO evidences, the study suggested
that financing needs and reduction of leverage were
not the major factors influencing IPO decisions in the UK.
Rosen, Smart and Zutter (2005) conducted a sector-specific study wherein they investigated 240 US banks which
completed their IPOs between 1981 and 2002. The advantage of doing a study on banking sector was the easy
accessibility of required data, even of the private banks.
Unlike the other sectors, both public as well as private
banks are required to disclose their annual financial data
to the regulators. Authors found that: the riskier banks
were more likely to go public; the chance of getting acquired increased the probability of going public; the
chance of becoming an acquirer also increased the probability of going public, and the banks went public to take
the advantage of prevailing market condition.
Chemmanur, He and Nandy (2005) investigated the relationship between product market characteristics and probability of going public for a large sample of US firms. The
Pin and Wei (2006) studied 383 IPOs of Taiwan, for the
sample period of 1989 to 2000. The probit model used to
analyse the determinants of IPOs in the study concluded
that: Taiwan IPOs were not motivated by financing needs
or constraints and larger and profitable firms were more
likely to go public.
Breinlinger and Glogova (2002) examined the influence
of macro-economic factors on going-public decision. Their
sample consisted of firms from six European countries
(Austria, Belgium, Denmark, Finland, France, and the
Netherlands) that went public between 1980 and 1997.
They explored the determinants of IPO volumes through
a panel data analysis of the following macro-economic
factors: stock index returns, changes in savings deposits,
GDP growth, interest rates, and exchange rates. The authors found that the overall IPO volume was dependent
on stock market returns but the dependence was not significant for all the stock price levels. Also, except Finland
and Austria, the relationship was not significant for other
countries. Other factors like changes in savings, GDP
growth, interest rates, and exchange rates exhibited nonsignificant influence on IPO volumes.
Benefits-Based Hypotheses
Raising capital for growth and expansion: Most theoretical models assert that firms go public to raise additional
capital required for financing their growth and expansion. The opportunity to tap public markets for equity
capital is appealing for high growth firms with large cur4
69
70
Therefore, it can be conjectured that firms which go public tend to have higher financial leverage than the firms
which decide to remain private. It is further assumed that
a firms debt-equity ratio should come down after it becomes public.
Lowering cost of capital: The tax shield advantage of debt
helps the firms to reduce their overall cost of capital. But
a company cannot continuously minimize its overall cost
of capital by employing debt. A point or range is reached
beyond which debt becomes more expensive because of
increased risk of excessive debt to creditors as well as to
shareholders. When the degree of leverage increases, the
risk of creditors increases, and they demand a higher interest rate and may not grant loan to the company at all,
once its debt has reached a particular level. Further, the
excessive amount of debt makes the shareholders position very risky. This has the effect on increasing cost of
capital. Thus, up to a point, the overall cost of capital
decreases with debt, but beyond that point, the cost of
capital would start increasing. According to Scott (1976)
and Modigliani and Miller (1963), companies conduct a
public offering when external equity minimizes their cost
of capital.
Diamond (1991) and Holmstrom and Tirole (1993) added
that raising public equity offered the opportunity to obtain low-cost direct financing without the intervention of
financial intermediaries such as banks or venture capitalists. Trading on major stock exchanges increases the
visibility of the companies. Also a sufficiently large number of quoted shares help in attracting more number of
investors (e.g. institutional investors). The visibility and
popularity amongst the large number of investors also
helps in reducing the cost of capital (Booth & Chua, 1996;
Maug, 1998). Therefore, it is conjectured that firms: (a)
which go public have higher cost of capital than firms
which decide to remain private; (b) face lower cost of capital after becoming public.
Liquidity: Listing on major stock exchange provides liquidity in the stock and makes share trading cheaper
(Amihud & Mendelson, 1986; Booth & Chua, 1996; Bolton
& Thadden, 1998). Shares of private companies can be
traded only by informal searching for a counterpart, at a
considerable cost for the initiating party (Pagano et al.,
1998). Therefore, companies may go public to facilitate
the trading of their shares by listing them on formal stock
exchanges aftermath of their IPOs.
nies do their IPOs during the periods when the companies in the same industry are overvalued. More the overvaluation, more is the possibility that a company will go
public (Ritter, 1991). Therefore, it is conjectured that firms
are likely to do their IPOs when peer firms in their industry are overvalued. Moreover, the industry peers of firms
which have recently gone public should suffer significant erosion in their valuations. Also, firms tend to
underperform after becoming public.
Publicity: The high visibility of severely discounted IPOs
serves as a marketing vehicle for issuers. Recent theoretical works on IPOs emphasize the benefits of publicity to
both customers and issuers. When companies go in for
IPOs, they get publicity that helps them to reduce the information asymmetry between insiders and outsiders.
The stock prices of publicly listed firms are visible to all
and hence customers can easily assess the value of such
firms (Subramanyam & Titman, 1999).
Stoughton, Wong and Zechner (2001) argued that the decision of a company to go public could serve as a signal of
its high quality to the product market. They proposed a
model where high-quality firms distinguished themselves,
and thereby built product market share, by incurring the
indirect cost of underpricing and subjecting themselves
to the scrutiny of secondary market investors engaged in
costly information production. In their model, consumers related the quality of a companys products to the
market prices of its listed stocks. Consumers perceived a
companys products to be better if its stock prices were
high and hence, were ready to pay more for its products.
Therefore, a good company could charge higher product
prices in high market conditions. They showed that firms
with higher first-day returns gained larger market share
in the product market. Helwege and Packer (2001) argued that these benefits should be higher for companies
with a large customer base. Therefore, it is conjectured
that companies belonging to retail trade sectors should
have higher propensity to become public.
Currency for Mergers and Acquisitions (M&As): Some researchers have highlighted the role of IPOs in facilitating
corporate M&A activities. Zingales (1995) argued that an
IPO could serve as a first step in acquiring a company at
an attractive price. Brau, Francis and Kohers (2003) supported Zingales (1995) that IPOs could create public
shares for a company which might be used as a currency in either acquiring other companies or in being
71
Cost-Based Hypotheses
Information asymmetry and adverse selection costs: The
economics of information is based on the premise that
different parties of a transaction often have different levels of information about the transaction. Information
asymmetry refers to a situation in which sellers often have
superior information than buyers about some aspect of
product quality. Akerlof (1970) pointed out that information asymmetry prevailed in all markets. He identified
the fact that if the good quality sellers had no means to
signal high quality, all products in the markets would be
sold at a single price reflecting the average quality level of
the market. This would lead to a situation where the high
quality sellers will have no other choice than to withdraw from the market because high quality sellers in an
information asymmetrical market have to sell products at
lower prices than actual worth of their products. Ultimately only lemons (bad quality products) are sold in
the market, which is how buyers also view the products
being sold in the market place. This leads to a market
failure situation referred to as adverse selection. Leland
and Pyle (1977) noted that the information asymmetry
was particularly high in the primary markets. In IPO situations, investors are generally less informed than the issuers about the true value and quality of the company
doing an IPO. Thus, prevailing information asymmetries
about the quality of issuers in IPO market results in adverse selection and should be a factor influencing the
firms going-public decision (Pagano et al., 1998; Albornoz
& Pope, 2004). They insisted that information asymmetry
adversely affected the average quality of the companies
seeking a new listing and thus affected the price at which
their shares could be sold.
Chemmanur and Fulghieri (1999) predicted that information asymmetry could result in an IPO price lower than
that raised by selling private equity to a small group of
venture capitalists. They, therefore, argued that adverse
selection can work as an obstacle for the young and small
companies which have little track record and low visibility. Chemmanur and Fulghieri (1995), Rock (1986), and
Welch (1989) empirically confirmed a positive relationship between age and probability of going public. Diamond (1991), however, asserted that the adverse selection
problems could be avoided if a company had visible prof-
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Public companies are required to release all operating and financial details to the public, at the time of filing and on the annual
basis after IPO. These details include sensitive information about
their markets, profit margins, Research & Development (R&D)
projects, and present and future strategy.
8Leveragei,t-1 + 9 B
METHODOLOGY
In the extant literature, the determinants of going-public
decision are viewed from two complementary perspectives. The ex-ante firm characteristics of going public firms
are studied along with the ex-post consequences of going
public decision of the firms. This study follows the same
design by carrying out two related but independent analyses. First, a panel probit regression analysis is done to
identify the ex-ante characteristics of goingpublic Indian
firms that differentiate them from those Indian firms that
continue to remain private even though they fulfill the
eligibility criteria of going public. In the second analysis,
ex-post consequences of IPOs for firms are examined by
comparing pre-IPO characteristics of IPO firms with their
post-IPO characteristics. The methodologies for both the
analyses are described below.
8Leveragei,t-1 + 9 B
i,t-1
+ 10Retaili,t)
(1)
Further, specification (2) and specification (3) are estimated by one way random effect probit regression. Specification (2) is estimated to control industry effects and
specification (3) is estimated to control year effects.
VIKALPA VOLUME 38 NO 1 JANUARY - MARCH 2013
7Disci,t-1 + 8Leveragei,t-1 + 9 B
i,t-1
10Industry
(2)
+ 10Retaili,t +
Time)
11
(3)
Dependent Variable
The nomenclature of dependent variable is IPO, a
dummy variable, which equals 1 if the company is publicly held and 0 if the company is a private in a particular
year. Individual companies are indexed i: for each year t,
in the sample. At any time t, the sample includes all companies which are private at that point in time, and the
companies which go public (had an IPO) in that year.
After a company goes public, that company is dropped
from the private sample.
Independent Variables
Table 4 provides detailed definitions and calculations of
all the independent variables used in the above model.
The selection of the independent variables in the model is
based on hypotheses included in the Table 5. The brief
justifications for inclusion of each of the independent
variables in the model are as follows:
Size is included in the model as review of literature indicates that bigger firms (a) tend to attain more liquidity
benefits than the smaller firms; (b) tend to face lower information asymmetry and adverse selection costs than
the smaller firms; and (c) have relative ease in bearing the
initial and subsequent expenses owing to the firm becoming public. Based on the above discussion, a positive
73
Firm with high proportion of intangible assets have less assets available as collateral and therefore finds difficulty in raising capital
through banks. IPOs appear to be the only feasible option for such
firms (Brealey & Myers, 2000).
74
are relatively less transparent. Therefore, a positive relationship between Disc and probability of going public is
anticipated.
Leverage (Debt to Equity ratio) is included in the model to
measure financial leverage of the firms. The literature review indicates that firms do IPO to rebalance their capital
structure. Therefore, a positive relationship between Leverage and probability of going public is anticipated.
M/B (Industry market to Book ratio) is included in the
model to access whether firms take advantage of windows of opportunity or not. The literature review indicates that firms belonging to overvalued industry are more
likely to go public. Therefore, a positive relationship between M/B and probability of going public is expected.
Retail is included in the model as the review of literature
indicates that firms belonging to the retail sectors tend to
drive more benefits from the higher publicity arising from
the public listing. Therefore, it is anticipated that firms
belonging to retail trade sector are more likely to go public. Hence we have also included a dummy variable Retail in the model, which takes the value 1 if a firm belongs
to the retail trade sector.
Post-IPO Analysis
In addition to the methodology discussed in the previous
section, the likely consequences of IPO decision on variables like promoters ownership, leverage, capital expenditure and investments and cost of credit are examined
by analysing the post-IPO changes in these variables. The
rationale behind analysing post-IPO consequences was
to see what actually had happened after IPO and was it
related to the factors that can motivate a company to do
IPO. The possible motivations are already discussed in
the theoretical framework section. The post-IPO consequences of Indian firms are analysed by comparing the
post-IPO values of variables with pre-IPO values using a
three-step procedure (Table 8). First, the firm-wise percentage changes in the variables for the following three
time windows are calculated: (i) one year before IPO (Y-1)
to IPO year (Y+0), (ii) one year before IPO (Y-1) to one year
after IPO (Y+1), and (iii) one year before IPO (Y-1) to two
years after IPO (Y+2). It is to be noted that the percentage
changes in variables are calculated separately for every
firm in our sample. Second, the median values of the firmwise percentage changes in the variables are separately
calculated and reported for each of the three time win-
75
confidence into the Indian capital market in the following period. In particular, the retail investors distanced
themselves from the Indian IPO market. During 1996-97,
SEBI, the Indian securities market regulator, introduced
fresh regulations related to the IPO pricing and enforced
other restrictions on the promoters and the management
board of the companies that compelled them to be more
responsible towards the shareholder wealth. This restricted the number of companies tapping the IPO market
and created a slump in the Indian IPO market (Aggarwal,
2000; Marisetty & Subrahmanyam, 2008). It can be seen
from Table 1 that between 1996 and 1999, the number of
IPOs and amount raised through these IPOs declined drastically. This lean period was followed by peaking up of
the dot-com boom during 1999-20019. The excessive optimism about the dot-com companies encouraged several
of them to raise money through their IPOs during 200001. It can be seen from the Table that the number of companies going for IPOs increased to 124 during 2000. The
peaking up of the dot-com boom was followed up by the
dot-com burst during 2001-02 wherein all major stock
markets suffered huge losses10. This drastically reduced
the number of IPOs by the Indian companies between
2001 and 2002. The increased interest of international
investors in the emerging markets from 2003 onwards
gradually revived the IPO activity and there was a huge
surge in amount of funds being raised through their IPOs
by the Indian companies till 2007.
than private firms. The average sales grew by 41.80 percent for IPO firms in the last three years before the IPO.
The average profitability, measured as operating return
on total assets, was the same for both the samples. The
level of disclosure was measured by the ratio of Tax to
Sales. Statistics show that private sample firms were paying more tax than the IPO sample firms, as the average
tax was found to be more for private sample. The operating risk measured as the ratio of intangible assets and
total assets was three times more for IPO firms. While the
average operating risk was 0.01 for private sample, the
average operating risk was 0.03 for the IPO sample. The
debt-equity ratio was less for IPO firms. While the debtequity ratio was 0.86 for the IPO sample, it was 1.55 for
private sample. The cost of credit was found to be higher
for the private sample. The industry market-to-book ratio
was more for the IPO sample indicating that the IPO
sample consisted of firms belonging to the overvalued
industry. The average beta of 1.17 for the IPO sample firms
was higher than the average beta of -0.01 for the private
sample firms. The negative figure of average beta for the
private sample firms meant that many private firms in
our sample had negative beta. A negative beta indicates
that the accounting returns of any such firm moves in the
opposite direction to the returns on the market. This appeared counter-intuitive and authors do not have any
particular explanation for the same.
Probit Analysis
The sample of the study was classified into 27 sectors.
Maximum number of IPOs 70 was from the computer
software sector followed by 28 IPOs from the banking
services sector, 17 IPOs from drugs and pharmaceuticals
sector, 9 from infrastructural construction, and 8 from
readymade garments.
The summary statistics (see Table 6) shows that the average size of a company in an IPO sample is almost four
times bigger than the private sample. While the average
size for the private sample was 1,247.17 crores, the average size for the IPO sample was 4,945.54 crores. Statistics
shows that the average age at which companies do IPO is
around 17 years which is lower than the average age of
private sample which is around 29 years. It was found
that the percentage growth in sales was more for IPO firms
9
The BSE Sensex, the most popular stock index in India, touched its
highest value (till that point of time) of 6, 151 on February 14, 2000.
10
76
Post-IPO Analysis
Table 8 shows results of the three-step procedure (already
explained in the methodology section) followed to calculate the median changes (percentage) in the firm-specific
variables of Indian firms around their IPOs for each of the
following three time windows: (i) one year before IPO (Y1) to IPO year (Y+0), (ii) one year before IPO (Y-1) to one
year after IPO (Y+1), and (iii) one year before IPO (Y-1) to
two years after IPO (Y+2).
The promoters ownership of IPO firms decreased by: (a)
0.01 percent at the time of IPO; (b) 3.14 percent in one year
after IPO; and (c) 4.24 percent in two years after IPO (all
significant at 0.01 level). The decrease in promoters ownership indicates that insiders offload their shares at the
time of IPO and during the following two years to diversify their risk.
The debt-equity ratio of IPO firms decreased by: (a) 19.35
percent at the time of IPO; (b) 51 percent in one year after
IPO; and (c) 36.40 percent in two years after IPO (all significant at 0.01 level). The drastic reduction in debt-toequity ratio indicates that firms do their IPOs to rebalance
their capital structure.
The level of capital expenditure increased by: (a) 58 percent at the time of IPO; (b) 139 percent in one year after
IPO; and (c) 138 percent in two years after IPO (all significant at 0.01 level. The level of investment increased by: (a)
18 percent at the time of IPO; (b) 285 percent in one year
77
after IPO; and (c) 347 percent in two years after IPO (all
significant at 0.01 level). The significant increase in capital expenditure and investments indicates that firms do
their IPOs to: (a) finance their future investment and
growth; and (b) reduce the excessive over monitoring by
the large shareholders.
The cost of credit decreased by: (a) 9.76 percent at the time
of IPO (significant at 0.1 level); (b) 31 percent in one year
after IPO (significant at 0.1 level); and (c) 65 percent in
two years after IPO (significant at 0.01 level). The significant decrease in cost of credit shows that IPOs enabled
firms to bargain for lower cost of credit.
Using Beta to assess the impact of IPO on the cost of capital provides similar results. Beta decreased by: (a) 0.62
percent at the time of IPO; (b) 6.55 percent in one year after
IPO; and (c) 12.61 percent in two years after IPO. Wilcoxon
test, however, is significant for only the last time window.
CONCLUSIONS
The study provides an analysis of the factors determining going-public decision of Indian firms. The determinants were investigated by examining both ex-ante
characteristics of the IPO firms and ex-post IPO consequences of the IPOs. Two independent analyses were carried out. First, a panel probit regression specification is
estimated to identify the ex-ante characteristics of goingpublic Indian firms that differentiate them from those Indian firms that continue to remain private even though
they fulfill the eligibility criteria of going public. Second,
ex-post consequences of IPOs for firms are examined by
comparing pre-IPO characteristics of IPO firms with their
post-IPO characteristics.
The probit analysis reveals that goingpublic Indian firms
tend to be younger, riskier, transparent, more profitable,
experiencing higher sales growth and large-sized than
firms that decide to remain private. Also, if a firm belongs
to the retail trade sector, it increases its probability to go
public.
The ex-post analysis reveals that firms go public to: finance their growth and investments, diversify owners
risk, rebalance their capital structure, and bring down
their borrowing rates.
Put together, the revelations of the above two indepen-
78
APPENDIX
Table 1: Number of IPOs and Amount raised by Indian Companies from 1989 to 2008
Year
1989-90
No. of Issues
187
1990-91
141
1,704
1991-92
196
1,898
1992-93
528
6,252
1993-94
770
13,443
1994-95
1,343
13,312
1995-96
1,428
11,822
1996-97
753
11,687
1997-98
62
3,061
1998-99
32
7,911
1999-00
65
7,673
2000-01
124
6,618
2001-02
19
6,423
2002-03
14
5,732
2003-04
35
22,145
2004-05
34
25,526
2005-06
102
23,676
2006-07
85
24,993
2007-08
91
53,219
2008-09
22
3534
Pagano,
Panetta &
Zingales
(1998)
Boehmer &
Ljungqvist
(2004)a
Albornoz
& Pope
(2004)
69/12391
830/9968
1315/2578
Country
Country Category
110/5118
Chun,
Lynch &
Smith
(2002)
Overall
304/1722
Italy
Germany
UK
US
Thailand
Korea
Developed
Developed
Developed
Developed
Developing
Developing
Multiv.
(Probit)
Multiv.
(Probit)
Multiv.
(Probit)
+*
+*
+*
+*
+*
Ex-ante results
Statistical Technique
Multiv.
(Probit)
Multiv.
(Cox)
Multiv.
(Logistic)
Explanatory variables
Size
+*
Age
Profitability
+*
+
+*
+*
Asset Risk
M+/
*
+*
Cost of Credit
Leverage
Bank Rate
Market-Book Ratio
+*
Growth
A+
M+/
A+
N
*
*
+*
+*
+*
M+
+*
M+
79
Table 2 (contd.)
Research Study
Pagano,
Panetta &
Zingales
(1998)
Capital Expenditure
Boehmer &
Ljungqvist
(2004)a
Albornoz
& Pope
(2004)
+*
Investments
Overall
M+
Index Volatility
Chun,
Lynch &
Smith
(2002)
*
+*
A+
Publicity/Coverage
+*
+*
A+
Ex-Post results
Statistical Analysis
Univariate
Sales
A +/
Profitability
Capital Expenditure
Leverage
Investments
Payout
TAX
Growth
Interest Rate
Ownership
A +/
A +/
N
N
+
M +/
A +/
A
Size
Covergae
A
A
Research Studies
A. Benefit-related Theories
1.
2.
Risk diversification
Pagano, 1993; Zingales, 1995; Stoughton & Zechner, 1998; Chemmanur &
Fulghieri, 1999; Mello & Parsons, 1998; Black & Gilson, 1998.
3.
4.
Scott, 1976; Modigliani & Miller, 1963, Diamond, 1991; Holmstrom & Tirole,
1993; Booth & Chua, 1996; Maug, 1998.
5.
Liquidity
Booth & Chua, 1996; Bolton & Thadden, 1998; Pagano et al, 1998..
6.
Monitoring
7.
Windows of opportunity
8.
Getting publicity
9.
Zingales (1995)
80
Table 3 (contd.)
Theories
Research Studies
1.
Akerlof, 1970; Leland & Pyle, 1977; Rock (1986); Welch (1989); Chemmanur
& Fulghieri (1999)
2.
Campbell, 1979; Tinic, 1988; Yosha, 1995; Maksimovic & Pichler, 2001
B. Cost-related Theories
3.
4.
Tinic, 1988
Size
Size is measured by value of total assets. Total assets include value of fixed assets, investments, and current assets.
Age
IA
Beta*
Accounting beta was calculated by regressing historical accounting earnings for each IPO against the accounting
earnings for the market. The model used is as follows: Rit =+iRmt + ui. The coefficient of the above regression,
i is the accounting beta for the ith IPO. Rit is the accounting return of the firm under observation, whereas Rmt is
the accounting return of market. BSE Sensex firms are included as market. Accounting return is proxied by ratio of
profit before depreciation, interest and tax (PBDIT) and total assets.
SG
PBDIT
Ratio of Profit before depreciation, interest and tax (PBDIT) and Total assets.
Disc
Disclosure is measured by ratio of corporate tax and total sales of a company. Corporate tax includes portion of
corporate income tax provided by the enterprise during a particular accounting period. Sales is income generated
from main business activities like sale of goods and services, fiscal benefits, trading income. It also includes
internal transfers.
LEVERAGE
Debt-Equity ratio is used as a measure of financial leverage of a company. This ratio is calculated by dividing total
borrowings of a firm by net worth.
M/B
The median market-to-book ratio of the industry that a firm belongs to.
Retail
Dummy variable which takes value 1 if a firm belongs to retail, telecom or utility industry; otherwise, its value is 0.
Promoters
ownership
A promoter is a person(s) who is in control of the company, or a relative of the promoter. Promoters ownership is
calculated as shares held by promoters (in percentage) including foreign promoters and persons acting in concert
as a percent of the total outstanding shares of the firm.
Capital
expenditure
Investments
Investments in shares/debentures of companies, PSU bonds, mutual fund schemes of UTI and other mutual funds,
etc. It includes both quoted investments as well as unquoted investments.
Cost of credit is measured as ratio of firms annual interest expense and total borrowings from bank.
CoC
*Note:
Since it was not possible to calculate market beta for private firms, accounting beta was taken as a proxy of the market beta.
Accounting beta was computed in a way that is similar to the computation of market beta. Historical earnings for each company were
regressed against the accounting earnings for the market.
81
Risk
diversification
Ex-ante Hypotheses
Ex-post Hypotheses
Statement
Relationship
Statement
Relationship
(SG)pub> (SG)pri
(Capexp)preIPO <
(Capexp)postIPO
(Leverage)pub >
(Leverage)pri
(Invest)preIPO <
(Invest)postIPO
(Promoters
ownership)preIPO >
(Promoters
ownership)postIPO
(Leverage)pub >
(Leverage)pri
(Leverage)pre
IPO>(Leverage)postIPO
Lowering of
cost of capital
(Beta)preIPO >
(Beta)postIPO
Liquidity
(CoC)preIPO >
(CoC)postIPO
Monitoring
(Capexp)preIPO <
(Capexp)postIPO
(Invest)preIPO <
(Invest)postIPO
Windows of
opportunity
Getting
publicity
(Retail) > 0
82
Mean
Std. Dev.
Min
Max
Obs
112,220.90
149.00
0.83
3.27
793.84
0.90
1.00
1.00
121.05
102.35
4,059.00
4,059.00
4,059.00
3,845.00
4,059.00
4,059.00
3,947.00
3,226.00
4,059.00
3,216.00
252,058.7
140.00
0.79
790.52
267.94
0.88
0.60
0.47
109.47
25.08
310
310
310
263
310
310
310
310
310
247
1,247.17
28.59
0.01
-0.01
21.98
0.14
0.04
0.09
1.55
1.93
4,608.17
23.34
0.04
0.13
62.90
0.09
0.14
0.22
4.64
5.38
20.48
3.00
0.00
-5.57
-100.00
0.00
0.00
0.00
0.00
-42.27
4,945.54
17.44
0.03
1.17
41.80
0.14
0.02
0.33
0.86
4.122
20,956.4
21.25
0.10
16.11
85.31
0.11
0.05
0.05
10.40
3.93
0.23
3.00
0.00
-0.11
-225.00
0.00
0.00
0.00
0.00
0.52
Note: This Table provides the summary statistics of private and public samples. Private sample consists of companies that were eligible to do
IPO but remained private throughout the study period. IPO sample contains total companies that went public during study period (19972006).
Definitions of variables are discussed in Table 4. Size is expressed in crores, age is expressed in years and growth in sales is expressed in
percentage. The remaining variables are expressed in ratios. The summary statistics describe the mean, standard deviation, minimum,
maximum and number of observation of the variables.
Model 1
Model 2
Model 3
Size
0.0001***
(0.0000)
0.0001***
(0.0000)
0.0001***
(0.0000)
Age
-0.0113***
(0.0105)
-0.0279*
(0.0043)
-0.0087*
(0.0071)
IA
1.4848**
(0.75019)
1.6488**
(0.8700)
0.7095
(1.6785)
Beta
0.0001*
(0.0000)
0. 0001*
(0.0000)
0.0001*
(0.0000)
SG
0.0283***
(0.00548)
0.0030*
(0.0006)
0.0004***
(0.0001)
PBDIT
0.5801*
(0.5281)
0.5136
(0.6868)
2.5030*
(1.7087)
Disc
0.0009*
(0.0016)
0.0015
(0.0043)
0.0002*
(0.0040)
LEVERAGE
-0.0259
(0.0713)
-0.0308
(0.0307)
-0.0155
(0.06294)
M/B
0.0001
(0.0040)
0.0002
(0.0014)
0.0003
(0.0038)
83
Table 7 (cont.)
Variable
Model 1
Retail
0.6969**
(0.3741)
Constant
-2.9866***
(0.4369)
Obs
Log likelihood
2
Model 2
Model 3
0.5834**
(0.3885)
-1.0056***
(0.2093)
-3.4623***
(0.6439)
1712
1712
1712
-32.2580
39.51***
-269.5918
39.15***
-32.2580
39.51***
The sign ***, ** and * indicate significant at 1%, 5% and 10% respectively.
Note:
This Table presents the results of maximum likelihood estimate of probit model used to investigate the determinants of going-public
decision of firms in the period 1999 to 2006. Model 1 is a simple probit estimation of probability of going public. Model 2 controls for
inter-industry effect and Model 3 controls for year effect. In order to control for industry effect and year effect, one way random effect
model was used where the differences in industry group and year group was assumed to be because of random effect. The
nomenclature of dependent variable is IPO, a dummy variable, which equals 1 if the company is publicly held and 0 if the company
is a private in a particular year. The explanatory variables are: the size, age, sales growth, profitability, level of disclosures, asset risk,
leverage, industry market to book value and market risk of the included companies. Detailed definitions of all variables are given in
Table 4. The number represents the coefficient in the probit regression model. Standard errors are reported in the parentheses.
Number of observations, log likelihood and 2 for the model are also reported in the Table.
Promoters ownership
-0.01***
(-5.822)
-3.14***
(-7.378)
-4.24***
(-8.092)
Debt to equity
-19.35***
(-4.543)
-51.95***
(-7.992)
-36.40***
(-4.473)
Capital expenditure
57.993***
(-4.72)
138.844***
(-5.81)
138.191***
(-5.92)
Investments
17.70***
(-7.40)
284.75***
( -10.62)
346.47***
( -11.58)
Cost of credit
-9.76*
(-0.68)
-31.34*
(-1.21)
-65.19***
(-3.28)
Beta
-0.62
(-.55)
-6.55
(-.13)
-12.61***
(-2.87)
The sign ***, ** and * indicate significant at 1%, 5% and 10% respectively.
Note: The above Table presents the median changes (percentage) in variables of Indian firms around their IPOs. The changes are analysed
for the following three time windows: (i) one year before IPO (Y-1) to IPO year (Y+0), (ii) one year before IPO (Y-1) to one year after
IPO (Y+1), and (iii) one year before IPO (Y-1) to two year after IPO (Y+2). The test for differences between the two groups is performed
using the Wilcoxon two-sample signed rank test, which assumes that the observations are independent. Z statistics are shown in
parentheses.
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Manoj Kumar is a member of the Faculty of Finance & Accounting at the Indian Institute of Management, Rohtak. He
has taken a Ph.D in Finance from IIT Bombay. He has published research papers in journals of national and international repute like, Journal of Financial Services Marketing, Vikalpa,
Management Review, Journal of Modern Accounting and Auditing, Bombay Stock Exchange Review, Indian Management, and
ICFAI Journal of Applied Finance. He has contributed research
papers in several edited volumes. He has also presented papers and chaired sessions at several international and national level professional conferences. His area of specialization
is Accounting and Finance.
e-mail: manoj.kumar@iimrohtak.ac.in.
86