Why Do Firms Go Public? The Role of The Product Market: A J, C A. H, T A. M P R

Journal of Business Finance & Accounting, 39(1) & (2), 165–192, January/March 2012, 0306-686X
doi: 10.1111/j.1468-5957.2011.02271.x
Why Do Firms Go Public? The Role of the

Product Market
ABE DE JONG, CAREL A. HUIJGEN, TEYE A. MARRA AND PETER ROOSENBOOM∗
Abstract: This paper investigates the effect of product market characteristics on the decision
to go public. When firms decide to go public or remain private, they trade off product market
related costs and benefits. Costs arise from the loss of confidential information to competitors,
e.g., in the IPO prospectus and subsequent mandated public disclosures, while benefits emerge
from raising capital allowing the firm to strengthen its position in the product market. Our
results show that UK firms are more likely to go public when they operate in a more profitable
industry and in an industry with lower barriers to entry. These firms are more likely to go public
in order to improve their position in the product market and to deter new entrants into the
industry. However, firms from more competitive industries and firms with smaller market share
are less likely to go public. For these firms the loss of confidential information to rivals outweighs
the benefits of going public.
Keywords: going public, initial public offering, product market competition, confidential
information
1. INTRODUCTION
The decision to go public is one of the most important decisions in the life of a firm
(Jain and Kini, 1999). Going public not only offers the advantage of lower-cost equity
financing (Chemmanur and Fulghieri, 1999; and Maksimovic and Pilcher, 2001) but
also allows the firm to improve its position in the product market at the expense of
its competitors that stay private (Chemmanur and He, 2011; and Chod and Lyandres,
2010). These product market benefits arise because shareholders in public firms are
better able to diversify risk and tolerate higher idiosyncratic profit variability than
owners of private firms (Shah and Thakor, 1988). This enables public firms to commit
to riskier and more aggressive product market strategies than otherwise similar private
firms.
∗ The first and fourth authors are from the Rotterdam School of Management, Erasmus University, The
Netherlands. The second and third authors are from the University of Groningen, The Netherlands. They
gratefully acknowledge comments from Lammertjan Dam, Douglas DeJong, Reggy Hooghiemstra, Robert
Lensink, Piet Moerland, Robert Scapens, Jeroen Suijs, Hans van Ees, Adri Verboven, Greg Waymire and
workshop participants at the 2005 EAA annual congress in Goteborg and the University of Groningen. An
anonymous referee and Andrew Stark (editor) provided valuable comments that substantially improved
earlier versions of this paper. (Paper received July 2009, revised version accepted September 2011)
Address for correspondence: Teye A. Marra, Faculty of Economics, University of Groningen, P.O. Box 800,
9700 AV Groningen, The Netherlands.
e-mail: t.a.marra@rug.nl

C 2012 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA. 165
166 DE JONG, HUIJGEN, MARRA AND ROOSENBOOM
However, firms that go public also face a loss of confidential information, because
public firms have to disclose their strategy, profitability and product innovations, which
is valuable information for their product market rivals (Campbell, 1979; Bhattacharya
and Ritter, 1983; Yosha, 1995; and Marra and Suijs, 2004). This information allows
competitors to copy more easily the firm’s product innovation (Maksimovic and
Pichler, 2001; and Spiegel and Tookes, 2008). Moreover, the decision to go public itself
signals higher product quality to competitors (Stoughton et al., 2001). The decision
to go public therefore depends on product market characteristics, and the position of
the firm within the product market.
In this paper we investigate the impact of ex ante product market characteristics of
a firm on the decision to go public. Our sample consists of 337 firms that went public
on the Official List of the London Stock Exchange during the period 1994–2006 and a
sample of 18,386 firms that decided to stay private but were eligible to go public. Our
study contributes to the literature in two ways. First, there are few empirical studies of
the decision to go public, mainly due to the difficulty of obtaining information about
private firms (Ritter and Welch, 2002). Existing studies therefore involve one industry
(Lerner, 1994) or small samples dominated by equity carve-outs (Pagano et al., 1998)
or large, highly leveraged firms (Helwege and Packer, 2009). Our study adds to this
literature by providing the first large sample study on the decision to go public in the
United Kingdom.
Second, this paper is one of the first to empirically test theoretical models that
provide product market explanations for going public. The only other paper we are
aware of is that of Chemmanur et al. (2010) who show, for a sample of US firms,
that a firm’s market share, productivity and industry concentration have positive
effects on the likelihood of going public. The authors conclude that these results are
consistent with confidential information theories. However, their sample is limited to
manufacturing firms and therefore their conclusions may not apply to services firms
(including service-oriented high technology firms). In this paper, we investigate a
sample of UK firms from both manufacturing and services industries. We have access
to audited financial statement data of private firms that are obliged to file financial
information with Companies House and are eligible to go public on the Official List
of the London Stock Exchange.
We confirm the US results of Chemmanur et al. (2010) using our UK sample
and find that, after controlling for other determinants of going public, confidential
information theories are important for explaining the decision to go public. However,
this paper also extends their work by investigating the impact of industry margins and
entry barriers on the decision to go public. We report that firms in more profitable
industries and firms from industries with lower entry barriers are more likely to seek a
public listing. We argue that firms in these industries are more likely to benefit from an
Initial Public Offering (IPO) which enables them to pursue more aggressive product
market strategies to deter entry into their profitable industry and to grab market share
from their private competitors. This finding is consistent with the theoretical models
of Chod and Lyandres (2010) and Chemmanur and He (2011). We also provide
interesting results for other variables. For example, Pagano et al. (1998) and Baker
and Wurgler (2002) argue that companies time financial decisions and may go public
to exploit high share valuations. We indeed find that companies are more likely to go
public when the equity valuation of their industries is relatively high, which suggest
that companies take advantage of this window of opportunity.

C 2012 Blackwell Publishing Ltd
WHY DO FIRMS GO PUBLIC? 167
We further examine the product market related effects of going public in the
years directly following the IPO. Firms that go public increase their market share and
operational risk in the post-IPO period to the year before the IPO. We also find that
firms increase their scale of operations in the post-IPO years. IPO-firms significantly
increase (in real value terms) their capital expenditures, fixed assets, total assets,
sales and profitability in comparison to the year before the IPO. These findings are
consistent with theories that predict that firms go public to increase the scale of their
investments (Clementi, 2002) and/or to engage in riskier product market strategies
to improve their position in the product market (Shah and Thakor, 1988; Chod and
Lyandres, 2010; and Chemmanur and He, 2011).
The remainder of this paper is organized as follows. In Section 2 we survey the
literature and develop our hypotheses. Section 3 describes our data and methodology.
In Section 4 we present our empirical results. Section 5 concludes our study.
2. LITERATURE AND HYPOTHESES

There exists only a handful of studies that empirically investigate why firms decide to
go public. Lerner (1994) studies the timing of going public of privately held venture-
backed biotechnology firms in the United States. He reports that biotech firms decide
to go public when equity valuations are high. Pagano et al. (1998) show that the
industry market-to-book ratio and firm size positively impact the likelihood of going
public using a sample of 5,350 Italian firms, of which only 69 went public. More recent
evidence comes from Helwege and Packer (2009) who investigate a sample of 181
large, highly levered US firms that continue to file with the SEC because they had
public bonds outstanding before the IPO. They find that family-controlled firms and
firms with greater managerial autonomy are less likely to go public because they want
to protect their private benefits of control. However, none of these studies examines
the role of product market characteristics on the decision to go public.
This lack of empirical work contrasts with the extensive theoretical literature related
to the IPO decision that focuses on explanations based on the product market. Firms
require access to external capital to exploit valuable opportunities in their product
markets once their internal financing is used up. External capital can be attracted from
either public or private capital markets. A general assumption is that public capital
is less expensive, because of improved diversification options and increased liquidity
(Chemmanur and Fulghieri, 1999; Maksimovic and Pilcher, 2001; and Boehmer and
Ljungqvist, 2004). However, the fixed cost of publicly issuing securities is greater
which makes going public more likely for firms with large scale investment projects
(Clementi, 2002). Investing on a large scale offers the opportunity to expand product
market positions more effectively and to deter new entrants to the industry.
Chemmanur and He (2011) develop a theoretical model and argue that firms that
go public can seize market share from their private rivals or prevent entry by new
firms. They mention several mechanisms through which public firms can improve
their position in the product market: they gain additional credibility with customers
and suppliers; they can hire and retain better quality staff by compensating them via
stock and stock options; and they are able to acquire other firms in the same industry
using their own publicly traded stock as an acquisition currency. Shah and Thakor
(1988) and Chod and Lyandres (2010) theoretically show that public firms can pursue
more aggressive product market strategies because their shareholders put up with

more idiosyncratic profit volatility than owners of private companies. Firms that go
public are therefore able to credibly commit to a more aggressive product market
strategy which helps to deter new entrants to their industry.
We therefore hypothesize that firms from more profitable industries are more likely
to go public. These firms have most to gain from grabbing market share from their
private competitors and from deterring further entry into the industry which could
erode their profitability.
H1a : Firms from more profitable industries are more likely to go public.
We also conjecture that companies from industries with low barriers to entry are more
likely to go public in order to adopt more aggressive product market strategies that
will deter new entrants.
H2a : Firms from industries with low entry barriers are more likely to go public.
Alternatively, confidential information theories predict that firms in more prof-
itable industries and industries with low barriers to entry are less likely to go public.
Going public forces the firm to inform investors publicly, thereby running the risk
of simultaneously informing competing firms. Ball and Shivakumar (2005 and 2008)
support this view and show that public UK firms supply higher quality financial
reports demanded by public investors, because these investors face higher information
asymmetry than private investors. Moreover, public firms have to disclose their strategy,
profitability and product innovations, which is valuable information for their product
market rivals and for new entrants to the industry. The confidential information
allows competitors to copy the firm’s product innovation more easily (Maksimovic and
Pichler, 2001; and Spiegel and Tookes, 2008). This loss of confidential information
imposes larger costs on firms going public in industries that are more profitable and
that are easier to enter. We therefore also formulate two alternative hypotheses.
H1b : Firms from more profitable industries are less likely to go public.
H2b : Firms from industries with low entry barriers are less likely to go public.
The confidential information theories of Bhattacharya and Ritter (1983) and Marra
and Suijs (2004) also predict that the loss of confidential information is more of a
concern when product markets are more competitive. We therefore hypothesize that
firms that are active in a more concentrated (i.e., less competitive) industry are more
likely to go public.
H3a : Firms from less competitive industries are more likely to go public.
On the other hand, firms in less competitive industries stand to benefit less from
going public. Public firms are able to adopt more risky and aggressive product market
strategies than otherwise similar private firms which enable them to expand their
market share (Chemmanur and He, 2011; and Chod and Lyandres, 2010). These
benefits are positively related to the level of product market competition in the
industry. Firms from less competitive industries are therefore less likely to go public.
H3b : Firms from less competitive industries are less likely to go public.
We also expect that firms with a higher market share have a higher propensity of
going public. These firms are established industry players that are expected to be

less concerned with the loss of confidential information (Chemmanur et al., 2010).
Guo et al. (2004) show that biotech firms that go public disclose more product-related
information at a time when they have secured patent protection and the firm is at a
later stage of development. This suggests that firms with more secure product market
positions are less concerned with a loss of confidential information. Hence:
H4a : Firms with higher market shares are more likely to go public.
At the same time, firms with higher market shares may be less likely to go public.
Firms with smaller market shares have more to gain from going public, as it allows
them to increase their market share and to strengthen their position in the product
market through aggressive product market strategies (Chemmanur and He, 2011; and
Chod and Lyandres, 2010). We therefore conjecture that the firm’s market share and
the likelihood of going public are inversely related.
H4b : Firms with higher market shares are less likely to go public.
3. DATA AND METHODOLOGY
(i) Data Sources and Sample

The main source of data used in this study is the FAME database, which provides
financial and other information on approximately 3.4 million UK companies.1 The
FAME database contains detailed financial information and industry classifications for
both public and private companies. For our analysis, we use three sets of companies.
The first set contains firms that went public on the Official List of the London Stock
Exchange in the period 1994–2006. The second set consists of firms that were in a
position to go public, but did not do so during this period. Our third set comprises
almost all UK firms that are registered in the FAME database in every year during the
period of our research.
To create our set of IPO firms we started with all 456 UK companies that went
public between 1994 and 2006 on the Official List and that did not previously have a
listing on another stock market.2 We include both public offers and placings (Goergen
et al., 2006). We identify IPO firms from the SDC New Issues database and from
New Issues Statistics provided to us by the London Stock Exchange. We exclude 56
financial companies because their accounting information is difficult to compare with
that of non-financial companies. Another 74 firms are omitted due to incomplete
information. Our final sample comprises 337 IPO firms.
The second set consists of companies that were in a position to go public in the
period of study. The selection of these companies is based on the availability of
audited financial statements. Companies with annual sales in excess of £350,000 before
2000 and £1,000,000 thereafter are required to file audited financial statements at
Companies House. This ensures that the rules concerning financial reporting
1 FAME is an acronym for Financial Analysis Made Easy and is marketed by Bureau van Dijk Electronic
Publishing.
2 We do not include firms that go public on the Alternative Investment Market (AIM) of the London Stock
Exchange, because data for these small and medium sized private firms is difficult to obtain from the FAME
database. The 1981 Companies Act permits small and medium sized private companies to file abridged
financial statements (which do not need to include sales) at Companies House (Ball and Shivakumar, 2005).
This means that we cannot obtain data for the small private firms that are eligible to list on the AIM.

are the same for the public and private companies in our sample. Firms are
assumed to be eligible to go public in every year that they fulfill these re-
quirements in the period 1994–2006. We do not use other selection criteria.
The London Stock Exchange is flexible in applying its listing requirements
and allows companies to go public without its formally required three-year track
record.3 Later we test the robustness of our results in relation to the possible selection
bias induced by our selection criterion (see Section 4(iv)). In addition, we check
whether our results change when we add the condition that private firms have a five-
year trading record. The sample of potential IPO firms contains 192,514 observations
for the period 1994–2006, corresponding, on average, to more than 14,800 potential
IPO firms per year.
Finally, the third set of firms consists of all firms with a registered office in the
UK that fulfill the following criteria: (i) qualified independent, (ii) non-financial,
(iii) private or public, (iv) active or inactive, and (v) turnover and operating profit
available. We use this set of firms to estimate our product market characteristics. This
set comprises 1,428,727 observations, which implies an average of 109,902 firms per
year.
(ii) Empirical Model

In order to assess whether our product market characteristics and control variables
can discriminate between firms that go public and eligible firms that remain private
we test logistic regressions using the following specification:
y ijt = β0 + β1 INDMARGIN j t−1 + β2 CAPINT j t−1 + β3 HERF j t−1 + β4 MSHAREit−1

+ β5 CAPEXit−1 + β6 GROWTHit−1 + β7 LNSALESit−1 + β8 LNAGEit
+ β9 LEVERAGEit−1 + β10 BTM j t−1 + β11 INDEX j t−1 + β12 PROFITit−1
+ β13 OWNit−1 + β14 OWNit−1 ∗ OWNit−1 + γt YEARt + εijt (1)
where yijt is the logit of the odds that firm i from industry j has gone public in period
t; INDMARGINjt−1 is the weighted average of the ratio of operating profit over sales
for industry j in period t−1; CAPINTjt−1 is a dummy that equals 1 if both the ratio of
property, plant and equipment over number of employees in industry j and the ratio
of net sales over number of firms in industry j exceed the median industry values in
period t−1, otherwise 0; HERFjt−1 is the Herfindahl index of industry j in period t−1;
MSHAREit−1 is the market share of firm i in period t−1; CAPEXit−1 is the ratio of capital
expenditure over property, plant and equipment of firm i in period t−1; GROWTHit − 1
is the growth in net sales of firm i in period t−1; LNSALESit−1 is the natural logarithm
3 The listing requirements of the Official List of the London Stock Exchange include, among others:
(i) at least 25% of the share capital should be in the hands of the public so that shares can be actively
traded, (ii) the anticipated market capitalization should be at least £700,000 and (iii) the company should
have at least three years of accounts. However, the London Stock Exchange allowed companies (e.g.,
Freeserve plc in 1999) to go public on the Official List without a three-year trading record. These companies
have to be ‘innovative high-growth companies’ which can demonstrate an ‘ability to attract funds from
sophisticated investors’ and be raising more than £20 million. At the time of listing, they should have a
market capitalization of more than £50 million. They must also detail their business plan and ‘risk factors’.
The problem with using these listing criteria to identify potential IPO firms is that market capitalization is
unobservable for private companies.

of total sales of firm i in period t−1; LNAGEit is the natural logarithm of firm i’s age in
period t; LEVERAGEit−1 is the debt ratio of firm i in period t−1; BTMjt−1 is the median
book-to-market value of equity of firms in the same industry j which are traded on the
Official List of the London Stock Exchange in period t−1; INDEXjt−1 is the buy-and-
hold return of the FTSE UK All Share ICB industry Index for industry j over the year
t−1; PROFITit − 1 is earnings before interest and taxes over sales of firm i in period
t−1; OWNit−1 is the percentage of shares held by senior managers and other insiders in
firm i in period t−1 and OWNit−1 ∗ OWNit−1 is its square; and YEARt is a calendar year
dummy. Industries are defined at the three-digit level of the SIC industry classification
code.4 IPO firms are excluded from the sample after the year they went public. Table
1 provides more detailed definitions of the variables.
In any year t, the sample consists of firms that went public in that year and private
firms that were eligible to go public. As a result, our sample contains several (year)
observations of a single firm, since private firms can be eligible IPO candidates for
more than one year during the period of research. To control for dependencies in the
standard errors of the firm year observations in our sample that relate to a single firm,
we use a logistic regression technique that clusters such related observations.5
(a) Product Market Characteristics

Our regression model includes industry margin (INDMARGIN) to account for differ-
ences in industry profitability and to test our first hypothesis. We also measure how
difficult it is for new firms to enter the industry in order to test hypothesis two. Main
barriers to entry are the capital, marketing and R&D intensity of an industry. However,
the available data does not allow us to measure marketing and R&D intensity. We
therefore measure the barriers to entry using a dummy variable (CAPINT) that is
one if both the average value of the ratio of property, plant, and equipment over
number of employees in an industry and the average sales per firm in an industry
exceed the median values of these two measures across all industries in the sample. We
use this dummy variable because both the relative investments in plant, property and
equipment and the firm’s absolute size can indicate the capital intensity of an industry.
To test our third hypothesis, we measure the level of competition in the industry by
the Herfindahl index (HERF). The higher the Herfindahl index the lower the level of
competition in the industry. We use the market share of the firm (MSHARE), defined
as the sales of the firm over the sum of all sales in the firm’s industry, to test hypothesis
four.
(b) Control Variables

Firms do not only go public to improve their position in the product market.
We, therefore, control for other possible determinants of going public. Firms that
invest heavily and grow fast need capital and therefore are more likely to seek
4 We considered using the four-digit SIC code but this would increase the difficulty of determining the
main product market of the firm, especially for multi-product market firms (we do, however, check the
robustness of our results by using a four-digit SIC demarcation). Using the two-digit or even one-digit SIC
industry classification code would lead to too coarse product market boundaries.
5 The standard errors in our analysis are adjusted for 18,723 clusters. Since the sample contains 337 unique
IPO firms, there were a total of 18,386 unique private firms that were in a position to go public in the period
1994–2006.

Table 1
Variable Definitions
Variable Description Source
Product market characteristics
INDMARGIN Industry margin computed as the weighted average FAME
margin of firms within industry j using the firm’s market
share as weights. In order to correct for extreme values,
we excluded the 5% lowest and highest profit margins in
an industry before computing the weighted industry
margin. We measure industry margin in industry j as:

INDMARGIN j = MARGINi ∗ MSHAREi
i∈ j
where MARGINi is firm i’s profit margin defined as
earnings before interest and taxes (EBIT) divided by
sales; and MSHAREi is firm i’s market share.
CAPINT Capital intensity captured as a dummy variable that equals 1 FAME
if both the ratio of property, plant and equipment over
number of employees and the ratio of net sales over
number of firms in an industry exceed the median values
of these ratios across all industries.
HERF Herfindahl index measured as the sum of the squared FAME
market shares in industry j. We measure the Herfindahl
index as:

HERFj = MSHAREi2
i∈ j
where MSHAREi is firm i’s market share.
MSHARE Market share defined as the ratio of the firm’s sales over FAME
total sales in the firm’s industry.
Control variables
CAPEX Capital expenditures over property, plant and equipment. FAME, IPO
prospectus
GROWTH Growth in net sales over the year. FAME, IPO
prospectus
SALES Total sales (in millions of pounds). FAME, IPO
prospectus
AGE Year of observation minus the year the company was FAME, IPO
founded. prospectus
LEVERAGE Book value of long term debt plus short term loans and FAME, IPO
overdrafts divided by book value of total assets. prospectus
BTM Median book-to-market value of equity of firms in the same FAME, IPO
industry which traded on the London stock exchange. In prospectus
order to correct for extreme values, we excluded the 1%
lowest and highest book-to-market values.
INDEX Buy-and-hold return of the FTSE UK All Share ICB industry Datastream
Index during the past year. In order to correct for
extreme values, we excluded the 1% lowest and highest
buy-and-hold returns.
PROFIT Operating profit over sales. FAME, IPO
prospectus
OWN Percentage of shares held by senior management and other FAME, IPO
insiders. prospectus
Notes:
Industries are classified by the three-digit SIC code and firms are assigned to the industry in which
they had the largest proportion of sales.

external financing (Jain and Kini, 1999). We measure current investments as capital
expenditures over property, plant and equipment (CAPEX), and growth as one-
year growth in sales (GROWTH). Both variables are capped at 1 (and CAPEX also
at −1), to prevent (small) companies with extreme investments or growth distorting
our findings.
An IPO involves considerable fixed costs, such as fees for the underwriters, auditors
and lawyers, as well as stock exchange fees. The fixed costs suggests that the likelihood
of an IPO should be positively associated with size (Pagano et al., 1998). We measure
size as the natural logarithm of net sales (LNSALES). We include the age of the firm
as a proxy for information costs. Investors more heavily discount prices for shares in
firms for which less information is available (Leland and Pyle, 1977). Such information
costs are more likely to affect the going public decision of relatively small and young
companies, which have a limited track record and low visibility (Chemmanur and
Fulghieri, 1999). This may mean that public financing is less attractive for younger
firms. We measure age as the natural logarithm of the age of the firm (LNAGE).
A high debt burden may force a firm to rebalance its capital structure by issuing
(public) equity. We use the debt ratio, which is defined as book value of long term
debt plus short term loans and overdrafts over total assets, as a proxy for leverage
(LEVERAGE). Companies may go public to exploit high valuations of their shares in
certain periods (Pagano et al., 1998; Baker and Wurgler, 2002; Benninga et al., 2005;
and Gregory et al., 2010). To control for the possibility that firms time their IPOs
immediately following a strong run-up in stock prices in their industry, we include in
our empirical model the median industry book-to-market ratio (BTM) and the buy-
and-hold return of the FTSE UK All Share ICB industry index during the previous
year.
As Pagano et al. (1998) argue, firm profitability can affect the likelihood of an IPO
in two opposite ways. First, tapping public equity markets is an infrequent event. Firms
are, therefore, likely to time an IPO in a period when their prospects are favorable
and their profits are high. Second, more profitable firms can more easily finance their
projects internally and therefore have less need for external capital. This implies a
negative relationship between profitability and the likelihood of an IPO. We measure
profitability (PROFIT) as the earnings before interest and taxes scaled by sales.
Managerial incentives in privately owned companies can also influence the decision
to go public (Wagner, 2010). For example, if managers of a private firm have a
relatively large ownership stake, then there might be a strong incentive to ‘cash out’
this investment by taking the firm public. We therefore include the percentage of
shares held by senior management and other insiders (OWN) in our empirical model.
Because the effect of insider ownership on the IPO decision might be nonlinear (i.e.,
insider ownership might only play a role when the insiders’ stake is very large) we also
include the square of insider ownership (OWN∗ OWN) in the regression.6
4. EMPIRICAL RESULTS
In this section we present our empirical results. We start with descriptive statistics (4(i))
followed by a presentation of our logistic regression results (4(ii)). We continue with
6 We thank an anonymous referee for this suggestion.

a discussion of interaction effects (4(iii)), robustness checks (4(iv)) and an analysis of

product market related effects of going public in the post-IPO period (4(v)).
(i) Univariate Comparisons

Table 2 reports summary statistics for the sample of IPO and potential IPO firms.
The univariate comparisons of the means and medians of these samples provide
a first indication of factors that discriminate between IPO and private firms. All
variables, except firm age, are lagged one period so as to align the firm and industry
characteristics more closely with the period when the decision to go public or stay
private was presumably made.
Our sample comprises 203 different 3-digit US SIC industries (not tabulated). The
337 IPOs in our sample are well-distributed over the industries, as 95 out of the 203
industries have at least one IPO. The Services-Computer Programming, Data Processing
(SIC 737) industry has the largest number of IPOs (61 firms). At the industry level,
we find that both the average and median weighted margins (INDMARGIN) are
significantly higher in the industries which have IPOs, indicating that the IPO firms
operate in more profitable industries than the eligible firms. Our measure of barriers
to entry into the industry (CAPINT) is not significantly different between the firms
that go public and those that remain private. However, the Herfindahl index (HERF)
exhibits a significant difference: firms that go public operate in more concentrated
(i.e., less competitive) industries. Furthermore, firms that go public have significantly
higher market shares (MSHARE) than firms that decide to stay private.
Table 2 also reveals that firms that go public have larger capital expenditures
(CAPEX), faster one-year sales growth (GROWTH), more sales (SALES) and higher
leverage (LEVERAGE) compared to firms that remain private. In terms of the median,
IPO firms are younger than firms that stay private. The industry book-to-market ratio
(BTM) of IPO firms is significantly lower than for private firms. This indicates that
firms go public in industries with higher equity valuations (i.e., higher market-to-
book ratios). Similarly, the industry buy-and-hold return (INDEX) is also significantly
higher for IPO firms than for private companies, further supporting the idea that
firms time their access to public equity markets. The mean and median profitability
(PROFIT) for IPO firms are respectively −2.4% and 8.9%, while for eligible firms the
mean and median are 4.3% and 3.2%. Because of the skewed distribution for IPO
firms, the mean and median tests yield opposite results. Also note that 15.8% (11,942)
of all observations concern firm-years with negative operating profit. We include
these loss reporting firms in our sample as the London Stock Exchange sometimes
allows loss making firms to go public without the formally required three-year trading
record. Share ownership by senior management and other insiders (OWN) is less
concentrated for IPO firms than for firms that remain private. Table 3 shows the
correlations between the variables we use in the subsequent regression analyses. The
most extreme correlation is the one between the variables OWN and LNSALES.
However, multi-collinearity is not a problem for the regression analyses per se. A
standard way to gauge whether multi-collinearity may cause problems is to calculate
Variance Inflation Factors (VIF). The VIF provides an index that measures how much
the variance of an estimated regression coefficient is increased because of collinearity.
A common rule is that a VIF higher than 5 indicates high multi-collinearity. We

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Table 2
Summary Statistics
2012 Blackwell Publishing Ltd

Standard
Mean Median Deviation Minimum Maximum
Test of Test of
Variable IPO Eligible Difference IPO Eligible Difference IPO Eligible IPO Eligible IPO Eligible
INDMARGIN 0.064 0.044 (−5.87)∗∗∗ 0.064 0.043 (−8.09)∗∗∗ 0.062 0.039 −0.429 −0.544 0.267 0.299
CAPINT 0.270 0.298 (1.12) 0.000 0.000 (1.120) 0.445 0.457 0.000 0.000 1.000 1.000
HERF 0.227 0.120 (−8.64)∗∗∗ 0.138 0.048 (−10.04)∗∗∗ 0.227 0.157 0.003 0.002 0.905 0.993
MSHARE 0.089 0.006 (−7.29)∗∗∗ 0.015 0.001 (−19.93)∗∗∗ 0.208 0.025 0.000 0.000 1.000 1.000
CAPEX 0.394 0.107 (−13.83)∗∗∗ 0.340 0.015 (−19.09)∗∗∗ 0.380 0.239 −1.000 −1.000 1.000 1.000
GROWTH 0.336 0.122 (−10.42)∗∗∗ 0.246 0.070 (−13.24)∗∗∗ 0.376 0.280 −0.986 −0.981 1.000 1.000
SALES 140.315 11.893 (−5.28)∗∗∗ 24.647 4.600 (−17.60)∗∗∗ 446.683 35.687 0.003 0.351 5, 286.000 3, 406.761
AGE 32.116 30.001 (−0.85) 14.000 24.000 (9.46)∗∗∗ 45.793 20.334 1.000 4.000 277.000 141.000
WHY DO FIRMS GO PUBLIC?
LEVERAGE 0.322 0.192 (−7.91)∗∗∗ 0.246 0.147 (−7.28)∗∗∗ 0.301 0.184 0.000 0.000 1.000 0.979
BTM 0.771 1.234 (18.60)∗∗∗ 0.689 1.095 (14.72)∗∗∗ 0.455 0.691 0.216 0.216 4.180 4.180
INDEX 0.166 0.035 (−9.64)∗∗∗ 0.180 0.077 (−8.77)∗∗∗ 0.217 0.247 −0.663 −0.663 0.632 0.632
PROFIT −0.024 0.043 (3.36)∗∗∗ 0.089 0.032 (−9.69)∗∗∗ 0.364 0.093 −1.000 −1.000 0.467 1.000
OWN 42.333 77.472 (19.16)∗∗∗ 36.270 99.000 (18.23)∗∗∗ 33.169 31.466 0.000 0.000 100.000 100.000
175
176
Table 2 (Continued)
Notes:
This table reports summary statistics for the sample of firms that went public and the firms that were eligible to go public on the Official List of the London Stock
Exchange between 1994 and 2006. All variables are one year lagged except for AGE. The sample of eligible firms consists of firms that file audited financial statements
with Companies House (i.e., net sales in excess of £350,000 before 2000 and £1,000,000 thereafter) for every year they fulfill this requirement in the period 1994–2006.
The sample consists of 75,708 firm-year observations of which 337 are IPOs. Managerial ownership data is only available for 46,271 firm-year observations of which 329
are IPOs. INDMARGIN denotes industry margin computed as the weighted average profit margin of firms within industry j using the firm’s market share as weights.
We measure industry margin in industry j as:
i∈ j
where MARGINi is firm i’s profit margin defined as earnings before interest and taxes (EBIT) divided by sales; and MSHAREi is firm i’s market share. CAPINT is
capital intensity measured as a dummy variable that equals 1 if both the ratio of property, plant and equipment over number of employees and the ratio of net sales
over number of firms in an industry exceed the median values of these ratios across all industries. HERF is the Herfindahl index measured as the sum of the squared
market shares in industry j. We measure the Herfindahl index as:

HERF j = MSHARE2i
i∈ j
where MSHAREi is firm i’s market share. MSHARE refers to market share defined as the ratio of the firm’s sales over total sales in the firm’s industry. CAPEX is capital
expenditures over property, plant and equipment. GROWTH denotes growth in net sales over the year. SALES equals total sales (in millions of pounds). AGE is the
year of observation minus the year the company was founded. LEVERAGE is measured as book value of long term debt plus short term loans and overdrafts divided by
book value of total assets. BTM is the median book-to-market value of equity of firms in the same industry which traded on the London stock exchange. INDEX refers
to the buy-and-hold return of the FTSE UK All Share ICB industry Index during the past year. PROFIT is operating profit over sales. OWN equals the percentage of
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shares held by senior management and other insiders. Industries are classified by the three-digit SIC code and firms are assigned to the industry in which they had the
DE JONG, HUIJGEN, MARRA AND ROOSENBOOM
largest proportion of sales. All ratio variables are winsorized to be no greater than one in absolute value, except for BTM, INDEX and INDMARGIN. BTM and INDEX
are winsorized at the first and 99th percentile and INDMARGIN excludes profit margins that are less (greater) than the fifth (95th ) percentile. One, two and three
asterisks indicate that the coefficients are significantly different from zero at the 10%, 5% and 1% level or better, respectively.

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Table 3
Correlation Matrix
IND- LEVE-
MARGIN CAPINT HERF MSHARE CAPEX GROWTH LNSALES LNAGE RAGE BTM INDEX PROFIT OWN

INDMARGIN 1.0000
CAPINT −0.1252∗∗∗ 1.0000
(<0.0001)
HERF 0.1705∗∗∗ 0.2027∗∗∗ 1.0000
(<0.0001) (<0.0001)
MSHARE −0.0033∗∗ −0.0033 0.0612∗∗∗ 1.0000
(0.0184) (0.3604) (<0.0001)
CAPEX 0.0066 −0.0047 0.0298∗∗∗ 0.0421∗∗∗ 1.0000
(0.3610) (0.1963) (<0.0001) (<0.0001)
GROWTH 0.0273∗∗∗ −0.0596∗∗∗ −0.0301∗∗∗ 0.0011 0.0918∗∗∗ 1.0000
(<0.0001) (<0.0001) (<0.0001) (0.7592) (<0.0001)
LNSALES −0.0916∗∗∗ 0.2437∗∗∗ 0.0191∗∗∗ 0.2677∗∗∗ 0.2227∗∗∗ 0.0070 1.0000
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (0.0534)
LNAGE −0.0170∗∗∗ 0.1398∗∗∗ 0.0554∗∗∗ 0.0750∗∗∗ −0.0200∗∗∗ −0.2332∗∗∗ 0.2134∗∗∗ 1.0000
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
LEVERAGE 0.0519∗∗∗ 0.0690∗∗∗ 0.0141∗∗∗ 0.0158∗∗∗ −0.0282∗∗∗ 0.0015 0.0523∗∗∗ −0.0412∗∗∗ 1.0000
(<0.0001) (<0.0001) (0.0001) (<0.0001) (<0.0001) (0.6753) (<0.0001) (<0.0001)

BTM −0.2138∗∗∗ 0.1585∗∗∗ −0.1323∗∗∗ 0.0533∗∗∗ −0.0556∗∗∗ −0.0524∗∗∗ 0.0684∗∗∗ 0.1042∗∗∗ 0.0414∗∗∗ 1.0000
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
INDEX 0.1503∗∗∗ 0.0219∗∗∗ 0.0130∗∗∗ 0.0206∗∗∗ 0.0030 −0.0004 0.0327 −0.0108∗∗∗ 0.0156∗∗∗ −0.1323∗∗∗ 1.0000
(<0.0001) (<0.0001) (0.0004) (<0.0001) (0.4165) (0.9200) (<0.0001) (0.0029) (<0.0001) (<0.0001)
PROFIT 0.1336∗∗∗ −0.0798∗∗∗ −0.0017 0.0076∗∗ −0.0047 0.1626∗∗∗ −0.0868∗∗∗ −0.1138∗∗∗ −0.0140∗∗∗ −0.0401∗∗∗ 0.0194∗∗∗ 1.0000
(<0.0001) (<0.0001) (0.6319) (0.0357) (0.1920) (<0.0001) (<0.0001) (<0.0001) (0.0001) (<0.0001) (<0.0001)
OWN 0.0662∗∗∗ −0.2185∗∗∗ −0.0118∗∗ −0.2097∗∗∗ −0.2090∗∗∗ −0.0533∗∗∗ −0.8363∗∗∗ −0.1582∗∗∗ −0.0592∗∗∗ −0.0654 ∗∗∗ −0.018∗∗∗ 0.0557∗∗∗ 1.0000
(<0.0001) (<0.0001) (0.0109) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
177
178
Table 3 (Continued)
Notes:
This table reports Pearson correlations for the variables used in our logistic regressions. All variables are one year lagged except for LNAGE. The sample of eligible
firms consists of firms that file audited financial statements with Companies House (i.e., net sales in excess of £350,000 before 2000 and £1,000,000 thereafter) for
every year they fulfill this requirement in the period 1994–2006. The sample consists of 75,708 firm-year observations of which 337 are IPOs. Managerial ownership
data is only available for 46,271 firm-year observations of which 329 are IPOs INDMARGIN denotes industry margin computed as the weighted average profit margin
of firms within industry j using the firm’s market share as weights. We measure industry margin in industry j as:

i∈ j
where MARGINi is firm i’s profit margin defined as earnings before interest and taxes (EBIT) divided by sales; and MSHAREi is firm i’s market share. CAPINT is
capital intensity measured as a dummy variable that equals 1 if both the ratio of property, plant and equipment over number of employees and the ratio of net sales
over number of firms in an industry exceed the median values of these ratios across all industries. HERF is the Herfindahl index measured as the sum of the squared
market shares in industry j. We measure the Herfindahl index as:

HERF j = MSHAREi2
i∈ j
where MSHAREi is firm i’s market share. MSHARE refers to market share defined as the ratio of the firm’s sales over total sales in the firm’s industry. CAPEX is
capital expenditures over property, plant and equipment. GROWTH denotes growth in net sales over the year. LNSALES equals the natural logarithm of total sales
(in millions of pounds). LNAGE is the natural logarithm of the year of observation minus the year the company was founded. LEVERAGE is measured as book value
of long term debt plus short term loans and overdrafts divided by book value of total assets. BTM is the median book-to-market value of equity of firms in the same
industry which traded on the London stock exchange. INDEX refers to the buy-and-hold return of the FTSE UK All Share ICB industry Index during the past year.
PROFIT is operating profit over sales. OWN equals the percentage of shares held by senior management and other insiders. Industries are classified by the three-digit
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SIC code and firms are assigned to the industry in which they had the largest proportion of sales. All ratio variables are winsorized to be no greater than one in absolute
value, except for BTM, INDEX and INDMARGIN. BTM and INDEX are winsorized at the first and 99th percentile and INDMARGIN excludes profit margins that are
less (greater) than the fifth (95th ) percentile. p-values are reported in parentheses. One, two and three asterisks indicate that the coefficients are significantly different
from zero at the 10%, 5% and 1% level or better, respectively.

find that none of the VIFs is higher than 5 indicating no severe multi-collinearity
problem.7
(ii) Regression Results

Table 4 shows the results of our logistic regressions. Model (1) includes the industry
margin (INDMARGIN) and control variables that are predicted to influence the IPO
decision that are derived from the previous literature (see Section 3(ii)(b)). We find
that firms are more likely to seek a public listing when their industry is more profitable.
A one standard deviation increase in the weighted average industry margin increases
the sample average probability of an IPO with about 47%.8 This finding is in line with
hypotheses 1a. Firms from profitable industries have an incentive to go public in order
to strengthen their position in the product market and to deter further entry into their
industry. These firms are less concerned with the loss of confidential information to
rivals.
In Model (2) we include barriers to entry, measured by the industry’s capital
intensity (CAPINT). In support of hypothesis 2a, we find that firms from industries
with lower entry barriers are more likely to go public. In particular, operating in
a capital intense industry decreases the sample average probability of an IPO by
roughly 50%.9 For firms from non capital intense industries going public offers an
opportunity to adopt more aggressive product market strategies in order to deter
potential new entrants into their industry. This effect dominates possible concerns
about the loss of confidential information to industry rivals. The positive sign of
the coefficient of the Herfindahl index (HERF) in Model (3) shows that firms from
more concentrated industries are more likely to go public. If greater concentration
means less competition in an industry, this result implies that less product market
competition positively affects the decision to go public, as predicted by hypothesis 3a.
When product market competition is relatively weak, firms are less concerned about
the loss of confidential information about their strategies and products. This result is
also economically significant with a one standard deviation increase in the Herfindahl
index increasing the sample average probability of going public by almost 41%.
Model (4) in Table 4 reveals that the firm’s market share (MSHARE) positively
influences the decision to go public. Firms that have a strong position in the product
market seem to be less worried about the loss of confidential information to industry
rivals. This supports hypothesis 4a. If the firm’s market share increases by one standard
deviation, the sample average probability of seeking a public listing increases with
almost 22%. We include all product market variables in Model (5) and observe that all
these variables remain statistically significant. Again, we find support for hypotheses
1a, 2a, 3a and 4a and thus fail to support our alternative hypotheses 1b, 2b, 3b and 4b.
To complete our discussion of the results, we turn to the control variables in our
regression models. We find that firms are more likely to go public when they have
larger investment projects to fund (CAPEX) and they experience faster one-year sales
7 The results are available on request from the authors.

8 We calculate the marginal effect of a continuous variable as the percentage change in the estimated
probability of an IPO by adding one standard deviation to the mean value of the variable of interest, while
leaving all other variables constant at their mean values and all time dummies zero.
9 We calculate the marginal effect of CAPINT as the percentage change in the estimated probability of an
IPO with and without this dummy variable, while leaving all other variables constant at their mean values
and all time dummies zero.

Table 4
The Determinants of the Decision to Go Public
Variables 1 2 3 4 5 6
INDMARGIN 9.87∗∗∗ 7.32∗∗∗ 1.89

(3.98) (3.03) (0.85)
CAPINT −0.69∗∗ −1.01∗∗∗ −0.72∗∗∗
(−2.48) (−4.11) (−3.42)
HERF 2.16∗∗∗ 2.25∗∗∗ 2.42∗∗∗
(5.18) (5.04) (4.94)
MSHARE 6.86∗∗∗ 5.83∗∗∗ 6.35∗∗∗
(6.13) (5.07) (5.68)
CAPEX 1.87∗∗∗ 1.76∗∗∗ 1.89∗∗∗ 2.00∗∗∗ 1.94∗∗∗ 2.08∗∗∗
(7.67) (7.31) (7.92) (8.14) (7.69) (8.76)
GROWTH 0.99∗∗∗ 0.94∗∗∗ 1.01∗∗∗ 0.95∗∗∗ 1.02∗∗∗ 1.27∗∗∗
(4.07) (3.98) (4.09) (3.87) (4.13) (5.76)
LNSALES 1.15∗∗∗ 1.18∗∗∗ 1.12∗∗∗ 0.93∗∗∗ 1.03∗∗∗ 0.78∗∗∗
(15.28) (14.77) (15.23) (11.78) (11.65) (4.98)
LNAGE −1.48∗∗∗ −1.53∗∗∗ −1.52∗∗∗ −1.59∗∗∗ −1.46∗∗∗ −1.12∗∗∗
(−4.99) (−5.16) (−5.17) (−5.27) (−5.00) (−4.90)
LEVERAGE 3.13∗∗∗ 3.28∗∗∗ 3.15∗∗∗ 3.15∗∗∗ 3.27∗∗∗ 2.96∗∗∗
(7.24) (7.50) (7.30) (7.23) (7.54) (6.90)
BTM −1.72∗∗∗ −1.95∗∗∗ −1.88∗∗∗ −2.07∗∗∗ −1.68∗∗∗ −1.61∗∗∗
(−5.05) (−5.37) (−5.41) (−6.61) (−5.73) (−6.02)
INDEX 2.50∗∗∗ 2.61∗∗∗ 3.49∗∗∗ 2.65∗∗∗ 3.10∗∗∗ 1.36∗∗
(2.67) (2.88) (3.64) (2.73) (3.23) (2.19)
PROFIT −3.84∗∗∗ −3.73∗∗∗ −3.59∗∗∗ −3.43∗∗∗ −3.77∗∗∗ −2.90∗∗∗
(−6.42) (−6.69) (−6.53) (−6.11) (−6.96) (−5.82)
OWN 3.32∗∗∗
(4.31)
OWN∗ OWN −3.50∗∗∗
(−5.53)
N 75,708 75,708 75,708 75,708 75,708 46,271
pseudo R 2 0.566 0.562 0.567 0.578 0.597 0.485
CoC 0.973 0.971 0.972 0.975 0.977 0.965
Notes:
This table reports the results of the estimated logistic regression model on the association between the
likelihood of going public and firm and industry specific product market variables, controlling for other
variables. It uses the following equation (see also equation (1) in Section 3(ii)):
y ijt = β0 + β1 INDMARGIN j t−1 + β2 CAPINT j t−1 + β3 HERF j t−1 + β4 MSHAREit−1
+ β5 CAPEXit−1 + β6 GROWTHit−1 + β7 LNSALESit−1 + β8 LNAGEit
+ β9 LEVERAGEit−1 + β10 BTM j t−1 + β11 INDEX j t−1 + β12 PROFITit−1
+ β13 OWNit−1 + β14 OWNit−1 ∗ OWNit−1 + γt YEARt + εijt .
The dependent variable is 1 for IPO-firms and zero otherwise. An IPO-firm is excluded from the sample
after the year it went public. In any year the sample consists of firms that went public in that year and private
firms that are eligible to go public. INDMARGIN denotes industry margin computed as the weighted average
profit margin of firms within industry j using the firm’s market share as weights. We measure industry margin
in industry j as:

i∈ j
where MARGINi is firm i’s profit margin defined as earnings before interest and taxes (EBIT) divided by
sales; and MSHAREi is firm i’s market share. CAPINT is capital intensity measured as a dummy variable that
equals 1 if both the ratio of property, plant and equipment over number of employees and the ratio of net
sales over number of firms in an industry exceed the median values of these ratios across all industries.

Table 4 (Continued)
HERF is the Herfindahl index measured as the sum of the squared market shares in industry j. We measure
the Herfindahl index as:

HERF j = MSHAREi2
i∈ j
where MSHAREi is firm i’s market share. MSHARE refers to market share defined as the ratio of the
firm’s sales over total sales in the firm’s industry. CAPEX is capital expenditures over property, plant and
equipment. GROWTH denotes growth in net sales over the year. LNSALES equals the natural logarithm
of total sales (in millions of pounds). LNAGE is the natural logarithm of the year of observation minus
the year the company was founded. LEVERAGE is measured as book value of long term debt plus short
term loans and overdrafts divided by book value of total assets. BTM is the median book-to-market value of
equity of firms in the same industry which traded on the London stock exchange. INDEX refers to the buy-
and-hold return of the FTSE UK All Share ICB industry Index during the past year. PROFIT is operating
profit over sales. OWN equals the percentage of shares held by senior management and other insiders.
Industries are classified by the three-digit SIC code and firms are assigned to the industry in which they
had the largest proportion of sales. All ratio variables are winsorized to be no greater than one in absolute
value, except for BTM, INDEX and INDMARGIN. BTM and INDEX are winsorized at the first and 99th
percentile and INDMARGIN excludes profit margins that are less (greater) than the fifth (95th ) percentile.
We use lagged values of all the variables except for LNAGE to align the firm and industry characteristics
with the period of time the decision to go public was presumably made. The regression includes a constant
and calendar year dummies (not reported) and standard errors are adjusted for clustering in firms. One,
two and three asterisks indicate that the coefficients are significantly different from zero at the 10%, 5% and
1% level or better, respectively. The joint-test which indicates that all coefficients are zero is rejected by the
likelihood ratio test at a level lower than 0.001 for all models. For goodness-of-fit we report the pseudo R 2
and the Coefficient of Concordance (CoC): the percentage of randomly drawn pairs of one IPO firm and
one eligible IPO firm for which it is true that the likelihood estimate of the model is higher for the IPO
firm.
growth (GROWTH). This indicates that growing and heavily investing firms seek to
finance their growth with public equity capital. Our results further show that firms
that go public are larger (LNSALES) than private firms. A plausible explanation is that
larger firms can more easily bear the fixed costs associated with an IPO. Surprisingly,
we find that firms going public are younger (LNAGE) than firms that stay private. This
is inconsistent with prior literature which suggests that younger firms are less likely
to go public because of their higher information costs (Chemmanur and Fulghieri,
1999).
Furthermore, firms going public have a higher debt ratio (LEVERAGE) than firms
that remain private. Such firms may need to rebalance their capital structure or have
exhausted their debt capacity. Firms also go public at a time when the equity valuation
of their industry is relatively high (i.e., their industry book-to-market ratio (BTM) is
relatively low) and their industry index return (INDEX) has increased. This suggests
that firms attempt to take advantage of the relative high equity valuation of their
industries (Pagano et al., 1998). We find that more profitable firms (PROFIT) have
a lower propensity to go public. More profitable firms seem to be able to finance their
investment projects with retained earnings, instead of seeking public equity capital.
In Model (6) we also include the ownership of senior managers and other insiders
(OWN) and its square (OWN∗ OWN). The ownership data for IPO firms are from
the pre-IPO year. The ownership data for the sample of eligible firms is collected
for the year 2002. Our motivation for this one-year cross section is that ownership
structures are typically stable over time and the collection of ownership data for all
eligible firms from our sample is very time consuming. As a result, we have 46,271
firm-year observations for which we have pre-IPO or 2002 ownership data. We find that
ownership by senior management is positively related to the IPO decision. However,
the relation is non-linear because the square of OWN is negatively related to the

decision to go public. This suggests that insiders with a large ownership stake prefer to
stay private and keep in full control of the firm.10 All other results remain as before with
the exception of the coefficient of industry margin (INDMARGIN) which becomes
insignificant.
(iii) Interaction Effects

Our current analysis omits potentially important interaction effects between industry
and firm-level variables.11 This is particularly true for product market characteristics.
We, therefore, add interactions between potentially correlated independent variables
to our main model. The results are reported in Table 5. It is important to note that all
our previous findings remain intact after inclusion of the interactions.
Since we use a nonlinear estimation model, the coefficients of the interaction
terms cannot be interpreted as in a linear model.12 There is some controversy
about the correct approach to analyzing interaction effects in nonlinear models. We
follow Greene (2010) who argues that interaction effects in nonlinear models are too
complex to describe numerically by simple summary statistics.13 One cannot assess
the statistical significance of the interaction effect with the standard significance
tests on the coefficient on the interaction term. Instead, Greene suggests using
graphical analysis in which the values of the interacted variables are plotted against
the probabilities predicted by the model.
Figures 1 to 7 display the relationships between the interacted variables presented in
the models 1 to 7 in Table 5. These figures display the predicted probability of an IPO
for every single model in relation to the two independent variables of interest, where
the other variables are held constant at their means. For interactions between two
continuous variables we plot five lines where each line shows the relationship between,
respectively, the 10th , 25th , 50th , 75th and 90th percentile value of the one variable and
a range of values of the other variable. The choice of the x-axis variable as well as
the range of values of both interacted variables is arbitrary.14 For interactions between
one continuous and one dummy variable we plot two lines: one for each value of the
dummy. Greene (2010) interprets the interaction effect as the change in the distance
between the different sets of predicted probabilities, which implies that the more the
slopes of the plotted lines will diverge, the higher the impact of the interaction effect
on the probability of interest, the probability of an IPO in our case. For lines that run
parallel we can say that there is no interaction effect.
Figure 1 shows that the interaction between CAPEX and GROWTH broadens the
distance between predicted probabilities for low versus high growth firms as CAPEX
increases. Hence, the positive effect of firm’s capital expenditures on the likelihood of
an IPO increases with its growth in sales. The effect of the interaction on the change in
10 The relationship between insider ownership and the probability of an IPO is further discussed in
Section 4(iii) and depicted in Figure 8.
11 We thank an anonymous referee for this suggestion.
12 This is, of course, true for all coefficients in a logit model. In a linear model, the coefficients measure
the average marginal effect of an independent variable on the dependent variable. The marginal effect of
an independent variable in a logit model depends on the values of the other independent variables.
13 Huang and Shields (2000) also recommend using graphical displays for interpreting interactive effects
in logit and probit analysis.
14 According to Greene (2010) one of the problems of analyzing interaction effects for continuous variables
is accommodating the units of measurement.

Table 5
The Determinants of the Decision to Go Public: Interaction Effects
Variables 1 2 3 4 5 6 7
INDMARGIN 7.33∗∗∗ 7.88∗∗∗ 7.18∗∗∗ 7.19∗∗∗ 7.17∗∗∗ 7.21∗∗∗ 7.32∗∗∗

(3.04) (3.44) (2.99) (2.68) (2.93) (3.00) (3.03)
CAPINT −1.01∗∗∗ −1.13∗∗∗ −1.01∗∗∗ −1.05∗∗∗ −1.02∗∗∗ 0.44 −0.85∗∗∗
(−4.11) (−4.49) (−4.13) (−4.33) (−4.22) (0.24) (−2.68)
HERF 2.25∗∗∗ 2.36∗∗∗ 2.24∗∗∗ 2.24∗∗∗ 2.65∗∗∗ 2.21∗∗∗ 2.28∗∗∗
(5.05) (5.22) (5.03) (4.97) (6.05) (4.84) (5.10)
MSHARE 5.84∗∗∗ 5.13∗∗∗ 5.87∗∗∗ 5.74∗∗∗ 9.95∗∗∗ 5.93∗∗∗ 5.81∗∗∗
(5.09) (4.95) (5.15) (5.02) (6.17) (5.20) (5.10)
CAPEX 2.03∗∗∗ 1.96∗∗∗ 1.94∗∗∗ 1.90∗∗∗ 1.97∗∗∗ 1.91∗∗∗ 2.05∗∗∗
(5.69) (7.61) (7.76) (7.81) (8.00) (7.73) (8.12)
GROWTH 1.12∗∗∗ 0.89∗∗∗ 1.15∗∗∗ 1.08∗∗∗ 1.00∗∗∗ 1.02∗∗∗ 1.02∗∗∗
(3.07) (4.06) (5.62) (4.40) (4.11) (4.11) (4.12)
LNSALES 1.03∗∗∗ −1.40∗∗∗ 1.03∗∗∗ 1.04∗∗∗ 1.01∗∗∗ 1.07∗∗∗ 1.02∗∗∗
(11.65) (−4.64) (12.13) (11.93) (11.58) (11.22) (11.67)
LNAGE −1.46∗∗∗ −10.40∗∗∗ −1.46∗∗∗ −1.45∗∗∗ −1.49∗∗∗ −1.47∗∗∗ −1.47∗∗∗
(−5.01) (−8.28) (−5.08) (−4.88) (−5.10) (−5.03) (−5.01)
LEVERAGE 3.27∗∗∗ 3.17∗∗∗ 3.27∗∗∗ 3.29∗∗∗ 3.32∗∗∗ 3.27∗∗∗ 3.28∗∗∗
(7.56) (7.66) (7.58) (7.64) (7.56) (7.55) (7.57)
BTM −1.68∗∗∗ −1.70∗∗∗ −1.68∗∗∗ −1.67∗∗∗ −1.70∗∗∗ −1.69∗∗∗ −1.68∗∗∗
(−5.72) (−5.33) (−5.67) (−5.60) (−5.40) (−5.72) (−5.69)
INDEX 3.10∗∗∗ 3.13∗∗∗ 2.99∗∗∗ 3.07∗∗∗ 3.24∗∗∗ 3.14∗∗∗ 3.09∗∗∗
(3.24) (3.23) (3.07) (3.08) (3.34) (3.29) (3.23)
PROFIT −3.78∗∗∗ −2.30∗∗∗ −4.40∗∗∗ −2.22 −3.72∗∗∗ −3.77∗∗∗ −3.76∗∗∗
(−6.87) (−3.45) (−6.64) (−1.12) (−6.89) (−7.02) (−6.92)
CAPEX∗ 0.23
GROWTH (0.37)
LNSALES∗ 0.85∗∗∗
LNAGE (7.95)
GROWTH∗ 1.45
PROFIT (1.58)
PROFIT∗ 19.56
INDMARGIN (0.97)
MSHARE∗ −14.77∗∗∗
HERF (−2.93)
LNSALES∗ −0.14
CAPINT (−0.79)
CAPEX∗ −0.49
CAPINT (−0.74)
N 75,708 75,708 75,708 75,708 75,708 75,708 75,708
pseudo R 2 0.597 0.630 0.598 0.598 0.600 0.597 0.597
CoC 0.978 0.978 0.978 0.978 0.978 0.978 0.977
Notes:
This table reports the effects of several interactions between product market and control variables on our
main results. INDMARGIN denotes industry margin computed as the weighted average profit margin of
firms within industry j using the firm’s market share as weights. We measure industry margin in industry j
as:

i∈ j
where MARGINi is firm i’s profit margin defined as earnings before interest and taxes (EBIT) divided by
sales; and MSHAREi is firm i’s market share. CAPINT is capital intensity measured as a dummy variable
that equals 1 if both the ratio of property, plant and equipment over number of employees and the ratio of
net sales over number of firms in an industry exceed the median values of these ratios across all industries.

Table 5 (Continued)
HERF is the Herfindahl index measured as the sum of the squared market shares in industry j. We measure
the Herfindahl index as:

HERF j = MSHAREi2
i∈ j
where MSHAREi is firm i’s market share. MSHARE refers to market share defined as the ratio of the
firm’s sales over total sales in the firm’s industry. CAPEX is capital expenditures over property, plant and
equipment. GROWTH denotes growth in net sales over the year. LNSALES equals the natural logarithm of
total sales (in millions of pounds). LNAGE is the natural logarithm of the year of observation minus the year
the company was founded. LEVERAGE is measured as book value of long term debt plus short term loans
and overdrafts divided by book value of total assets. BTM is the median book-to-market value of equity of
firms in the same industry which traded on the London stock exchange. INDEX refers to the buy-and-hold
return of the FTSE UK All Share ICB industry Index during the past year. PROFIT is operating profit over
sales. Industries are classified by the three-digit SIC code and firms are assigned to the industry in which they
had the largest proportion of sales. All ratio variables are winsorized to be no greater than one in absolute
value, except for BTM, INDEX and INDMARGIN. BTM and INDEX are winsorized at the first and 99th
percentile and INDMARGIN excludes profit margins that are less (greater) than the fifth (95th ) percentile.
We use lagged values of all the variables except for LNAGE to align the firm and industry characteristics
with the period of time the decision to go public was presumably made. The regression includes a constant
and calendar year dummies (not reported) and standard errors are adjusted for clustering in firms. One,
two and three asterisks indicate that the coefficients are significantly different from zero at the 10%, 5% and
1% level or better, respectively. The joint-test which indicates that all coefficients are zero is rejected by the
likelihood ratio test at a level lower than 0.001 for all models. For goodness-of-fit we report the pseudo R 2
and the Coefficient of Concordance (CoC): the percentage of randomly drawn pairs of one IPO firm and
one eligible IPO firm for which it is true that the likelihood estimate of the model is higher for the IPO
firm.
the predicted probability, however, is rather low (and occurs mainly in the right tail of
the distribution). Hence, the economic significance of the interaction effect of firm’s
capital expenditures and growth on the probability of an IPO is low.
Figure 2 shows that the interaction effect between LNSALES and LNAGE is am-
bivalent. LNAGE first decreases the probability of an IPO to a certain point of
LNSALES after which it increases the probability of an IPO by increasing LNSALES.
The interaction effect of size and age on the probability of an IPO reverses at about
LNSALES of 12.24 (i.e., sales of 206.9 millions of pounds). The existence of a complex
interaction effect between size and age may appear from the change of sign for
LNSALES in model 2 with respect to all other estimated logistic models in our paper.
Figure 3 shows that the positive effect of growth in sales on the likelihood of an IPO
decreases the more profitable the firm. The interaction effect between GROWTH and
PROFIT appears to be weak because the gap between the predicted probabilities for
the five different levels of PROFIT hardly changes when GROWTH increases.
The effect of the interaction between the firm sales margin (PROFIT) and the in-
dustry sales margin (INDMARGIN) is depicted in Figure 4. It shows that the predicted
probabilities for firms from relatively high profitable industries vis-à-vis relatively low
profitable industries decreases when the profitability of the firm decreases. Stated
differently, the negative association between profitability of the firm and the likelihood
of an IPO is increasing with the profitability of the industry.
Figure 5 displays the interaction effect of the firm’s market share (MSHARE) and
industry concentration (HERF). Both variables positively influence the likelihood of
a firm going public. The joint effect of these variables on the likelihood of an IPO is
ambivalent. HERF first increases the effect of MSHARE on the likelihood of an IPO to
a certain value of MSHARE after which HERF decreases the effect of MSHARE. The

Figure 1
C

Figure 1 Figure 2
Relationships between CAPEX and GROWTH and Relationships between LNSALES and LNAGE and
Probability of an IPO Probability of an IPO

Figure 3 Figure 4
Relationships between GROWTH and PROFIT and Relationships between PROFIT and INDMARGIN and
185
Figure 2
186
Figure 5 Figure 6
Relationships between MSHARE and HERF and Relationships between LNSALES and CAPINT and
Figure 7 Figure 8
Relationships between CAPEX and CAPINT and Relationships between OWN and
C


change in influence turns at a value of MSHARE at about 0.16. Hence, the negative
effect of HERF on the propensity to go public when MSHARE increases only occurs
for firms with very high market shares.
Figure 6 shows that the impact of the interaction between LNSALES and CAPINT
is to widen the gap between predicted probabilities for non capital intense industries
and capital intense industries as firm size increases. Also, Figure 7 shows that the
impact of the interaction between CAPEX and CAPINT is to widen the predicted
probability gap for non capital intense and capital intense industries when firm capital
expenditures increase. Both Figure 6 and Figure 7 show that the positive effect of,
respectively, firm’s size and capital expenditures on the likelihood of an IPO decreases
when a firm operates in a capital intense industry.
Figure 8 shows the effect of adding the squared value of OWN to the estimation
model. Both OWN and OWN squared have significant coefficients suggesting that both
variables are statistical significant determinants of the likelihood of an IPO. The signs
of the coefficients of OWN and OWN squared suggest that the relationship between
OWN and the dependent variable is inverted U-shaped, as we contend in Section 4(ii).
Figure 8 supports this presumption. It shows that ownership by senior management
increases the likelihood of an IPO for low values and decreases it for high values of
ownership. The turning point occurs around an ownership value of 53%.
(iv) Robustness Checks

We conduct several robustness checks. We first test how sensitive our results are to
the sample criteria we used to identify eligible IPO firms. We based the selection
of potential IPOs on the availability of audited financial statements, i.e., companies
with annual sales in excess of £350,000 before 2000 and £1,000,000 thereafter. To test
the robustness of our results, we re-estimate all models with the requirement that (i)
annual sales is at least £1 million, (ii) the company exists for at least five years, (iii)
a combination of requirements (i) and (ii), (iv) annual sales is at least £350,000 and
(v) a combination of requirements (ii) and (iv). All our findings are similar except
for profitability (PROFIT) which becomes insignificant when we apply requirement
(iii).15
The largest industry in our IPO sample is the industry Services-Computer Programming,
Data Processing (SIC 737) with 61 IPO firms. To test whether our results are driven by
this industry, we re-estimated all models excluding firms from this industry. We find
that our results are not changed. As a final robustness check, we measure the product
market characteristics at the 4-digit SIC code level, instead of the 3-digit SIC code level.
Again, we find similar results.
(v) Product Market Related Effects in the Post-IPO Period

In this section we further investigate the product market related effects of going
public. Table 6 shows dynamic IPO firm characteristics for one year before up to
three years after the IPO. The event year of the IPO is labeled year 0. The first
(second) row shows the median (mean) values. We compare the median (mean)
ex-post IPO characteristics to the year before the IPO using a two sample Wilcoxon
15 All results are available upon request from the authors.

Table 6
Dynamic IPO Firm Characteristics (Ratios)
Event Years Test of Difference (p-values)
Variable Year −1 Year 0 Year 1 Year 2 Year 3 −1 to 0 −1 to +1 −1 to +2 −1 to +3
MSHARE 0.015 0.019 0.021 0.021 0.018 0.127 0.066∗ 0.058∗ 0.161
0.089 0.098 0.093 0.081 0.081 0.576 0.800 0.605 0.667
(337) (335) (304) (261) (232) (335) (304) (261) (232)
CAPEX 0.340 0.380 0.331 0.254 0.223 0.510 0.734 0.001∗∗∗ 0.001∗∗∗
0.394 0.419 0.378 0.294 0.297 0.367 0.579 0.001∗∗∗ 0.001∗∗∗
(337) (335) (312) (279) (254) (335) (312) (279) (254)
PPE 0.360 0.323 0.365 0.403 0.421 0.098∗ 0.611 0.277 0.093∗
0.403 0.372 0.413 0.426 0.436 0.137 0.628 0.299 0.143
(336) (335) (313) (281) (254) (335) (313) (281) (254)
GROWTH 0.246 0.266 0.235 0.187 0.162 0.944 0.514 0.001∗∗∗ 0.000∗∗∗
0.336 0.327 0.319 0.223 0.217 0.762 0.568 0.001∗∗∗ 0.001∗∗∗
(337) (333) (314) (280) (252) (333) (314) (280) (252)
PROFIT 0.089 0.092 0.077 0.070 0.061 0.586 0.389 0.268 0.009∗∗∗
−0.024 −0.032 −0.039 −0.025 −0.022 0.791 0.599 0.985 0.933
(337) (335) (312) (280) (254) (335) (312) (280) (254)
Test of
Before After Difference
VOLATILITY IPO IPO (p-values)
Mean 0.067 0.088 0.001∗∗∗
Median 0.023 0.028 0.001∗∗∗
(257) (257)
Notes:
This table reports dynamic firm characteristics of firms that went public on the London Stock Exchange
between 1994 and 2006. Table values are for the mean and median level. The first (second) row per variable
shows median (mean) values, and the third row depicts (within parentheses) the number of observations.
The last four columns report p-values using a two sample Wilcoxon rank-sum (Mann-Whitney) test for
differences in medians and a t-test for differences in means. MSHARE refers to market share defined
as the ratio of the firm’s sales over total sales in the firm’s industry. CAPEX is capital expenditures over
property, plant and equipment. PPE is property, plant and equipment divided by total assets. GROWTH
denotes growth in net sales over the year. PROFIT is operating profit over sales. VOLATILITY is the standard
deviation of PROFIT. VOLATILITY before the IPO is measured for the three years period preceding the year
of the IPO. VOLATILITY after the IPO is measured for the period starting in the year of the IPO (year 0)
and ending three years thereafter. All observations are firm year observations except for VOLATILITY. All
ratio variables are winsorized to be no greater than one in absolute value. VOLATILITY is winsorized at the
5th and 95th percentile.
rank-sum (Mann-Whitney) test for differences in medians and a t-test for differences in
means. In our discussion we focus on the differences in medians because these are less
influenced by extreme observations. We find that the median market share (MSHARE)
increases directly after an IPO. Market share in post-IPO years 1 and 2 is significantly
higher than in the year before the IPO. However, the median market share in year 3
is not significantly higher than in the year before the IPO. This result suggests that in
the years directly following an IPO the effect of having access to public equity at least
initially dominates the potential loss of confidential information (which would predict
a decline in market share). This result supports the models of Chemmanur and He
(2011) and Chod and Lyandres (2010).
Table 6 shows no evidence that capital expenditures (CAPEX) increase immediately
after the IPO. In contrast, there is a significant reduction in capital expenditures in the
post-IPO years 2 and 3 relative to the year before the IPO. The ratio of fixed assets to
total assets (PPE) decreases in the year of going public (year 0) relative to the year

before. However, in post-IPO year 3 this ratio is significantly higher than in the year
before going public.
We find that sales continue to increase during all post-IPO years (median sales
growth is always positive) but that sales growth is declining over time. In post-IPO
years 2 and 3 we find that sales growth (GROWTH) is significantly lower than
in year −1. This finding is consistent with the US findings of Chemmanur et al.
(2010) who attribute it to firms timing their IPO when a positive productivity shock
occurs. The strong growth in sales in the year before the IPO reflects a positive
shock in productivity. The financing of the increase in sales after the productivity
shock, increases the likelihood of going public. This argument is also in line with the
models of Clementi (2002) and Spiegel and Tookes (2008). Clementi argues that firms
primarily go public to raise external financing to increase the scale of their operations.
Spiegel and Tookes (2008) predict that firms before going public first (privately)
finance the projects that will likely generate most revenues, such that only modest
growth remains after the IPO. We also find that the ratio operating profits divided by
sales (PROFIT) declines over time with the median profit margin in post-IPO year 3
being significantly lower than in the year before the IPO. This result is in line with
Coakley et al. (2007) who report post-IPO operating underperformance for UK-IPOs
in the period 1985–2003.
As a final point, we compare the standard deviation of PROFIT before and after
the IPO (VOLATILITY). We find that PROFIT becomes more volatile after the IPO.
(Since we need at least two years to be able to compute VOLATILITY, both before and
after the IPO, we are left with a lower number of observations.) The increase in the
volatility of profits is consistent with firms pursuing more aggressive product market
strategies after their IPO resulting in an increase in operational risk (Chemmanur and
He, 2011; and Chod and Lyandres, 2010).
One important reason for firms to go public is to have access to external equity
markets and to increase the size of their operations (Clementi, 2002). We follow
Chemmanur et al. (2010) and also examine the absolute values in real terms (using
the 2009 CPI index from the Office of National Statistics) of capital expenditures,
fixed assets, total assets, sales and operating profits. Table 7 shows the results. Again,
we focus on median values in our discussion of the results because medians are less
influenced by extreme observations.
We find that firms spend substantially more on capital expenditures in the year of
the IPO and directly thereafter than in the year before the IPO. The median amount
spent on capital expenditures increases significantly from £1.3 million before going
public to £5.4 million in post-IPO year 3. IPO firms also substantially increase their
fixed assets, total assets, sales and profits in value terms as of the year of the IPO. This
is consistent with the idea that firm go public to increase their scale of operations
(Clementi, 2002; and Chemmanur et al., 2010).
Overall, our results suggest that firms go public at a peak in their sales growth and
continue to expand their scale of operations directly following the IPO. After the IPO,
firms show higher volatility in profitability which is consistent with firms being able
to pursue more aggressive product market strategies. The increase in market share by
the median IPO firm in post-IPO years 1 and 2 suggests that the effect of having access
to lower-cost equity financing for increasing the scale of operations at least initially
dominates the effect of having to disclose sensitive information to product market
competitors (which would predict a smaller market share).

Table 7
Dynamic IPO Firm Characteristics (Values)
Event Years Test of Difference (p-values)
Variable Year −1 Year 0 Year 1 Year 2 Year 3 −1 to 0 −1 to +1 −1 to +2 −1 to +3
CAPEX £1,364 £4,135 £4,914 £4,867 £5,462 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗
(£000) £16,290 £22,899 £32,606 £30,203 £59,486 0.205 0.035∗∗ 0.057∗ 0.017∗∗
(337) (335) (312) (279) (254) (335) (312) (279) (254)
PPE £7,861 £12,029 £16,313 £22,300 £25,464 0.002∗∗∗ 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗
(£000) £104,024 £114,979 £147,150 £174,510 £277,866 0.727 0.248 0.095∗ 0.027∗∗
(336) (335) (313) (281) (254) (335) (313) (281) (254)
ASSETS £22,302 £42,195 £51,451 £59,623 £65,850 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗
(£000) £166,102 £200,850 £222,206 £260,419 £398,219 0.418 0.232 0.074∗ 0.018∗∗
(337) (335) (314) (281) (254) (335) (314) (281) (254)
SALES £30,966 £41,075 £50,422 £63,992 £74,225 0.034∗∗ 0.000∗∗∗ 0.000∗∗∗ 0.000∗∗∗
(£000) £169,011 £184,091 £209,227 £256,893 £342,897 0.704 0.365 0.107 0.027∗∗
(337) (333) (314) (280) (252) (333) (314) (280) (252)
PROFIT £3,185 £4,725 £4,723 £6,135 £5,418 0.081∗ 0.141 0.026∗∗ 0.098∗
(£000) £12,981 £13,674 £14,065 £20,478 £33,146 0.851 0.772 0.150 0.061∗
(337) (335) (312) (280) (254) (335) (312) (280) (254)
Notes:
This table reports dynamic firm characteristics of firms that went public on the London Stock Exchange
between 1994 and 2006. The first (second) row per variable shows median (mean) values, and the third row
depicts (within parentheses) the number of observations. The last four columns report p-values using a two
sample Wilcoxon rank-sum (Mann-Whitney) test for differences in medians and a t-test for differences in
means. All variables are values in thousands of pounds (in 2009 real terms using the CPI index from the
Office of National Statistics). CAPEX is capital expenditures, PPE is property, plant and equipment, ASSETS
refers to total assets, SALES equals sales and PROFIT is operating profit.
5. CONCLUSION
This paper investigates the influence of product market characteristics on the decision
to go public. When making this decision, firms trade off the product market related
costs and benefits of a public listing. Costs arise from the disclosure of confidential
information which comes with the public status. This loss of confidential information
may benefit product market rivals. At the same time, benefits come from the
opportunity to grow and improve the firm’s position in the product market using the
newly obtained access to financing.
We examine the decision to go public using a sample of UK firms that went public
and that stayed private during 1994–2006. We find that the likelihood of going public is
positively related to the average profit margin in the industry. This result implies that
firms from more profitable industries have more incentives to go public in order to
grow and improve their position in the product market. They can do so by committing
to riskier and more aggressive product market strategies that otherwise similar private
firms or new entrants would not be able to adopt (Shah and Thakor, 1988). The
increase in volatility in operating profits and increase in market share and scale of
operations after the firm went public provides further support for the product market
related benefits of going public. We also find that firms from industries with low
barriers to entry are more likely to go public. This suggests that a public listing can
yield an important competitive advantage which may deter new entrants.
Another key finding of this study is that firms from less competitive industries are
more likely to obtain a public listing. This result implies that the loss of confidential
information is less important for the going public decisions of firms that face less

competition in their industry. We also find that a higher market share increases the
likelihood of going public. Firms with a higher market share have a more secure
competitive position and are therefore less worried about the loss of confidential
information.
In conclusion, we find that going public involves a trade-off between competitive
benefits and costs. Our results show that both confidential information theories (e.g.,
Campbell, 1979; Bhattacharya and Ritter, 1983; and Marra and Suijs, 2004) and more
recent theories that focus on product market benefits of obtaining a public listing
(e.g., Chemmanur and He, 2011; and Chod and Lyandres, 2010) are relevant for
explaining the complex decision to go public.
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Journal of Business Finance & Accounting, 39(1) & (2), 165–192, January/March 2012, 0306-686X

Why Do Firms Go Public? The Role of the

ABE DE JONG, CAREL A. HUIJGEN, TEYE A. MARRA AND PETER ROOSENBOOM∗

2. LITERATURE AND HYPOTHESES

3. DATA AND METHODOLOGY

(i) Data Sources and Sample

(ii) Empirical Model

y ijt = β0 + β1 INDMARGIN j t−1 + β2 CAPINT j t−1 + β3 HERF j t−1 + β4 MSHAREit−1

(a) Product Market Characteristics

(b) Control Variables

6 We thank an anonymous referee for this suggestion.

a discussion of interaction effects (4(iii)), robustness checks (4(iv)) and an analysis of

(i) Univariate Comparisons

2012 Blackwell Publishing Ltd

2012 Blackwell Publishing Ltd

2012 Blackwell Publishing Ltd

(<0.0001) (<0.0001) (0.0001) (<0.0001) (<0.0001) (0.6753) (<0.0001) (<0.0001)

2012 Blackwell Publishing Ltd

(ii) Regression Results

7 The results are available on request from the authors.

INDMARGIN 9.87∗∗∗ 7.32∗∗∗ 1.89

(iii) Interaction Effects

INDMARGIN 7.33∗∗∗ 7.88∗∗∗ 7.18∗∗∗ 7.19∗∗∗ 7.17∗∗∗ 7.21∗∗∗ 7.32∗∗∗

2012 Blackwell Publishing Ltd

2012 Blackwell Publishing Ltd

(iv) Robustness Checks

(v) Product Market Related Effects in the Post-IPO Period

15 All results are available upon request from the authors.

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