Evidence on What Cfos Think About the Ipo Process: Practice, Theory, and Managerial Implications

Evidence on What CFOs Think About the IPO Process: Practice, Theory, and Managerial Implications

by James C. Brau and Stanley E. Fawcett, Brigham Young University1

any privately held companies aspire to go public through an initial public offering (IPO). There are two obvious benefits: First, an IPO can put a great deal of capital into the company’s coffers. Second, a successful IPO can generate tremendous wealth for company insiders and pre-IPO investors. In recent years, IPOs have raised billions of dollars for issuing firms, created a multitude of millionaires, and generated considerable excitement among the media. But going public is not an easy process, nor is it without costs. Many companies have begun the IPO process only to withdraw the offering, often confused and frustrated by the experience. To improve decision-making—and to mitigate many of the uncertainties—managers need a clear picture of the core issues involved in the IPO process. With this as motivation, we constructed a theoretical-based survey instrument and surveyed 336 CFOs to get their insights into the IPO process. We studied six specific aspects of the IPO process: (1) motives for going public; (2) the timing of IPOs; (3) criteria for choosing an underwriter; (4) IPO underpricing; (5) IPO signaling; and (6) reasons to stay private. Where possible we also attempted to add extra insight by stepping outside of the survey data to test managerial behavior. By surveying CFOs to obtain a real-world perspective of the IPO process, we can also compare their beliefs and experiences to both academic theory and the findings of empirical research. Doing so allows us to identify the gaps between theory and practice, and to begin to bridge those gaps through better communication and more targeted research. In many areas, we find harmony between CFO beliefs and academic theory. But in several key areas, we find that CFO perceptions diverge in significant ways from traditional academic theory. The main findings...