Why do firms decide not to go public? : evidence from the U.K.

Abstract

This research investigates why the majority of private companies that are eligible for public listings choose not to do so. The choice between going public and staying private is regarded as the decision of the initial owner of a private company balancing the costs against the benefits of an Initial Public Offering. I use a comprehensive database with both accounting and ownership data of vast private companies in the U.K. to test the ex ante determinants of the IPO decision, as well as the ex post consequences. The major tests are conducted in three steps. The first step examines the information related determinants of the IPO decision. The second step investigates the ex ante determinants of the IPO decision regarding ownership and control. The third step estimates complete ex ante models to investigate the relative importance of all the key factors affecting the IPO decision, as documented in the literature. It also examines the post-IPO performances of the IPO companies, and compares these with the performances of the matched companies that stay private. The findings from both ex ante and ex post tests with accounting and ownership variables suggest that the main reasons that some private companies are reluctant to go public include the potential loss of control, high direct costs of listing, loss of confidentiality, and high costs of capital predicted by the pecking order theory, while the major benefits that a public listing can provide include an exit channel for the venture capital or private equity shareholders and better access to capital. In addition, the companies going public also consider the costs of agency problem and information asymmetry as well as the benefits of improved share liquidity, information spillover from the stock market, higher valuation in the "hot" market time, and better product reputation.