The Timing of Initial Public Offerings

Abstract In this paper, we study the dynamics of initial public offerings (IPOs) by examining the tradeoff between an entrepreneur’s private benefits, which are lost whenever the firm is publicly traded, versus the advantages from diversification. We characterize the timing dimension of the decision to go public, derive a function for firm value, and describe their effect on the evolution of firm risk over time. Our model, which endogenizes the timing of the decision to stay private or to go public, is able explain two puzzling phenomena: the clustering of IPOs and buyouts in time and the long-run underperformance of recently issued stock relative to the shares of longer-listed companies.