Choice of Organizational Form as a Trade-Off Between Fit and Market Timing

Abstract

This paper proposes that a firm's choice of organizational form is a trade-off between the fit with its investment opportunity set, and its attempt to exploit periods of favourable market valuations for a given organizational form. To test this prediction, we identify 272 firms that go public in Canada between 1995 and 2005. Of these, 128 choose the organizational form of public corporation, while 144 choose the alternative organizational form of income trust. We find that market timing affects the choice of organizational form. An increase in valuations for income trusts relative to public corporations increases the likelihood that a firm will go public as an income trust. Using propensity score matching, we also show how market timing driven choices allow firms to maximize the proceeds through reduced initial underpricing and reduced underwriting fees.