Determinants of Going-Public Decision in an Emerging Market: Evidence from India

Abstract

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? 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: finance their growth and investments diversify owners' risk rebalance their capital structure bring down their borrowing rates.