Selling out or going public? A real options signaling approach

Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 16-28, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We examine a dynamic model in which a firm chooses between selling out and going public under asymmetric information. We show that information asymmetry tends to change the firm fs policy from selling out to IPO. More precisely, a separating equilibrium can arise in which the good firm goes public while the bad firm follows the first-best sales policy because the good firm signals to market investors by doing an IPO. In order to separate itself from the bad firm, the good firm can choose an IPO timing that is earlier than the first-best IPO timing. This result is consistent with the empirical evidence that less profitable firms tend to sell out to a large firm rather than going public.

Keywords: IPO; signaling; real options; asymmetric information; acquisition; earnout (search for similar items in EconPapers)
JEL-codes: D82 G31 G34 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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