European Financial Management, Vol. 15, No.

4, 2009, 844–884
doi: 10.1111/j.1468-036X.2009.00501.x

Why Do European Firms Go Public?

Franck Bancel
ESCP-EAP, France
E-mail: [email protected]

Usha R. Mittoo
University of Manitoba, Canada
E-mail: [email protected]

Abstract
We survey chief financial officers (CFOs) from 12 European countries regarding
the determinants of going public and exchange listing decisions. Most CFOs
identify enhanced visibility and financing for growth as the most important
benefits of an IPO, but other motivations for IPOs differ significantly across firms,
countries, and legal systems. We find strong support for the IPO theories that
emphasise financial and strategic considerations, such as enhanced reputation
and credibility, and financial flexibility as a major advantage of an IPO. At
the same time, we find moderate support for theories that focus on exit strategy,
balance of power with creditors, external monitoring, and merger and acquisition
motivations. European CFOs’ views on the major benefits of an IPO are generally
similar to those of US managers as reported in Brau and Fawcett (2006), but
differ significantly on outside monitoring; outside monitoring is considered a
major benefit by European CFOs but a major cost by US CFOs. Our evidence
suggests that the decision to go public is a complex one, and cannot be explained
by one single theory because firms seek multiple benefits in going public. These
motivations are influenced by the firm’s ownership structure, size and age as well
as by the home country’s institutional and regulatory environment.

Keywords: going public, European firms, IPO, survey, financing, exit, ownership
JEL classification: F30, G32, G34, G30

We are grateful to all Chief Financial Officers who have participated in this study, and to
the corporate finance team of BNP Paribas and Euronext for their valuable comments and
suggestions. We would like to thank John Doukas (editor) and two anonymous referees for
valuable comments and suggestions. We also thank Douglas Cummings, Susanne Espenlaub,
Anjo Koenter-Kant and participants at the 2008 EFM Special IPO Symposium, 2008
Financial Management European, and 2007 Northern Finance Association meetings for
helpful comments, and Zhou Zhang, Weimin and Huihui for excellent research assistance.
Mittoo acknowledges funding from the Bank of Montreal Professorship and from the Social
Sciences and Humanities Research Council of Canada. Correspondence: Franck Bancel.


C 2009 Blackwell Publishing Ltd.
 Why Do European Firms Go Public? 845

1. Introduction

The decision to go public has important consequences for the firm. A public listing
subjects the firm to the enhanced disclosure and regulatory requirements of stock
exchanges, and to intense scrutiny of analysts and media. Yet little is understood about
why firms choose to go public. While several theories have been proposed for why
firms go public, there is little empirical evidence to support them. Pagano et al. (1998)
is the only study that directly tests different initial public offering (IPO) theories, using
a sample of 69 Italian firms that went public between 1982 and 1992. The authors
conclude that Italian firms choose to go public primarily to rebalance their leverage,
and experience a reduction in cost of credit after the IPO. The authors use a proprietary
database to compare both ex ante and ex post characteristics of their sample firms to
discriminate between different theories. Such data are not easily available or comparable
across countries and, as a result, the extent to which their findings can be generalised
to other countries has not been investigated.
In this study, we survey chief financial officers (CFOs) of firms from 12 European
countries that went public between 1994 and 2004 about the costs and benefits of the
decision. The survey approach has several advantages that complement traditional em-
pirical studies. We can directly ask questions on both the implications and assumptions
of different theories. We can also collect data on several variables that may not be
publicly available, such as ownership control both before and after the IPO. A major
drawback is that surveys measure beliefs – and not necessarily actions – of managers.
To minimise this bias, we ask both structured and open-ended questions on the same
topic. To check the robustness of our findings, we also interview CFOs of three firms
who were closely involved with their firms’ IPO decisions, and we interview the head
of Global Equity Capital Markets in a large European bank.
Our study extends the IPO literature in three ways. First, most IPO theories focus
on only one major motivation for going public, such as raising funds for growth, or
facilitating an exit strategy for owners. However, firms may seek multiple benefits
in going public, and those perceived benefits might differ across firms. Further, two
IPO theories might propose the same benefits but different costs of going public. For
example, Maksimovic and Pichler (2001) and Chemmanur and Fulghieri (1999) both
model the IPO decision as a strategic move to raise equity financing for growth but
the former specifies it as a trade-off between enhanced credibility and disclosure of
sensitive information whereas the latter models it as a trade-off between the dispersion
of ownership and the information production costs. The main contribution of our study
is that we attempt to untangle these multiple motivations and trade-offs by asking CFOs
questions on both assumptions and implications of major IPO theories. We also collect
data on the ex ante and ex post firm characteristics, and use cross-correlations among
CFO responses and firm characteristics to discriminate between IPO theories. We find
support for most IPO theories, but in different subsamples of firms.
Second, motivations for going public are also likely to differ across countries due
to differences in legal and institutional environments. However, most prior studies
examine the determinants of IPO decisions in a single country. Our study fills this
gap by comparing European CFOs’ views on going public across the English and civil
system countries in our sample to those of US managers in Brau and Fawcett (2006) and
Brau et al. (2006). We find significant differences in some dimensions. For example,
European firms consider external monitoring to be a major benefit whereas the US
firms view it as a major cost.


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846 Franck Bancel and Usha R. Mittoo

Finally, while the choice of a listing exchange is an integral part of the decision to
go public, few studies have examined these decisions together. We ask firms separate
questions about the exchange listing (home or foreign) and decisions to go public in
order to gain insight into the major determinants of these interrelated decisions. We find
that enhanced visibility and the ability to raise capital are most important criteria for
the choice of a listing exchange.
Our main finding is that the motivations for an IPO differ significantly across firms,
countries, and legal systems. Large firms consider the enhanced external monitoring to
be the most important benefit; small firms value the ability to raise capital for growth,
and family-controlled firms view the IPO as a vehicle to strengthen their bargaining
power with creditors without relinquishing control. The English system firms value
the ability of the pre-IPO investors to exit and enhanced stock liquidity as the most
important benefits of an IPO whereas the Italian firms identify the reduction in the cost
of financing as most valuable. The European and US CFOs have similar views on most
benefits of an IPO but disagree strongly on the costs (both direct and indirect) of an
IPO.
Our evidence suggests that the decision to go public is a complex one that cannot be
explained by one single theory because firms seek multiple benefits in going public.
We find strong support for the IPO theories that focus on financial and strategic
considerations, such as increased credibility and reputation, and financial flexibility for
growth, moderate support for theories that emphasise exit strategy, balance of power,
monitoring, or mergers and acquisitions as a major benefit, and less support for the
asymmetric information and cost of capital theories.
The paper is organised as follows. Section 2 describes our survey design and sample.
Section 3 presents and analyses the survey results. Section 4 presents cross-country
comparisons and Section 5 provides conclusions.

2. Survey Design and Sample Data

2.1. Initial sample

The initial survey instrument was developed after reviewing the IPO literature. It
was circulated to several academics and financial executives, and their feedback was
used to revise the survey. The tests show that it took a minimum of 25–30 minutes to
complete the final survey questionnaire (over 100 questions). The survey is reproduced
in Appendix 1 and is also available at the following web address: http://www.
escp-eap.eu/fileadmin/user uploads/faculty and research/Questionnaire IPO Bancel-
Mittoo.pdf. Although we assure anonymity to facilitate honest responses, the proprietary
nature of the information asked and the additional time in answering the questions
is likely to lower our response rate compared to a standard survey instrument. BNP
Paribas and Euronext provide our initial sample of 1808 European firms that went
public between January 1994 and December 2004. We determined the CFO name and
the firm’s mailing address using Bloomberg or the firms’ Web sites. In few cases, the
CFOs were not explicitly identified on the firm web site. For these firms, we contacted
the CEO or the executive manager in charge of financial affairs.
We undertook three mailings: the first in April 2005, the second in September 2005
and the third in December 2005. In each mailing, an accompanying letter was included
that explained the objectives of the study, and a promise to send a summary of our


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 Why Do European Firms Go Public? 847

findings to those who wished to receive them. We received a total of 78 responses by

mail or fax. Our response rate of 4.3% is reasonable considering the length of the time
period, the nature of the data gathered and the number of countries involved. For example,
Brounen et al. (2004) obtain a response rate of 5% in a survey about capital structure
theories across four European countries. Panel A of Table 1 lists the response rate by
country and legal system. The UK firms form the largest component (23%), followed by
the French (22%) and German (13%) firms. Three countries – Greece, Italy, and Austria –
comprise about 19% of the sample, and six other countries (Switzerland, Portugal,
the Netherlands, Spain, Ireland and Belgium) make up the remaining 23% of the
sample.
We also test for the non-response bias using the early-versus-late respondent compari-
son. Using a t-test with equality or inequality of variances, we find that only 10 of the 109
survey questions have significant differences in sample means at the 10% level (4 are at
the 5% level). Since random variation would predict a similar number of differences, we
conclude that there is no substantial difference between the two groups. One concern in
our sample is that the sample from the UK, Germany and Italy may not be representative
of the population because of a significantly lower response rate relative to the population.
We address this concern by comparing our findings to those in prior IPO studies in these
countries for robustness checks, and find that our main results are in line with those of
prior studies. In our cross-country analysis, we also exclude countries that have either a
small number of observations (e.g. only one respondent from the Netherlands), or have
respondents with distinct characteristics, such as mostly high-tech (Greece). This issue
is discussed more fully in Section 3 (cross-country comparisons).
Another concern is that respondents may not have been closely involved with the IPO
decision. To address this concern, we also conducted in-depth one-on-one interviews
with three chief executives/CFOs who had firsthand knowledge of their firms’ IPO
decisions, and with the head of Global Equity Capital Markets division of a large
European bank who has expertise in the European IPO market. We use interviews as
a supplementary device to ask for clarification on some responses, to ask additional
questions about some IPO theories that we did not include in the survey (such as
the Lyandres et al. (2008) theory linking IPOs and M&As) and to check robustness
of our main findings. We follow Brav et al. (2005) in our interviewing procedure
and chose firms non-randomly to ensure that they have different characteristics. The
firms were selected to ensure that they illustrate a wide range of point of views on
IPO motivations. The three firms operate in different industries (Energy, Software
and Electronic equipment), vary in size (two are small and one is large based on
market capitalisation) and pre-ownership structure. They went public in 1999, 2005
and 2007, and according to the publicly available information (newspapers, web
sites, etc.), made their IPO for different reasons. The interviews varied in length
between one and two hours. We integrate their insights with the survey evidence to
reinforce and clarify our survey findings, and to check the robustness of our main
findings.

2.2. Summary statistics of respondent firms

Table 1 presents summary statistics for sample characteristics that are used as condition-
ing variables in our analysis. The first conditioning variable ‘Size’ is based on the market
capitalisation of the firm. We define a firm as large if its market capitalisation in 2005 is


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Table 1
848

Sample characteristics
Panel A lists the survey response rate by country and legal system. Panel B presents summary statistics on 1) For year 2005: Market capitalisation (million euro),
Employees, Total assets (million euro), Year incorporated, and IPO year; 2) At the IPO time: Market capitalisation (million euro standardised to 2005 real euro
value), PE ratio, Price per share, First day IPO return, New shares in IPO as % of shares outstanding, Number (%) of firms that raised capital in IPO. Panel C
presents information on the firms’ ownership structure and largest shareholder in 2005. Panel D presents the summary statistics on the control (%) of the major
shareholder(s) before and after the IPO. Panel E summarises the responses to the questions, ‘Did the IPO change a) the percentage of control of major shareholders,

C 2009 Blackwell Publishing Ltd

b) the firm’s shareholding, and c) the firm’s leverage?’

Panel A: Reponding firms by country of origin

% of Respondent
Country of Origin # of Sample Firms % of Sample Firms Reponding Firms % of Respondent Firms Firms by Country
French Law Countries 619 34.2 38 48.7 6.1
Belgium 41 2.3 3 3.9 7.3
France 245 13.6 17 21.8 6.9
Greece 144 8.0 5 6.4 3.5
Italy 74 4.1 5 6.4 6.8
Netherlands 58 3.2 1 1.3 1.7
Portugal 19 1.1 4 5.1 21.1
Spain 38 2.1 3 3.9 7.9
Franck Bancel and Usha R. Mittoo

German Law Countries 464 25.7 19 24.4 4.1

Austria 48 2.7 5 6.4 10.4
Germany 349 19.3 10 12.8 2.9
Switzerland 67 3.7 4 5.1 6.0
English Law Countries 725 40.1 21 26.9 2.9
Ireland 22 1.2 3 3.9 13.6
United Kingdom 703 38.9 18 23.1 2.6
TOTAL 1808 100.0 78 100.0 4.3


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Panel B: Summary statistics of respondent firms

N Mean Median S.D. Min Max

Year 2005
Market capitalization (million euro) 75 3,315 400 7,692 4.0 50,000
Employees 76 14,965 950 48,761 8 380,000
Total assets (million euro) 72 22,118 240 100,479 7 815,000
When incorporated 73 1977 1988 35 1819 2004
When IPO 77 2001 2000 3 1994 2005
IPO Time
Market capitalization (million euro – real value) 72 2,394 340 6,951 4.5 50,000
PE ratio 44 20.7 15.55 25.05 5.00 175
Price per share 70 18.5 12.83 21.56 0.06 126.7
First day return 45 36.7% 5.0% 149.8% −8.0% 1000.0%
Why Do European Firms Go Public?

IPO new shares as of shares outstanding 50 31.4% 25.0% 19.9% 1.8% 100.0%
Raising capital during IPO (Yes) 77 74.0%
849


850

Table 1
Continued.

Panel C: Ownership structures in 2005

Widely held Family control State control Other

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Ownership 52.0% 34.7% 5.3% 8.0%
Largest Shareholder An individual A public company A bank A mutual fund A family Other
28.6% 16.9% 3.9% 6.5% 18.2% 22.1%

Panel D: Did the IPO change the percentage of control of major shareholders? If YES, please, specify

N Mean Median S.D. Min Max

If yes % largest BEFORE 72 72.2 77.5 28.6 12.8 100.0
If yes % 5 largest BEFORE 42 81.9 90.0 22.9 20.0 100.0
If yes % largest AFTER 71 46.3 50.1 22.8 1.0 86.0
If yes % 5 largest AFTER 48 53.5 56.7 23.0 5.0 100.0
Franck Bancel and Usha R. Mittoo

Panel E: Did the IPO change the following? If YES, please, specify

N Yes % No %
% of control of major shareholders 63 81.0 19.0
Your firm’s shareholding 54 88.9 11.1
Your firm’s leverage 63 44.4 55.6
 Why Do European Firms Go Public? 851

greater than 500 million euros. 1 The mean (median) market capitalisation is 3315 (400)
million euros. The mean (median) market capitalisation at the IPO time standardised
to 2005 real euro value is similar to that in 2005 (2394 (340) million euros)) (Table 1,
Panel B). Our sample represents firms with varying size ranging from a minimum of 4
million euros to a maximum of 50 billion euros based on the 2005 market capitalisation.
The pattern is similar when we measure firm size based on total assets, or number of
employees (Table 1, Panel B).
The next two variables, ‘Age’ and ‘Initial Return’ are measured at the time of the
IPO. The IPO year ranges from 1994 to 2005. The mean (median) IPO year is 2000
(2001). We define a firm as old if it has a founding year of 1987 or earlier (the median
is 1988). The mean (median) age of sample firms at the time of the IPO is 24 (12) years.
The oldest firm is over 190 years old and the youngest is only one year old (Table 1,
Panel B). ‘Initial Return’ is the stock return on the first day of the IPO listing reported
by the respondents. Following Brau and Fawcett (2006), we define an IPO as hot if the
first day IPO return is greater than 10% and cold otherwise. The mean (median) first
day IPO return is 36.7% (5%) but varies from a low of −8% to a high of 1000%. The
extreme 1000% return is for a high-tech IPO conducted at the height of dotcom bubble
in 1999. The average (median) IPO price is 18.2 (12.83) euros and the average (median)
Price to Earnings ratio is 20 (15).
‘Hi-Tech’ is an indicator variable that equals one if the firm is a high-technology firm
and zero otherwise. High technology firms comprise 22% of our sample. Other industries
with large representation include financial (13%), manufacturing (12%), services (12%),
and pharmaceutical (7%). The percentage of foreign revenue varies across firms; about
36% of firms concentrate their sales in the country. Eighteen firms (21%) are listed on
foreign exchanges, eleven on the European, six on US exchanges (NYSE or NASDAQ)
and one in other countries (not tabulated).
The next conditioning variable, ‘Ownership’, is an indicator variable that equals one
if the firm is controlled by a family and zero otherwise. Panel C in Table 1 shows
that 52% of firms are widely held and 35% are family controlled. An individual or a
family is the largest shareholder in about half of the firms (47%), followed by a public
company (17%) and banks or mutual funds (10%). The state, private equity, fund or a
foundation is the major shareholder in the remaining 22% of the firms. The controlling
shareholder(s) retains a majority stake in most firms even after going public, although the
mean (median) shareholding of the largest shareholders declines from 72.2% (77.5%) in
the pre-IPO period to 46.3% (50.1%) after the IPO (Table 1, Panel D). After the IPO, the
managers’ holdings decline by about half and founders’ by 33%. In contrast, the stakes
of the institutional and retail investors increase; the number of firms with institutional
investors almost doubles and those with retail investors jumps three-fold (not tabulated
for brevity).
The last two conditioning variables, ‘Raising Capital’ and ‘Change Leverage’, are
indicator variables. ‘Raising Capital’ equals one if firm issued new shares in the IPO
and zero otherwise. Panel B shows that 74% of firms issued new shares in the IPO. The
proportion of new shares as a percentage of shares outstanding varies from a minimum
of 1.8% to a maximum of 100%. The mean (median) shares issued is 31% (25%) of
the shares outstanding. ‘Change Leverage’ equals one if the firm answered yes to the
question ‘Did the IPO change your firm’s leverage (total debt/equity – in book value)?’
1
June 2005 exchange rates were used to convert non-euro currencies to euro: EUR/USD:
1.21, EUR/GBP: 0.66, EUR/CHF: 1.54, EUR/ SEK: 9.38 and EUR/NOK: 7.93.


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852 Franck Bancel and Usha R. Mittoo

About 45% of the firms reported a change in leverage (total debt/equity in book value)
after the IPO (Table 1, Panel E). Of the 35 (55%) firms that reported no change in
leverage, 17 firms did not raise new capital in the IPO. The remaining 18 capital raising
firms that reported no change in capital may have increased their short-term or long-
term debt at the time of the IPO. The firms specified leverage change before and after
the IPO in four broad categories: D/E <20%, between 20 and 50%, 50 and 100%, and
over 100% (not tabulated). All firms that reported no change in leverage either did not
answer this question or reported no change in category which is consistent with their
answer.

3. Survey Evidence

Tables 2–4 present CFOs’ responses to different questions. Column 1 reports the
percentage of respondents who agree or strongly agree with the statement, and Column 2
the overall mean rating based on a five-point Likert scale (−2 = not important; +2 =
very important). 2 The remaining columns present univariate analyses on each survey
question using conditioning variables based on several firm characteristics such as firm
size, firm age and ownership structure. The responses to the open-ended question are
summarised in Table 6. For brevity, we do not tabulate the responses on foreign listing
decision because they are largely similar to the home listing decision, but we discuss
these in the paper when they differ significantly.
The small sample size and the high correlations among several of the conditioning
variables limit our ability to perform multivariate analysis. Instead, we examine cor-
relations among responses to each question on the IPO and exchange listing decision
to test implications of major IPO theories. The correlations are presented in Table 5.
Below, we summarise our survey evidence on these theories, which are grouped under
nine major benefits proposed in the IPO literature that are neither mutually exclusive
nor exhaustive.

3.1. Benefits

3.1(a) Investor recognition, reputation and credibility. Merton (1987) predicts that an
increase in investor recognition and shareholder base lowers the firm’s cost of equity
and increases its value. Bancel and Mittoo (2001) report that European CFOs consider
enhanced visibility and investor recognition as the most important benefit of listing on
foreign exchanges.
We find strong support for Merton’s model. Most CFOs indicate that ‘to enhance
the company’s prestige and visibility’ and ‘to broaden the shareholder base’ are major
criteria for the listing decision (Table 2). Over 80% of CFOs agree or strongly agree that
the IPO acts as an advertisement for the company and increases its reputation/image
2
We also measure the relative importance of each factor by controlling for the average
response of each respondent. We compute the mean and standard deviation of their responses
across all categories, and then measure how many standard deviations from the mean each
response is. We average these deviations across respondents and compute the standard errors
of the average responses to test each factor’s perceived impact relative to the average. The
relative importance of most factors using this score is similar to those for the raw average
presented in the tables.


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Table 2
Survey response to the question: home exchange listing criteria
Respondents are asked to rate factors on a scale of −2 (not important) to +2 (very important). We report the sample means and the percentage of respondents
who answered +1 (important) and +2 (very important). The subsample means are based on the following conditioning variables: Size (a large firm has market
capitalisation greater than 500 million euros), Hi-Tech (a high-technology firm), Age (an old firm has a founding year of 1987 or earlier), Initial Return (a hot

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firm has initial return greater than 10%), Ownership/Family Control (whether the firm is controlled by a family), Raising Capital (whether the firm issued new
shares in the IPO), Change Leverage (whether the IPO changed the firm’s leverage (total debt/equity – in book value)). ∗∗∗ ,∗∗ ,∗ denote significant differences at
the 1%, 5%, and 10% levels, respectively.
Ownership:
Important Initial family Raising Change
or very Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes
a) To enhance the company’s 77.78 1.00 1.06 0.91 0.89 1.35∗ 1.14 0.84 0.96 1.13 1.09 0.84 1.05 0.98 0.97 0.92
prestige, image and visibility
l) To facilitate raising capital 76.39 1.11 1.24 1.06 1.11 1.18 1.05 1.20 1.07 1.27 1.30 0.92 0.42 1.37∗∗∗ 0.88 1.40∗
∗∗
j) To implement a “natural path” 70.83 0.86 0.79 0.92 0.96 0.56 0.62 1.20 0.83 1.00 0.77 1.08 0.75 0.90 0.71 1.04
of growth for our firm
d) To increase shareholder base 69.86 0.75 0.65 0.89 0.83 0.65 0.92 0.65 0.66 1.13∗ 0.89 0.52 0.80 0.71 0.88 0.68
e) To increase the liquidity of 62.50 0.60 0.32 0.83 0.66 0.29 0.83 0.23∗ 0.56 0.73 0.82 0.24∗ 1.10 0.37∗∗ 1.15 0.04∗∗∗
the company’s securities
Why Do European Firms Go Public?

n) To appeal to institutional 60.56 0.75 0.72 0.72 0.75 0.65 1.00 0.48∗ 0.68 1.00 0.91 0.52 1.11 0.61∗ 1.03 0.58
investors
g) To be recognized by the 59.72 0.56 0.44 0.69 0.53 0.71 0.44 0.68 0.46 0.93 0.50 0.64 0.60 0.53 0.47 0.58
relevant financial community
as a major player
i) To facilitate mergers and 55.56 0.50 0.62 0.46 0.47 0.71 0.42 0.58 0.46 0.67 0.52 0.56 0.10 0.67∗ 0.32 0.42
acquisitions
853


854

Table 2
Continued.
Ownership:
Important Initial family Raising Change
or very Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes

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k) To facilitate business 52.11 0.46 0.44 0.53 0.48 0.41 0.36 0.53 0.46 0.47 0.58 0.40 −0.16 0.73∗∗∗ 0.15 0.75∗∗
operations
q) To provide stock ownership 50.68 0.30 0.21 0.42 0.28 0.47 0.27 0.45 0.17 0.80∗∗ 0.31 0.36 0.30 0.27 0.35 0.40
plans for employees
c) To reduce the cost of debt and 45.07 0.04 0.09 0.06 0.04 −0.06 0.08 −0.07 0.07 −0.07 0.02 0.13 −0.26 0.20 −0.39 0.50∗∗∗
equity
b) To trade on a large stock 40.28 0.19 −0.09 0.49∗ 0.13 0.47 0.33 −0.06 0.18 0.27 0.43 −0.12∗ −0.05 0.27 0.15 0.16
exchange
r) To be listed where financial 38.57 0.09 0.30 −0.15 0.11 −0.07 0.43 −0.29∗∗ 0.11 0.00 0.21 −0.17 −0.16 0.16 0.25 −0.04
analysts (and other major
financial actors) are located
m) To support marketing efforts 32.35 −0.09 0.19 −0.29∗ −0.08 −0.25 −0.13 −0.06 −0.07 −0.14 −0.19 0.08 0.22 −0.22 −0.06 0.04
in the country where the firm
is listed
p) To trade at a better 30.99 −0.11 −0.03 −0.17 −0.12 −0.24 0.23 −0.58∗∗∗ −0.21 0.27 −0.05 −0.28 −0.15 −0.06 −0.09 −0.04
price/earning multiple
Franck Bancel and Usha R. Mittoo

h) To minimise the cost of the 21.43 −0.44 −0.50 −0.39 −0.47 −0.41 −0.42 −0.69 −0.44 −0.47 −0.33 −0.63 −0.63 −0.34 −0.56 −0.43
IPO
f) To follow competitors/peers 20.83 −0.57 −0.53 −0.57 −0.57 −0.71 −0.22 −1.00∗∗ −0.61 −0.40 −0.59 −0.52 −0.90 −0.41 −0.82 −0.42
that are listed on this
exchange
o) To create ‘good relations’ 13.04 −0.62 −0.66 −0.59 −0.63 −0.75 −0.68 −0.70 −0.73 0.21 −0.67 −0.58 −0.47 −0.65 −0.71 −0.50
with government or local
authorities
 Table 3
Survey response to the question: in your opinion, the IPO has allowed your company

Respondents are asked to rate factors on a scale of −2 (not important) to +2 (very important). We report the sample means and the percentage of respondents
who answered +1 (important) and +2 (very important). The subsample means are based on the following conditioning variables: Size (a large firm has market
capitalization greater than 500 million euros), Hi-Tech (a high-technology firm), Age (an old firm has a founding year of 1987 or earlier), Initial Return (a hot
firm has initial return greater than 10%), Ownership/Family Control (whether the firm is controlled by a family), Raising Capital (whether the firm issued new
shares in the IPO), Change Leverage (whether the IPO changed the firm’s leverage (total debt/equity – in book value)). ∗∗∗ ,∗∗ ,∗ denote significant differences at
the 1%, 5%, and 10% levels, respectively.
Ownership:

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Important Initial family Raising Change
or very Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes
k) To make the firm’s share 75.32 1.00 0.92 1.06 1.05 0.79 1.13 0.78 1.13 0.53∗∗ 1.08 0.88 1.00 1.00 1.14 1.07
more liquid and to increase
the firm value
d) To increase financial 75.32 0.90 0.76 1.03 1.02 0.47∗∗ 0.80 0.94 0.95 0.71 0.82 1.16 0.50 1.04∗ 0.63 1.18∗∗
flexibility (generating new
financing alternatives)
a) To finance investment 73.33 1.04 1.45 0.59∗∗∗ 0.91 1.37∗∗ 1.05 0.94 1.07 0.94 1.04 1.08 0.15 1.39∗∗∗ 0.57 1.48∗∗∗
opportunities
i) To be monitored by 69.74 0.79 0.47 1.09∗∗ 0.95 0.32∗∗ 0.75 0.81 0.78 0.82 0.80 0.79 1.15 0.64∗ 0.97 0.63
outsiders (analysts,
investors, etc.) in order to
increase the firm value
j) To compensate employees 59.74 0.49 0.42 0.58 0.46 0.63 0.55 0.59 0.45 0.65 0.57 0.48 0.35 0.54 0.57 0.61
and managers (ability to
Why Do European Firms Go Public?

provide stock options, etc.)

c) To reduce the cost of 57.89 0.33 0.42 0.31 0.36 0.21 0.35 0.29 0.36 0.24 0.27 0.54 −0.20 0.55∗∗ −0.17 0.86∗∗∗
financing (debt and equity)
g) To sell the company to 56.58 0.47 0.32 0.57 0.47 0.37 0.65 0.32 0.49 0.41 0.59 0.25 0.85 0.31 0.89 0.15∗∗
external shareholders
l) To estimate the market value 56.58 0.46 0.45 0.49 0.55 0.21 0.53 0.35 0.47 0.41 0.53 0.33 0.40 0.51 0.37 0.74
of the firm
e) To reinforce the firm’s 56.00 0.51 0.63 0.32 0.54 0.42 0.36 0.61 0.50 0.53 0.31 0.96∗∗∗ 0.25 0.63 0.26 0.92∗∗
balance of power with
bankers and other financial
855

creditors
 Table 3.

Continued.
856

Ownership:
Important Initial family Raising Change
or very Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes
r) To pay for future acquisitions 53.33 0.36 0.58 0.15 0.26 0.68 0.46 0.19 0.47 0.00 0.35 0.46 −0.30 0.59∗∗∗ 0.14 0.63
with the firm’s shares
h) To allow founding 47.37 0.26 −0.11 0.60∗∗ 0.33 0.16 0.41 0.03 0.30 0.13 0.60 −0.32∗∗∗ 0.89 0.02∗∗ 0.47 −0.14∗

C 2009 Blackwell Publishing Ltd

shareholder(s) to disengage as
major shareholder
s) To increase firm value by 40.54 0.05 −0.03 0.03 0.06 0.00 0.26 −0.32∗∗ 0.07 0.00 0.15 −0.21 0.21 −0.02 0.24 −0.19
attracting diversified investors
who value shares more than
undiversified investors
n) To benefit from favourable 39.47 0.14 0.24 −0.03 0.04 0.32 0.35 −0.16∗ 0.12 0.24 0.10 0.21 0.25 0.13 0.06 0.26
market conditions (“bullish”
stock exchange/industry
valuation)
f) To “secure” relations with all 38.67 0.13 0.26 −0.03 −0.02 0.53∗ 0.15 −0.06 0.10 0.24 0.06 0.25 0.00 0.19 0.00 0.26
stakeholders (suppliers, etc.)
o) To benefit from a high level 36.84 0.03 −0.05 0.06 0.15 −0.37∗ 0.05 0.03 −0.05 0.29 −0.12 0.38∗ 0.30 −0.07 −0.11 0.30
of cash-flows and the ability
to present a favourable
business plan
m) To benefit from outside 36.00 0.00 0.11 −0.21 −0.13 0.21 0.21 −0.35∗ 0.07 −0.25 0.15 −0.33 −0.16 0.07 0.00 0.22
Franck Bancel and Usha R. Mittoo

investors who are willing to

pay a higher price for the
firm’s risky cash-flows than
the entrepreneur’s own
valuation of these flows
b) To reduce the firm leverage 35.53 0.08 0.34 −0.14 0.07 0.00 0.03 0.13 0.10 0.00 0.02 0.32 −0.60 0.36∗∗∗ −0.63 1.04∗∗∗
∗
p) To follow industry peers/ 35.53 −0.14 −0.32 0.06 −0.18 −0.11 0.10 −0.44 −0.17 −0.06 −0.04 −0.32 −0.16 −0.16 −0.18 0.04
competitors (most of them are
listed)
q) To list an entity/business 24.32 −0.70 −0.58 −0.82 −0.59 −1.11 −0.23 −1.35∗∗∗ −0.83 −0.25∗ −0.65 −0.96 −0.40 −0.79 −0.69 −0.88
separately and to achieve a
better firm valuation


Table 4
Survey response to the question: do these statements agree with your company’s IPO decisions?
Respondents are asked to rate factors on a scale of −2 (not important) to +2 (very important). We report the sample means and the percentage of respondents
who answered +1 (important) and +2 (very important). The subsample means are based on the following conditioning variables: Size (a large firm has market

C 2009 Blackwell Publishing Ltd

capitalisation greater than 500 million euros), Hi-Tech (a high-technology firm), Age (an old firm has a founding year of 1987 or earlier), Initial Return (a hot
firm has initial return greater than 10%), Ownership/Family Control (whether the firm is controlled by a family), Raising Capital (whether the firm issued new
shares in the IPO), Change Leverage (whether the IPO changed the firm’s leverage (total debt/equity – in book value)). ∗∗∗ ,∗∗ ,∗ denote significant differences at
the 1%, 5%, and 10% levels, respectively.
Ownership:
Important Initial family Raising Change
or very Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes
b) The IPO acts as advertising for 83.12 0.90 0.89 0.92 0.96 0.74 0.82 1.06 0.95 0.71 0.88 0.92 0.85 0.91 0.83 1.00
the company and increases ts
reputation/image
j) Making the IPO, we believed it 72.73 0.96 0.97 0.92 0.98 0.84 1.10 0.85 0.93 1.06 1.00 1.04 0.60 1.07∗∗ 0.97 1.07
was the best time to do it
a) The IPO is a normal ‘stage’ in the 68.83 0.83 0.76 0.92 0.89 0.63 1.00 0.70 0.87 0.71 0.79 0.92 0.70 0.88 0.83 0.75
growth of a company
d) Making an IPO, we had a clear 58.11 0.65 0.51 0.76 0.69 0.53 0.62 0.56 0.69 0.50 0.78 0.48 0.42 0.74 0.62 0.65
Why Do European Firms Go Public?

vision of our capacity to give an

acceptable return to shareholders
g) The cost of the IPO was not a real 42.67 0.08 0.11 0.06 0.17 −0.11 0.03 0.19 0.05 0.19 0.13 −0.04 0.26 −0.02 0.18 0.22
issue because it does not
significantly impact the EPS (the
cost of the IPO can be deducted
from the issue premium, etc.)
857


858

Table 4.
Continued.

C 2009 Blackwell Publishing Ltd

Ownership:
I mpor tant Initial family Raising Change
or ver y Size Hi-Tech Age return control capital leverage
important
(%) Mean Small Large No Yes Young Old Cold Hot No Yes No Yes No Yes
c) We analyse the IPO as a trade off 40.00 0.03 0.18 −0.09 0.00 0.16 −0.08 0.09 −0.03 0.25 −0.02 0.20 −0.26 0.11 −0.03 0.15
between diversification gains and
private benefits of control
e) When we made the IPO, the 37.18 0.05 −0.18 0.30∗∗ 0.12 −0.11 −0.10 0.30 −0.03 0.35 −0.06 0.31 0.10 0.00 0.14 0.07
asymmetry of information
between external investors and the
company (comprehension of our
business by financial analysts)
was a major problem
h) The IPO has obliged us to disclose 22.37 −0.38 −0.43 −0.33 −0.39 −0.28 −0.39 −0.42 −0.52 0.13∗∗ −0.54 −0.16 0.00 −0.50∗ −0.12 −0.64∗
information that was crucial for
our competitive advantage
f) The high cost of the IPO 14.10 −0.62 −0.21 −1.08∗∗∗ −0.75 −0.26∗ −0.45 −0.79 −0.64 −0.53 −0.61 −0.62 −0.85 −0.51 −0.60 −0.57
Franck Bancel and Usha R. Mittoo

(underwriting fees, etc.) was a

major problem for our company
i) Making an IPO, we knew our firm 12.16 −0.82 −0.76 −0.97 −0.94 −0.47∗ −0.84 −0.78 −0.91 −0.50 −0.94 −0.58 −0.89 −0.78 −0.91 −0.63
had the option to take the firm
private again in a second stage
 Table 5

Spearman correlations between selected survey responses on IPO and listing decisions
Spearman correlations among responses to the following survey questions are reported: 1) Managers’ views on IPO costs and benefits (Q4); 2) Managers’ views
on IPO decisions? (Q5); and (3) Home exchange listing criteria (Q3). ∗∗∗ , ∗∗ , ∗ denote significance at the 1%, 5%, and 10% levels, respectively.
Managers’ views on Home exchg
Managers’ views on IPO benefits (Q4) IPO decision (Q5) listing decision (Q3)
Q4a Q4b Q4c Q4d Q4e Q4f Q4g Q4h Q4i Q4j Q4k Q4l Q4m Q4n Q4r Q4s Q5a Q5b Q5c Q5e Q5g Q5j Q3a Q3d Q3f Q3i

Q4b To reduce the firm 0.42∗ ∗

leverage

C 2009 Blackwell Publishing Ltd

Q4c To reduce the cost of 0.48∗ ∗ 0.59∗ ∗
financing (debt and
equity)
Q4d To increase financial 0.41∗ ∗ 0.41∗ ∗ 0.51∗ ∗
flexibility
Q4e To reinforce the firm’s 0.25∗ 0.39∗ ∗ ∗ 0.41∗ ∗ 0.56∗ ∗
balance of power with
bankers and creditors
Q4f To ‘secure’ relations 0.28∗ 0.25∗ 0.21 0.39∗ ∗ 0.61∗ ∗
with all stakeholders
Q4g To sell the company −0.15 −0.08 −0.09 −0.04 −0.06 0.00
Q4h To allow founding −0.11 −0.02 0.00 0.12 −0.03 0.09 0.31∗ ∗
shareholder(s) to
disengage
Q4i To be monitored by −0.02 0.00 0.08 0.17 −0.02 0.27∗ 0.13 0.23∗
outsiders (analysts, etc.) to
increase the firm value
Q4j To compensate 0.02 0.12 0.20 0.37∗ ∗ 0.27∗ 0.28∗ 0.22 0.19 0.25∗
employees and managers
(stock options, etc.)
Q4k To make the firm’s 0.10 0.15 0.10 0.29∗ 0.14 0.38∗ ∗ 0.13 0.08 0.64∗ ∗ 0.43∗ ∗
Why Do European Firms Go Public?

share more liquid and to

increase the firm value
Q4l To estimate the market 0.11 0.17 0.23 0.19 0.05 0.15 0.03 0.04 0.43∗ ∗ 0.25∗ 0.58∗ ∗
value of the firm
Q4m To benefit from outside 0.12 0.36∗ ∗ 0.25∗ 0.14 0.20 0.33∗ ∗ 0.10 0.15 0.20 0.11 0.41∗ ∗ 0.37∗ ∗
investors who are willing
to pay a higher price for
the firm’s risky cash-flows
than the entrepreneur’s
own valuation
Q4n To benefit from 0.18 0.22 0.27∗ 0.16 0.24∗ 0.36∗ ∗ 0.06 0.02 0.25∗ 0.24∗ 0.34∗ ∗ 0.36∗ ∗ 0.63∗ ∗
favourable market
conditions (“bullish”
exchange/industry
859

valuation)
 Table 5
Continued.

Managers’ views on Home exchg
Managers’ views on IPO benefits (Q4) IPO decision (Q5) listing decision (Q3)
860

Q4a Q4b Q4c Q4d Q4e Q4f Q4g Q4h Q4i Q4j Q4k Q4l Q4m Q4n Q4r Q4s Q5a Q5b Q5c Q5e Q5g Q5j Q3a Q3d Q3f Q3i
Q4r To pay for future 0.40∗ ∗ 0.22 0.35∗ ∗ 0.49∗ ∗ 0.29∗ 0.23∗ −0.19 −0.01 0.15 0.28∗ 0.44∗ 0.26∗ 0.33∗ ∗ 0.33∗ ∗
acquisitions with the
firm’s shares
Q4s To increase firm value 0.01 0.03 0.09 0.11 0.07 0.23∗ 0.22 0.18 0.34∗ ∗ 0.14 0.49∗ ∗ 0.33∗ ∗ 0.68∗ ∗ 0.59∗ ∗ 0.37∗ ∗
by attracting diversified
investors who value shares
more than undiversified
investors

C 2009 Blackwell Publishing Ltd

Q5a The IPO is a normal −0.04 −0.10 0.04 0.18 −0.03 −0.05 0.13 0.05 0.25∗ 0.23∗ 0.19 0.15 0.10 0.25∗ 0.16 0.24∗
‘stage’ in the growth of a
company
Q5b The IPO acts as −0.07 0.20 0.24∗ 0.16 0.14 0.07 −0.15 0.05 0.26∗ 0.22 0.18 −0.04 0.20 0.15 0.23∗ 0.27∗ 0.15
advertising for the
company and increases its
reputation/image
Q5c We analyse the IPO as a 0.15 0.21 0.21 0.07 0.16 0.17 −0.09 −0.09 −0.11 0.14 −0.03 0.07 0.15 0.16 0.06 0.09 −0.12 0.19
trade off between
diversification gains and
private benefits of control
Q5e When we made the IPO, −0.19 −0.18 −0.06 0.16 −0.01 0.05 0.02 −0.12 0.12 0.19 0.13 0.09 −0.22 −0.04 −0.03 −0.10 0.23∗ 0.05 −0.01
the asymmetry of
information between
external investors and the
company (comprehension
of our business by
financial analysts) was a
major problem
Q5g The cost of the IPO was −0.05 0.13 0.04 0.19 0.12 0.13 0.14 0.09 0.15 0.24∗ 0.21 0.16 −0.04 0.06 0.18 0.19 0.17 0.06 −0.06 0.22
not a real issue because it
does not significantly
Franck Bancel and Usha R. Mittoo

impact the EPS

Q5j Making the IPO, we 0.03 0.18 0.12 0.30∗ ∗ 0.03 0.03 0.14 0.01 0.14 0.28∗ 0.25∗ 0.16 0.12 0.15 0.18 0.10 0.21 −0.06 0.11 0.26∗ 0.12
believed it was the best
time to do it
Q3a To enhance the −0.10 −0.02 0.05 −0.03 −0.11 0.10 −0.06 0.27∗ 0.09 0.00 −0.09 0.10 0.22 0.14 0.04 0.18 0.11 0.32∗ ∗ 0.08 −0.09 0.10 −0.08
company’s prestige, image
and visibility
Q3d To increase shareholder −0.05 0.02 0.16 0.14 0.04 0.16 0.09 0.11 0.34∗ ∗ 0.31∗ ∗ 0.23∗ 0.19 0.22 0.20 −0.01 0.24∗ 0.24∗ 0.02 0.04 0.13 0.00 0.18 −0.08
base
∗ ∗∗ ∗ ∗ ∗∗ ∗ ∗
Q3f To follow 0.01 0.26 0.33 0.23 0.06 0.07 −0.17 0.04 0.15 0.11 0.07 0.29 0.25 0.39 0.25 0.16 0.16 0.09 0.10 −0.01 0.18 0.27 0.32∗ ∗ 0.12
competitors/peers that are
listed on this exchange
Q3i To facilitate mergers 0.39∗ ∗ 0.25∗ 0.31∗ ∗ 0.34∗ ∗ 0.25∗ 0.36∗ ∗ −0.25∗ −0.09 0.04 0.21 0.21 0.07 0.16 0.16 0.47∗ ∗ 0.09 −0.08 0.18 0.29∗ −0.07 0.09 0.12 0.15 −0.05 0.19
and acquisitions
Q3p To trade at a better 0.08 0.24∗ 0.30∗ 0.29∗ 0.09 0.25∗ 0.13 0.16 0.08 0.21 0.26∗ 0.28∗ 0.51∗ ∗ 0.37∗ ∗ 0.14 0.37∗ ∗ 0.14 −0.09 0.18 −0.11 0.14 0.25∗ 0.16 0.15 0.33∗ ∗ 0.23
price/earning multiple
 Why Do European Firms Go Public? 861

(mean = 0.90, Table 4). Consistent with the Merton model, the CFOs who value
enhanced visibility are also more likely to agree that the IPO has lowered the cost
of financing (Q4c/Q5b, corr. = 0.24, p = 0.040, Table 5). In the open-ended question,
the CFOs cite: ‘reputation among businesses, awareness of the company by stakeholders,
good reputation as an employer, and international visibility’ as major benefits.
Maksimovic and Pichler (2001) model the going public decision as the firm’s strategic
choice to gain the first-mover advantage in the product market. The public trading of
stock enhances the firm’s visibility, reputation, and credibility, enabling the firm to raise
capital for growth but also forcing the firm to disclose sensitive information that may
be valuable to its competitors, especially in high-tech industries. Their model implies
that the IPO firms will highly value the capital raising benefits of going public, and will
lead rather than follow their industry peers in going public.
We find support for three implications of the Maksimovic–Pichler model. Consistent
with the Maksimovic–Pichler model, most CFOs agree that funding for growth is a
major benefit of an IPO whereas few (21%) agree that they follow their industry peers
on the home exchanges. The high-tech firms assign significantly higher ranking to
the benefits of enhanced visibility and prestige than their peers (mean = 1.35 versus
0.89, p = 0.082, Table 2), and firms that tend to agree that an IPO enhances the
firm’s reputation also tend to place a higher value on external monitoring (Q4i/Q5b,
corr. = 0.26, p = 0.023, Table 5). However, only 22% of firms agree with the model’s
main assumption that going public forces the firm to disclose information that is crucial
for its competitive advantage (mean = −0.38, Table 4). Firms that raise capital in the
IPO disagree more strongly with this assumption (mean = −0.5 versus 0.0, p = 0.083,
Table 4).

3.1(b) Funding for growth opportunities. Ritter and Welch (2002) argue that most
firms go public primarily to raise new capital for growth. Kim and Weisbach (2008)
examine IPOs from 38 countries and find that almost all firms raise a substantial amount
of new capital in the IPO, but new funds raised in the IPO are used for several purposes in
addition to financing growth, such as rebalancing leverage and increasing cash balances.
We find strong support that funding for growth is a major motivation for going
public. Over 70% of the CFOs agree that financing investment opportunities is the
most important benefit of the IPO and listing (Tables 2 and 3). Three-fourth of our
sample firms raise new capital in the IPO. The capital-raising firms exhibit higher
annual average growth rates than do non-capital raising firms in assets (53% versus 3%,
p = 0.017,) in market capitalisation (33% versus 15%) and in the number of employees
(18% versus 12%). 3
In line with Kim and Weisbach (2005), we find that the cash raised in the IPO is used
for several purposes. The firms that report a reduction in leverage after the IPO assign
a higher mean rating to the benefit of raising capital for growth (mean = 1.48 versus
0.57, p = 0.001, Table 3), suggesting that a portion of the funds might be used for
rebalancing their leverage. The CFOs’ views on the benefits of raising capital (columns
1–3 of Table 5) are strongly positively correlated with their responses to the questions
regarding the reduction of leverage (Q4a/Q4b, corr. = 0.42, p = 0.000), the enhanced

3
These comparisons are based on survey data reported by CFOs from the year of the IPO
to 2005. These differences are modest when we restrict our analysis to firms with growth
rates between −50% and +100%, suggesting that the difference in growth rates is driven by
a few high performing capital-raising firms.


C 2009 Blackwell Publishing Ltd
862 Franck Bancel and Usha R. Mittoo

financial flexibility (Q4a/Q4d, corr. = 0.41, p = 0.000) and the reduction in cost of
financing (Q4a/Q4c, corr. = 0.48, p = 0.000). The CFOs also mention different uses
of funds in the open-ended question: ‘Raise cash; reduction of debt; money to finance
new investments’.
Chemmanur and Fulghieri (1999) model the going public decision in an asymmetric
information framework as a trade-off between the option to raise equity financing in
public markets compared to the private sale of equity to a small group of large investors.
Their model predicts that firms tend to go public only when a sufficient amount of
information about them is accumulated in the public domain because it lowers their
information production costs. It also implies that firms go public when they are older,
well established and have a track record. The exception to this pattern is high technology
firms, which have a greater need for public financing.
Consistent with the Chemmanur–Fulghieri model, a typical firm in our sample goes
public at an average (median) age of 24 (12) years, but the high-tech firms go public
at a younger age and value the financing benefit more than their peers (mean = 1.37
versus 0.91, p = 0.036, Table 3). The CFOs who value the benefit of raising external
financing also tend to value the enhanced balance of power with creditors (Q4a/Q4e,
corr. = 0.25, p = 0.033, Table 5), consistent with the model. However, only 37% of the
CFOs agree that asymmetry of information was a major problem before going public.
Moreover, this support arises mainly from the firms that went public in cold markets
(mean = 0.35 versus −0.03, Table 4), suggesting that it is related to market timing. We
also find little support for the Chemmanur–Fulghieri model’s implication that access
to better financing stems from broadening the shareholder base since the correlation
between the two benefits is low (Q4a/Q3d, corr. = −0.05, Table 5).

3.1(c) Mergers and acquisitions. Lyandres et al. (2008) argue that firms go public
primarily to pursue an efficient merger and acquisition (M&A) strategy. They assume
that a private firm is uncertain about the precise value of its capital. An IPO removes this
valuation uncertainty and allows the firm to exercise its restructuring options optimally
with cash or stock financing for acquisitions. Consistent with this theory, Celikyurt
et al. (2007) find that there is a high incidence of M&A activity among newly public
US firms, and that the amount of post-IPO acquisitions is positively related to the degree
of valuation uncertainty and market conditions. Brau et al. (2003) argue that an IPO
allows firms to create publicly traded shares that can be used as a currency for growth
through mergers or acquisitions.
Although we do not ask direct questions regarding the uncertainty valuation theory,
we find support for the three main implications of the theory in the answers to several
related questions in our survey. First, 56% of the CFOs agree that facilitating mergers
and acquisitions is important in their listing decision (mean = 0.50, Table 2). Second,
over half of the CFOs agree that the IPO has allowed them to estimate the market value
of the company (mean = 0.46, Table 3) and to use stock currency for future acquisitions
(mean = 0.36, Table 3). The responses on both these questions are positively correlated
(Q4r/4l, corr. = 0.26, p = 0.026, Table 5). Further, firms that consider these two factors as
major benefits of an IPO are also more likely to agree that favourable market conditions
were a factor in their IPO timing (Q4l/Q4n – Q4r/Q4n, corr. = 0.36 – corr. = 0.33,
p = 0.002– p = 0.004, Table 5). In addition, the capital-raising firms assign a higher
ranking to the use of stock currency for future M&As compared to non-capital raising
firms for both the IPO (mean = 0.59 versus −0.30, p = 0.008, Table 3) and the listing
(mean = 0.67 versus 0.10, p = 0.086, Table 2) decisions.


C 2009 Blackwell Publishing Ltd
 Why Do European Firms Go Public? 863

Finally, the CFOs’ comments in the open-ended question and in the interviews also
underscore the link between IPOs and M&As, and indicate that both cash and stock are
used for financing M&As: ‘the growth of the company thanks to acquisition and joint
ventures; ability to issue shares for acquisitions; currency for acquisitions; potential
capital raise for M&A’. Two of the three CFOs we interviewed told us that growth
through M&A was a primary objective in the firm’s IPO decision. Both firms completed
a major acquisition within three years of their IPO – one financed with stock, the other
with only cash – consistent with the predictions of Lyandres et al. (2008). The CFO of
the third firm also mentioned that the listing provided a clear idea of the firm’s value
and enhanced its financial flexibility, which was in turn useful in future M&As. All
three CFOS also told us that their firms did not set up any takeover defenses at the time
of the IPO.

3.1(d) Financial flexibility and greater bargaining power with banks. Rajan (1992)
argues that going public increases the firm’s financial flexibility, enhances its bargaining
power with bankers and financial creditors, and consequently reduces the firm’s cost
of credit. Huyghebaert and Hulle (2005) argue that an IPO allows the firm to enhance
its financial flexibility by generating additional sources of capital to finance its growth
and expansion. Pagano et al. (1998) document that Italian firms executing an IPO
experienced a reduction of about 0.30 percentage points in cost of credit after going
public.
We find strong support for Rajan’s theory but primarily in the family-controlled firms.
Over half of the CFOs agree that the IPO has reinforced the firm’s balance of power with
bankers and creditors but this support is primarily seen within family-controlled firms
(mean = 0.96 versus 0.31, p = 0.009, Table 3). Further, the firms that value an enhanced
balance of power are also more likely to agree that an IPO increases financial flexibility
(Q4e/Q4d, corr. = 0.56, p = 0.000, Table 5), reduces cost of capital (Q4e/Q4c, corr. =
0.41, p = 0.000, Table 5) and are more likely to reduce their leverage after going public
(Q4e/Q4b, corr. = 0.39, p = 0.001, Table 5), consistent with the theory. We also find
support for the Huyghebaert–Hulle theory since firms that value financing for growth
more also tend to value financial flexibility more (Q4a/Q4d, corr. = 0.41, p = 0.000,
Table 5). Moreover, while most CFOs agree that financial flexibility is a major benefit
of going public, this support is higher among firms that raise capital in the IPO (mean =
1.04 versus 0.50, p = 0.067, Table 3) and that reduce leverage after the IPO (mean =
1.18 versus. 0.63, p = 0.019, Table 3).

3.1(e) Exit strategy. Zingales (1995) argues that an IPO is a first step in the owner’s
exit strategy. The owner maximises the total proceeds from the firm’s eventual sale by
selling part of the cash flow rights in the IPO, and the ownership control rights at a
later stage. His theory implies that pre-IPO owners would be less interested in the firm’s
growth through mergers and acquisitions. Mello and Parsons (1998) argue that an IPO is
a vehicle to enhance stock liquidity and firm value, which enables owners to sell shares
in several stages. Black and Gilson (1998) model the IPO decision as an opportunity
for the venture capitalists to cash out their investments.
We find moderate support for exit strategy theories. Over half of the CFOS identify
the sale of the company as a major motivation, but the support is stronger among firms
that do not reduce leverage after the IPO (mean = 0.89 versus 0.15, p = 0.033, Table 3).
The firms that cite the sale of the company as the primary reason for an IPO are also less
likely to agree that an IPO creates a currency for mergers and acquisitions (Q4g/Q3i,


C 2009 Blackwell Publishing Ltd
864 Franck Bancel and Usha R. Mittoo

corr = −0.25, p = 0.037, Table 5), consistent with Zingales. These firms are also more
likely to value stock liquidity in their listing decision (Q4g/Q4k, corr. = 0.13, Table 5),
consistent with Mello and Parsons (1998). They are less likely to use the cash raised in
the IPO for reducing leverage (mean = 0.89 versus 0.15, p = 0.033, Table 3), consistent
with Black and Gilson (1998).

3.1(f) Lower cost of capital. We find less support for cost of capital theories. The
trade-off theory implies that firms go public to achieve an optimal capital structure and
to lower their cost of capital (see, for example, Scott (1976) and Modigliani and Miller
(1963)). Only 45% of the CFOs agree that cost of capital is important in their listing
decision (mean = 0.04, Table 2). Although about 58% of the CFOs agree that going
public has reduced their firms’ cost of financing (mean = 0.33, Table 3), this support
arises mainly from the firms that reduce their leverage after the IPO (mean = 0.86
versus −0.17, p = 0.000, Table 3) and appears to be related to the enhanced balance of
power with creditors. We also find weak support for the pecking order theory by Myers
and Majluf (1984) because few CFOs agree that asymmetric information was a problem
at the time of the IPO, and capital-raising firms agree even less with this statement. We
find some support for Holmstrom and Tirole (1993), who argue that firms can reduce
their cost of capital by obtaining cheap financing directly from the capital markets since
capital-raising firms in our survey agree that the IPO reduces the cost of capital whereas
non-capital raising firms do not (mean = 0.55 versus −0.20, p = 0.012, Table 3).

3.1(g) External monitoring. External monitoring is viewed as a benefit in some

IPO models, but a cost in others. Jensen and Meckling (1976) argue that the firm’s
commitment to meet the regulatory and disclosure requirements of stock exchanges
increases transparency, lowers the agency costs between managers and majority share-
holders and facilitates better corporate governance. External monitoring is a benefit
for dispersed shareholders but is a cost for managers and controlling shareholders. The
increased scrutiny of analysts and market participants imposes discipline on managers
for performance, and limits the private benefits of control. A public listing, however,
allows the firm to devise managerial incentive plans to align managers’ interest with
those of shareholders. Maksimovic and Pichler (2001) argue that enhanced transparency
forces the firm to disclose crucial information that may be advantageous to competitors.
Pagano and Roell (1998), on the other hand, suggest that the level of monitoring is higher
at the pre-IPO stage because a small group of investors can monitor the firm more closely
than dispersed investors.
We find strong support for the notion that external monitoring increases firm value, but
this is mainly true among the large firms (mean = 1.09 versus 0.47, p = 0.016, Table 3).
About 60% of CFOs also agree that an IPO enables the firm to design compensation
schemes for managers and employees. The firms that went public primarily to allow
founding owners to disengage from the business are also more likely to value external
monitoring (Q4h/Q4i, corr. = 0.23, p = 0.047, Table 5) and use stock options for
managers (Q4i/Q4j, corr. = 0.25, p = 0.028, Table 5). The capital raising firms value
external monitoring less than non-capital raising firms (mean = 0.64 versus 1.15, p =
0.070, Table 3), and high-tech firms value it significantly less than their peers in other
industries (mean = 0.32 versus 0.95, p = 0.031, Table 3). Because large firms in our
survey care less about the capital raising benefit and are less likely to be high-tech firms,
we conclude that the value of external monitoring is higher for large firms, especially
when founders/owners want to disengage from the business.


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 Why Do European Firms Go Public? 865

Several CFOs also comment on the value of monitoring in the open-ended question:
‘Pressure on management to perform; better governance; greater management discipline;
transparency of value; better monitoring and improved performance; having the market
as a reference for managers, external scrutiny and accountability focuses; management’s
attention on value-creating’. All CFOs we interviewed told us that they had completely
redesigned their accounting and managerial reporting systems after the IPO, and that
these changes had enhanced managerial accountability and efficiency.

3.1(h) Windows-of-opportunity. The windows-of-opportunity hypothesis argues that

managers use their superior information to select the timing of corporate decisions
opportunistically to take advantage of temporarily favourable market conditions and at-
tractive stock prices. A large number of US and non-US studies document the clustering
of IPOs during strong industry and market conditions and long-run underperformance
following initial public offerings (see, for example, Ritter (2003)).
We find modest support for the windows-of-opportunity hypothesis. Although most
CFOs believe that it was the best time to execute an IPO (mean = 0.96, Table 4),
only 40% agree that the IPO has allowed them ‘to benefit from favourable market
conditions (such as, bullish stock exchange/industry valuation)’ (mean = 0.14, Table 3).
In untabulated analysis, we find that the main support for market timing comes from
high-tech firms that list on foreign exchanges – they agree more strongly that trading
at a better price/earnings multiple is an important listing criteria (mean = 1.33 versus
0.0, p = 0.027).

3.1(i) Stock liquidity. Amihud and Mendelson (1986) suggest that a stock exchange
listing enhances stock liquidity, which in turn increases firm value. Maug (1998) argues
that stock liquidity is valuable for managerial incentive schemes, and predicts a positive
correlation between liquidity and external monitoring.
Although 75% of the CFOs agree that stock liquidity enhances firm value, few
mention it as a major benefit in the open-ended question. The importance of stock
liquidity for listing also varies across firms. The non-family-controlled firms view stock
liquidity as more important than family-controlled firms (mean = 0.82 versus 0.24, p =
0.093, Table 2), and old firms value it more than young firms (mean = 0.23 versus 0.83,
p = 0.071, Table 2). We find that CFOs’ views are more consistent with Maug (1998).
Consistent with his predictions, Table 5 shows that the CFOs who value stock liquidity
are also more likely to value external monitoring (Q4k/Q4i, corr. = 0.64, p = 0.000,
Table 5), compensation plans for employees (Q4k/Q4j, corr. = 0.43, p = 0.000, Table 5)
and relations with stakeholders (Q4k/Q4f, corr. = 0.38, p = 0.001, Table 5).

3.2. Costs
The IPO literature mentions both direct costs, such as underwriting costs, and indirect
costs of going public, such as increased disclosure requirements and public scrutiny.
The European CFOs are less concerned with the costs of going public. About 42% of
the CFOs agree that the direct costs are not a real issue (mean = 0.08, Table 4) and
only 37% CFOs agree that indirect costs related to asymmetric information or public
scrutiny matter. In the open-ended question, the CFOs mention professional fees of
bankers, lawyers and accountants as the major IPO costs (Table 6). One CFO estimated
the professional fees to be about 9% of the funds raised. About 30% of CFOs also


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866 Franck Bancel and Usha R. Mittoo

Table 6
Major costs and benefits of IPO
Panels A and B summarise the major costs and benefits identified by the CFOs in open-ended questions.
Panel C presents the views of CFOs on the net benefits of the IPO.

Panel A: What have been the major costs of the IPO? – open-ended question

Identified as a major cost by % of firms

Fees in general 62
Public relations costs 38
Accounting reporting requirements 34
Opportunity costs 11

Panel B: What have been the major benefits of the IPO? – open-ended question

Identified as a major benefit by % of firms

Visibility or signaling 57
Financing or financial flexibility 61
External monitoring or employees SO plan 36
Liquidity for shareholders 19
Other benefits 4

Panel C: Do you consider the net benefits of the IPO is?

% of reponding firms
Significantly positive 77
Marginally positive 21
Equal 1
Significantly negative 1

mention costs, such as public relations costs, management time, frequency of reporting,
need to change accounting systems, and short-term focus of the market.

3.3. Net benefits

Table 6 summarises the CFOs’ views on the net benefits of going public. Almost all
CFOs agree that the benefits of the IPO significantly outweigh the costs. This result
could reflect the response bias, because firms that are satisfied with their IPO decision
are more likely to respond to the survey.

4. Cross-Country Comparisons

4.1. Comparison across European countries

Table 7 compares the CFOs’ views across European countries. We group the countries
by legal system and/or the firm’s ownership structure. To conserve space, we tabulate


C 2009 Blackwell Publishing Ltd
 Table 7
Managers’ views: cross-country comparisons

The CFOs’ views are compared across European countries. We exclude three countries (the Netherlands, Switzerland, and Greece) that have a small number of
observations and distinct firm characteristics, such as mostly high-tech or very large firms. Countries are grouped by legal system and/or the firm’s ownership
structure as follows: 1) English (UK and Ireland) versus Civil (French and German system) countries; 2) French (France and Belgium) versus German (Germany
and Austria) system countries with similar proportions of family-controlled firms; 3) French system countries with a high (74%) percentage of family-controlled
firms (Italy, Portugal, and Spain) versus low percentage (40%) of such firms (France and Belgium); and 4) Italy versus other Civil system countries. Panel A
presents mean ratings for only those responses that differ significantly across at least two country groups. Panel B compares firm and offering characteristics, and
Panel C compares ownership structures before and after the IPO. T-test is used to test equality of means for English versus Civil system countries; Bonferroni

C 2009 Blackwell Publishing Ltd

difference tests are used for the remaining pair-wise comparisons of groups; ∗∗∗ ,∗∗ ,∗ denote significance at the 1%, 5%, and 10% levels, respectively.

Panel A: Managers’ views on IPO

English vs. Civil French vs. German Across French system Italy vs. other
UK & Civil Fr & Gr & It & Pr & Sp Fr & Bel Other
Ire Countries Bel Aus (Hi family) (Lo family) Italy Civil
Mean Mean Mean Mean Mean Mean Mean Mean
(Median) (Median) (Median) (Median) (Median) (Median) (Median) (Median)
N = 20 N = 57 N = 20 N = 15 N = 12 N = 20 N=5 N = 52
Q4k To make the firm’s share 1.40 0.84∗∗ 0.65 1.13 0.55 0.65 0.20 0.90
more liquid and to increase the
firm
Why Do European Firms Go Public?

l Q4c To reduce the cost of 0.15 0.40 0.20 0.40 0.45 0.20 1.20 0.32∗∗∗
financing (debt and equity)
Q4g To sell the company to 1.15 0.2∗∗∗ −0.11 0.20 0.73 −0.11 0.00 0.22
external shareholders
Q4e To reinforce the firm’s 0.20 0.59 0.89 0.00∗∗ 0.27 0.89∗ 0.60 0.59
balance of power with bankers
and other financial creditors
Q4r To pay for future acquisitions 0.55 0.30 0.37 0.73 −0.55 0.37∗ 0.00 0.33
with the firm’s shares
867
 Table 7
Continued.

Panel A: Managers’ views on IPO
868

English VS. Civil French VS. German Across French System Italy VS. Other
UK & Civil Fr & Gr & It & Pr & Sp Fr & Bel Other
Ire Countries Bel Aus (Hi Family) (Lo Family) Italy Civil
Mean Mean Mean Mean Mean Mean Mean Mean
(Median) (Median) (Median) (Median) (Median) (Median) (Median) (Median)

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N = 20 N = 57 N = 20 N = 15 N = 12 N = 20 N=5 N = 52
Q4h To allow founding 0.00 0.33 0.30 0.40 0.30 0.30 −0.75 0.41∗∗∗
shareholder(s) to disengage as
major
Q4o To benefit from a high level −0.20 0.07 −0.32 0.33∗ 0.55 −0.32∗∗ 0.40 0.04
of cash-flows and the ability to
present a favourable business
plan
Q4q To list an entity/business −0.50 −0.79 −1.18 −0.40∗ −0.45 −1.18∗ 0.20 −0.90∗
separately and to achieve a
better firm valuation
Q5a The IPO is a normal “stage” 1.10 0.71∗ 0.80 0.53 0.92 0.80 1.00 0.69
in the growth of a company
Franck Bancel and Usha R. Mittoo

Q5c We analyse the IPO as a −0.10 0.11 0.11 −0.07 0.36 0.11 1.25 0.02∗∗
trade off between
diversification gains and
private benefits of control
Q3a To enhance the company’s 0.83 1.06 0.90 1.21 1.09 0.90 1.75 1.00
prestige, image and visibility
Q3g To be recognized by the 0.00 0.75∗∗ 0.74 0.71 0.64 0.74 0.25 0.80
relevant financial community
as a major player
Q3i To facilitate mergers and 0.50 0.53 0.58 0.64 −0.18 0.58 −0.25 0.59
acquisitions


Panel B: IPO firm and offering characteristics
Market capital at IPO time (million euro) 178 3223∗∗∗ 4,602 4,154 1,830 4,602 724 3,432
Age IPO 8 31∗∗∗ 26 35 27 26 18 32

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% IPO after 2000 85% 50%∗∗∗ 53% 53% 25% 53% 0% 55%∗∗∗
% High-tech IPO 35% 19% 20% 27% 0% 20%∗∗ 0% 21%∗∗∗
% Raising capital in IPO 90% 70%∗∗ 75% 71% 42% 75%∗ 80% 69%
IPO new shares as % of shares outstanding 39% 28%∗ 21% 28% 46% 21% 46% 26%
% IPO change leverage 33% 50% 47% 55% 40% 47% 80% 46%
- Leverage before IPO 2.13 2.39 2.47 2.22 2.30 2.47 2.50 2.38
- Leverage after IPO 1.27 217∗∗∗ 2.20 2.11 2.10 2.20 2.00 2.19
First day IPO stock return 84% 18% 9% 45% 17% 9% 16% 18%

Panel C: Change in ownership structure at IPO

Q2 Family-controlled firms 5% 42%∗∗∗ 40% 27% 67% 40% 80% 38%
% IPO change control after IPO 87% 79% 74% 91% 80% 74% 100% 76%∗∗∗
Pre-IPO, largest shareholder % shares 50.2% 80.3%∗∗∗ 70.3% 88.5%∗∗ 91.5% 70.3%∗∗ 100% 78%∗∗∗
(36%) (90.5%) (77.9%) (97.5%) (100%) (77.9%) (100%) (80%)
Post-IPO, largest shareholder % shares 27.1% 53.3%∗∗∗ 53.9% 54.1% 59% 53.9% 65.2% 52%
Why Do European Firms Go Public?

(15%) (60%) (53%) (50%) (60%) (53%) (60%) (52%)

Pre-IPO, founder % shares 50.5% 74.2%∗∗ 64.6% 80.8% 84.7% 64.6% 100% 71.3%∗∗∗
(51%) (88.5%) (78.5%) (89%) (100%) (78.5%) (100%) (77.5%)
Post-IPO, founder % shares 29.6% 52.5%∗∗∗ 50.4% 48.3% 59.9% 50.4% 71.3% 50.5%
(30%) (58%) (55%) (48%) (60%) (55%) (72.5%) (50.7%)
869
870 Franck Bancel and Usha R. Mittoo

mean ratings only for those questions that differ significantly across at least two country
groups. Panel A of Table 7 compares the mean ratings of the CFOs’ responses on
different questions; Panel B compares the firm and IPO characteristics, and Panel C
examines the firm’s ownership structures before and after the IPO. These data are self-
reported and collected through the survey.

4.1(a) English versus civil system countries. This comparison shows several striking
differences across the two groups. The English system (the UK and Ireland) CFOs
strongly disagree with their civil system peers on the major motivations for going public
(Table 7, columns 1 and 2). The English system CFOs go public primarily to sell the
company (mean rank = 1.15 versus 0.2, p = 0.001, Table 7), and to enhance stock
liquidity (mean rank = 1.40 versus 0.84, p = 0.047, Table 7). They are significantly
less concerned with IPO costs and recognition than their European peers.
Panel B shows that the English system firms are significantly smaller and younger
than their civil system peers when they go public. At the time of the IPO, the market value
of a typical English system firm is about 178 million euros, less than one-eighteenth that
of a Continental European firm (3.223 million euros), and its age is 8 years compared
to 31 years for its civil system peer; both differences are significant at the 1% level.
The English system IPOs also include a much larger proportion of primary shares in
the IPO (39% versus 28%), and are more likely to reduce their leverage after the IPO
compared to their Continental European peers.
The ownership and control structure also differs between the two groups. Panel C of
Table 7 shows that family-controlled firms comprise about 42% of the civil system firms
but only 5% of the English system firms. Prior to the IPO, the English system firms are
typically controlled by five or more large shareholders who own 85% of the firm’s shares
on average (not tabulated). In contrast, the largest shareholder in a pre-IPO civil system
firm owns an average of 80% (median = 90.5%) of shares compared to 50% (median =
36%) in an English system firm. After the IPO, the largest shareholder/founder continues
to hold a majority stake (over 50%) in a typical civil system firm but owns less than
30% of shares in a typical English system firm.
Taken together, these pieces of evidence suggest that ownership differences might
explain why English system firms value the ability to sell shares much more than
their civil system peers do. Several large pre-IPO investors in the English system firms
may wish to harvest their investment and relinquish control whereas the typical large
controlling shareholder in a Continental European firm continues to maintain control
of the firm.
A major concern in our study is whether our small sample of English system firms is
representative of the population. To address this concern, we compare how our findings
stack up against other European IPO studies. Burton et al. (2006) survey managers
and interview financial intermediaries who were associated with the IPOs conducted
in the UK between 1999 and 2001. Their focus was to identify the determinants of the
decisions regarding the IPO timing, the amount to raise and the choice of an exchange.
We examine these issues as well as both motivations and consequences of going public
decision for IPOs conducted in the UK between 1994 and 2004. The majority of their
sample IPOs were conducted in 2000 whereas most of our UK sample IPOs are from
the post-2000 period.
Burton et al. (2006) find that the need to obtain funds for growth, the need to increase
the company’s profile, and industry trends were the most important influences on the
timing of an IPO. We find that enhancing stock liquidity, obtaining funds for growth, and


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 Why Do European Firms Go Public? 871

facilitating sale of the company are the primary motivations for the UK firms in going
public. Burton et al. also note that the views of the firm’s major investors, who generally
wanted to realise some of their investment (especially in the smaller companies) and
strengthen the management team, were very important in the IPO decision. One of
their interviewees argued that facilitating an exit route for major shareholders, whether
individuals, companies or venture capitalists, was vital. This finding is consistent with
our conclusions.
Our findings are also in line with those of several other empirical studies and
managerial surveys. Brennan and Franks (1997) document that the pre-IPO owners
in the UK tend to relinquish control after the IPO. Goergen and Renneboog (2007) find
that new large shareholders in the UK tend to accumulate stronger control in smaller,
riskier and faster growing firms, whereas new large shareholders in Germany tend to
acquire control in older, profitable firms. They argue that economic and legal factors
drive these observed differences between the UK and German IPOs.

4.1(b) Comparisons across civil system countries. In Table 7 (columns 3–6), we

compare the CFO responses across different subgroups of civil system countries based
on the legal system and family ownership differences. 4 Columns 3 and 4 compare
the views of CFOs from two French system countries (France and Belgium) and two
German system (Germany and Austria) countries that have similar proportions of family-
controlled firms. We find a strong agreement between the two groups on all dimensions
except one. The German system CFOs do not agree with their French peers that the IPO
enhances the firm’s balance of power with banks and creditors (mean = 0.0 versus 0.89,
p = 0.035, Table 7). This difference might be explained by the ownership differences;
German and Austrian banks typically hold large ownership stakes in firms whereas
French and Belgium banks do not.
Next, we compare the views of CFOs from three French system countries (Italy,
Portugal and Spain) that have a higher percentage of family-controlled firms (74%)
to those from two other French system countries (France and Belgium) with a lower
percentage of such firms (40%). This comparison confirms our results in Section 2
that family-controlled firms seek different benefits in going public than do non-family-
controlled firms. A major difference is in their views on the link between IPOs
and M&As. The family-controlled firms do not agree that an IPO facilitates M&As
(mean = −0.18 versus 0.58, Table 7) nor view the use of stock currency in future
M&As as a major benefit (mean = −0.55 versus 0.37, p = 0.062, Table 7).
In Table 7, the last two columns compare the views of the Italian CFOs with their other
civil system peers. Several prior managerial surveys and empirical studies have examined
why Italian firms go public. For example, Marchisio and Ravasi (2003) survey Italian
IPO firms and conclude that they go public to increase visibility and to strengthen their
network of relationships. Pagano et al. (1998) find that Italian firms go public primarily
to rebalance their accounts and to lower their cost of credit.
Despite the small number of Italian IPOs in our sample, our findings are similar to
those in prior studies. The Italian CFOs in our survey agree more strongly that an IPO
reduces the cost of financing (mean = 1.2 versus 0.32, p = 0.006, Table 7) and place

4
We exclude three countries (the Netherlands, Switzerland and Greece) that either have
a small number of observations or distinct firms characteristics, such as mostly high-tech
firms or very large firms. Our results remain essentially the same when we include these
countries.


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872 Franck Bancel and Usha R. Mittoo

a higher value on visibility compared to their civil system peers (mean = 1.75 versus
1.00, Table 7). The pre-IPO owners in Italian firms also do not disengage from the
business (mean = −0.75 versus 0.41, p = 0.007, Table 7) and agree more strongly than
their peers that an IPO is a trade-off between diversification gains and private benefits
of control (mean = 1.25 versus 0.2, p = 0.015, Table 7).
In sum, our cross-country comparisons indicate that ownership control has a major
influence on the motivations for going public, even across countries with similar legal
systems.

4.2. A comparison of European and US CFOs’ views

Brau and Fawcett (2006) survey 87 US firms that went public in the post-Internet
bubble period (January 2000 to December 2002). They report that the US CFOs identify
the ability to create public shares for use in future acquisitions as the most important
motivation for going public. Brau et al. (2006) survey 438 CFOs in both pre-Internet
(1996–98) and post-Internet bubble (2000–2002) periods, and conclude that the decision
to go public is motivated by three interrelated strategic considerations. First, firms go
public primarily to fund growth and view the increased public scrutiny as a major cost.
Second, an IPO is not a vehicle for changing control or facilitating owners’ exit. Third,
IPOs are motivated by a desire for liquidity to gain a currency for future growth through
generic investments and through M&A activity. Both surveys find that managers try to
time the IPOs to benefit from strong market conditions but find little support for capital
structure theories.
While our survey questionnaire is very different from the two US surveys, several
questions are similar. In Table 8, we compare the US managers’ mean ratings on
these comparable questions with European CFOs’ rating using our scale, from −2 (not
important) to +2 (very important). Both groups share similar views in several aspects.
Both US and European CFOs view financing for growth opportunity, creating a stock
currency for mergers and acquisitions and stock liquidity as major benefits of going
public. In line with the US findings, we also find that the pre-IPO owners continue
their control after the IPO, and that there is little support for the capital structure and
asymmetric information theories.
The European CFOs, however, have different views from their US peers in two
ways. First, the European CFOs consider enhanced investor recognition, reputation
and credibility as a major benefit of an IPO whereas US CFOs do not. Ritter and
Welch (2002) observe: ‘Non-financial reasons, such as increased publicity, play only a
minor role for most US firms; absent cash considerations, most entrepreneurs would
rather just run their firms than concern themselves with complex public market process’
(p. 1796). Brau et al. report that less than half of the CFOs agree that an IPO serves
to improve the market perception of the stock, and that an exchange listing increases
the firm’s prestige. Second, the European CFOs do not view the IPO costs to be a big
issue but the US managers are highly concerned about both direct and indirect costs of
an IPO. Brau et al. report that about 60% of the CFOs consider the underwriting costs
and auditing fees as significant whereas fewer than 15% of European CFOs view these
costs to be an issue. The differences on the indirect costs are particularly striking. About
two-thirds of the US CFOs consider the indirect costs, such as the loss of confidentiality
and increased public scrutiny, to be onerous. In contrast, over two-thirds of the European
CFOs say that the increased transparency and external monitoring is a major benefit of
going public, not a cost.


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 Table 8
Comparison of European and US managers’ views on IPO costs and benefits

We compare the European CFOs’ mean ratings in our survey with those of the US CFOs’ ratings reported in Brau and Fawcett (BF, 2006) and Brau, Ryan and
DeGraw (BRD, 2006). Although, our survey questionnaire and the scale used for responses are different from the two US surveys, several questions are similar.
We compare the US CFOs’ mean ratings on the comparable questions with European CFOs’ ratings. We rescale the US responses using our survey scale, from
−2 (not important) to +2 (very important). The last two columns present the UK CFOs’ mean ratings from our survey.

Panel A: Q4 In your opinion, the IPO has allowed your company

C 2009 Blackwell Publishing Ltd

Europe USA (BF, (2006)) USA (BRD, (2006)) UK
Important Important Important Important
or very or very Mean or very Mean or very
important (%) Mean important (%) (Rescaled) important (%) (Rescaled) important (%) Mean
k) To make the firm’s share more 75.32 1.00 82.5 1.21 88.24 1.41
liquid and to increase the firm
value
a) To finance investment 73.33 1.04 66.47 0.82 82.6 1.33 82.35 1.24
opportunities
i) To be monitored by outsiders 69.74 0.79 29.76 −0.29 68.9 0.8 70.59 0.59
(analysts, investors, etc.) in
order to increase the firm value
c) To reduce the cost of financing 57.89 0.33 42.51 0.12 38.2 −0.02 58.82 0.24
(debt and equity)
Why Do European Firms Go Public?

g) To sell the company to 56.58 0.47 30.2 −0.54 76.47 1.18

external shareholders
l) To estimate the market value of 56.58 0.46 51.17 0.39 64.71 0.76
the firm
e) To reinforce the firm’s balance 56.00 0.51 44.4 0.03 47.06 0.18
of power with bankers and
other financial creditors
r) To pay for future acquisitions 53.33 0.36 59.41 0.56 58.82 0.59
873

with the firm’s shares

 Table 8
Continued.

Panel A: Q4 In your opinion, the IPO has allowed your company

Europe USA (BF, (2006)) USA (BRD, (2006)) UK
874

Important Important Important Important

or very or very Mean or very Mean or very
important (%) Mean important (%) (Rescaled) important (%) (Rescaled) important (%) Mean
h) To allow founding 47.37 0.26 −0.49 35.29 −0.12
shareholder(s) to disengage as

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major shareholder
s) To increase firm value by 40.54 0.05 3.8 −1.55 52.94 0.24
attracting diversified investors
who value shares more than
undiversified investors
n) To benefit from favourable 39.47 0.14 82.94 1.21 47.06 0.35
market conditions (‘bullish’
stock exchange/industry
valuation)
p) To follow industry peers/ 35.53 −0.14 24.26 −0.47 29.41 −0.53
competitors (most of them are
listed)
Panel B: Q5 Do these statements agree with your company’s IPO decisions
Franck Bancel and Usha R. Mittoo

b) The IPO acts as advertising for 83.12 0.90 49.11 0.27 82.35 0.65
the company and increases its
reputation/image
j) Making the IPO, we believed it 72.73 0.96 59.2 0.44 82.35 1.12
was the best time to do it
h) The IPO has obliged us to 22.37 −0.38 63.5 0.73 11.76 −0.82
disclose information that was
crucial for our competitive
advantage
f) The high cost of the IPO 14.10 −0.62 59.6 0.57 29.41 −0.41
(underwriting fees, etc.) was a
major problem for our
company
 Why Do European Firms Go Public? 875

Why do European and US CFOs’ have such divergent views on IPO costs? One
plausible explanation could be that the direct costs of going public are significantly
higher in the USA compared to those in Europe. For example, the gross underwriting
spread that makes up the largest explicit cost of conducting an IPO clusters around 7%
in the US but varies between 3–4% in Europe (e.g., Chen and Ritter, 2000, and Torstila,
2001)) Moreover, the IPO costs may also be less burdensome for European firms because
they are larger and older when they go public compared to their US peers. We find some
support for this argument since large firms in our survey are significantly less concerned
with direct costs than small firms (mean = −1.08 versus −0.21, p = 0.000, Table 4).
More puzzling is the finding that the European IPO firms consider public scrutiny
to be a benefit whereas their US peers consider it as an onerous cost. One plausible
explanation could be that the disclosure and market scrutiny levels are generally much
higher and more burdensome in the US compared to that in Europe. However, this
argument is not supported in our survey because the firms that went public on the
US exchanges also consider external monitoring as a benefit, similar to their peers
listed on home exchanges. Our discussions with some European managers suggest that
the increased transparency and disclosures required by stock exchanges motivate the
firms to initiate better internal control systems for setting future goals and measuring
managerial performance. All CFOs interviewed stated that a public listing forced them
to design accounting and reporting systems that improved firm performance.
Finally, we also note that the UK firms value the IPO as a vehicle to facilitate pre-IPO
owners’ exit whereas the pre-IPO owners in the US continue to retain control after going
public. These differences suggest that the local institutional and regulatory environment
might play a major role in why firms go public, even across countries with similar legal
systems.

5. Summary and Conclusions

We survey CFOs from 12 European countries about the costs and benefits of going public
and exchange listing. Our evidence suggests that the decision to go public cannot be
explained by one single theory because firms seek multiple benefits in going public. We
find support for most IPO theories but mainly among firms with specific characteristics.
Following Brau and Fawcett’s (2006) Appendix C, Appendix 2 summarises the main
IPO theories and our survey findings. In the first column, we present the theory and its
implications. In the second column, we summarise our survey evidence and conclusions
for each theory with a rating of strong support, moderate support, and low support,
and the evidence across countries within Europe and the USA. Our major findings are
summarised below.

• The CFOs identify enhanced visibility and prestige, funding for growth and financial
flexibility as the most important benefits of going public. These benefits are common
across all firms and countries.
• Motivations for an IPO differ significantly across firms based on ownership structure,
size, and age. Large firms consider external monitoring to be the most important
benefit, whereas small firms value the ability to raise capital for growth and care less
about monitoring. Family-controlled firms view the IPO as a vehicle to strengthen
their bargaining power with creditors without relinquishing control. They also care
less about growth through mergers and acquisitions, and stock liquidity compared to


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876 Franck Bancel and Usha R. Mittoo

their peers. Old firms and non-family controlled firms value stock liquidity more than
their peers.
• The CFOs’ views are largely similar across legal systems and countries but differ
strongly on exit strategy and external monitoring. The English system firms value the
ability of the pre-IPO investors to exit and experience significant changes in ownership
structure after the IPO whereas their civil system peers continue to maintain control
of the firm after the IPO. The European and US CFOs disagree strongly on external
monitoring. The European CFOs consider it a major benefit whereas their US peers
view it as an onerous cost.
• Most CFOs agree that going public is a stage in the firm’s life-cycle, express less
concern about costs, and perceive benefits to be significantly higher than the costs of
going public.
• We find strong support for the theories that focus on financial and strategic considera-
tions, such as increased credibility and reputation, and financial flexibility for growth.
We find moderate support for theories that emphasise exit strategy, balance of power,
monitoring, or mergers and acquisitions as a major benefit but less support for the
asymmetric information and cost of capital theories.

Our findings are also confirmed through one-on-one interviews with three CFOs who
were closely involved with his or her firm’s IPO decision. All three firms went public
to achieve multiple but varying strategic objectives. One firm went public to allow the
venture capitalists and financial investors to cash out, and to fund for growth but not for
visibility or cost of capital considerations. The second firm made an IPO primarily for
financial flexibility to grow through M&As, to adapt to the new competitive industry
environment and to meet the expectations of its diverse stakeholders. Investor recognition
or pure financial considerations, such as firm value, cost of capital or windows-of-
opportunity were not an issue. In contrast, the third firm (a high-tech firm) used its IPO
mainly as a vehicle to enhance its reputation and credibility, and its ability to recruit key
personnel through managerial incentive schemes such as stock options; raising funds for
growth and cost of capital were not important motivations. The head of the Global Equity
Capital Market division of a large European bank who is familiar with the European
IPO market also validated most of our survey results, and remarked that the importance
of a specific criterion is mainly a function of the firm’s shareholdings, its industry, and
its size, a view consistent with our findings.
In conclusion, our analysis indicates that the IPO decision is a strategic decision that
is motivated by different factors across firms, and countries. Our study identifies key
factors underlying this decision and suggests that future IPO studies should incorporate
these factors in theoretical and empirical considerations of the going public decision.

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878 Franck Bancel and Usha R. Mittoo

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Appendix 1
Survey Questionnaire

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Appendix 1
Continued.

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Appendix 2
880

Summary of Theories and Survey Findings

A theoretical concept or a factor is listed in the first column followed by the direct survey evidence (column 2). In column 2, SS means ‘strong support’, MS
means ‘medium support’ and LS ‘Low support’.

Survey evidence
Theory or concept (Strong Support – SS; Moderate Support – MS; Low Support – LS)

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A. Benefits
a. Investor Recognition, Reputation and Credibility SS: over 75% agree;
Theory and Evidence Across Europe: no difference; USA: MS (BF, (2006))1
Merton (1987) SS – over 75% CFOs agree that IPO (listing) enhances visibility, reputation
– Increased visibility and shareholder base reduce cost of capital MS – Corr: benefits: visibility and reduce cost (0.24)∗
Maksimovic and Pichler (2001) MS – support for implications, not for the assumptions
– Strategic choice to gain first-mover advantage, IPO firms lead SS – only 20% firms agree that they follow peers on home exchanges
not follow industry peers for listing
– Enhances credibility and trust to facilitate capital raising MS – Corr: enhances reputation and external monitoring benefit (0.20)∗
– A major cost is that listing forces the firm to disclose sensitive LS – only 20% CFOs agree that information disclosure a cost (mean =
information −0.38); capital raising firms agree less than non-capital raising
(mean = −0.5 vs. 0.1)
Franck Bancel and Usha R. Mittoo

b. Funding for Growth Primarly Reason for IPO SS: about 75% CFOs agree and raise capital in the IPO;
Theory and Evidence Across Europe: no difference; USA SS: 66% agree (BRD, (2006))1
Ritter and Welch (2002) SS: about 75% CFOs agree and raise capital in the IPO
– Firms go public primarily to raise new capital for growth
Kim and Weisbach (2008) SS – Corr: benefits
– Most firms raise new funds in the IPO, and these funds are – finance investments and reduce leverage (0.42)∗
used for serveral purposes, including funding growth, and – finance investments and reduction in cost of capital (0.48)∗∗
reducing leverage – finance investments and financial flexibility (0.41)∗∗


Chemmanur and Fulghieri (1999) MS – support for implications, not for the assumptions
– Firms go public when older and well-established SS – average (median) IPO age 24 (12) years; high-tech at younger age
– Enhances power of balance with private investors MS – Corr: finance investments and enhance power balance (0.25)∗
– Broadening investor base to raise capital LS – Corr: finance investments and broaden shareholder base (−0.053)
– Asymmetric information LS – only 37% CFOs agree that asymmetric information was a problem
c. Mergers and Acquisitions (M&A) MS: 50% CFOs agree that facilitaing M&A is important listing criteria;

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Theory and Evidence Across Europe: no difference; USA; SS: M&A most imp. benefit (BF,
(2006))1
Lyandres et al. (2008) MS – over 50% CFOs agree that estimating market value and using stock
– An IPO removes valuation uncertainty currency are important benefits are important benefits
– Facilitates optimal restructuring for M&As MS – Corr: benefits: M&A currency and estimate market value (0.26)∗
– Predicts cash or stock can be used for M&A financing – M&A currency and market condition (0.33)∗
MS – CFOs comments support both cash and stock used for M&As
Brau et al. (2003) MS – 53% CFOs agree that currency for M&A is a benefit
– Use stock currency for mergers and acquisitions (M&As) MS – capital-raising firms value stock currency for M&As more in both
IPO (mean = 0.59 vs. −0.30), and listing (mean = 0.67 vs. 0.10)
decisions.
d. Financial Flexibility and Greater Bargaining Power with Banks MS to SS: 75% (56%) agree increases financial flexibility (balance of
power);
Theory and Evidence Across Europe: German firms agree less; USA: LS (BRD, (2006))1
Why Do European Firms Go Public?

Rajan (1992) SS but mainly in family-controlled firms (mean = 0.96 vs. 0.31)
– Enhances flexibility and bargaining power with creditors SS – Corr: benefits : power balance and flexibility (0.56)∗∗
– Reduces cost of credit – power balance and reduce cost of capital (0.41)∗∗
Huyghebaert and Hulle (2005) SS – Corr: financing for growth and flexibility (0.41)∗∗
– Enhances flexibility for financing growth – capital raising firms value flexibility more (mean = 1.04 vs. 0.50)
– firms reducing leverage value flexibility more (mean = 1.18 vs. 0.63)
881
 Appendix 2

882

Continued.

Survey evidence
Theory or concept (Strong Support – SS; Moderate Support – MS; Low Support – LS)
e. Exit Strategy SS mainly among English system firms;
Theory and Evidence Across Europe: LS among Civil system firms; USA: LS (BRD, (2006))1

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Zingales (1995) MS – to sell the company is a major benefit, but primarily among English
– IPO first step to exit system firms (mean = 1.18 vs. 0.24)
– Second stage to sell the controlling rights ⇒ likely to disagree MS – Corr: benefits: to exit and to use currency for acquisitions (−0.25)
that IPO is a currency to pay for future acquisitions
Mello and Parsons (1998) MS – enhanced liquidity and firm value is a benefit, but primarily among
– IPO enhances stock liquidity and firm value, and facilitates English system firms (mean = 1.40 vs. 0.84)
exit strategy MS – Corr: benefits: to exit for IPO and stock liquidity for exchange listing
– IPO enhances stock liquidity and firm value, and facilitates (0.23)
exit strategy
Black and Gilson (1998) MS – ownership control changes, but primarily among English system firms
– IPO a vehicle for venture capitalist to cash out MS – Corr: founders sell company and change control (0.31)
f. Lower Cost of Capital MS to LS: 58% agree, IPO reduces cost of capital;
Theory and Evidence Across Europe: Italian firms agree more; USA: LS (BF, (2006))1
Franck Bancel and Usha R. Mittoo

Scott (1976), Modigliani and Miller (1963) MS to LS: 58% (45%) agree cost of capital is important for IPO (listing)
– Trade-off between benefits and cost of debt decision
– IPO firms optimize capital structure and minimize cost of LS – support mainly among firms that reduce their leverage (mean = 0.86
capital vs. −0.17), and is also related to the enhanced balance of power with
creditors.
Myers and Majluf (1984) Pecking order theory
– Asymmetric information between investors and managers; LS – only 37% agree asymmetric information was a problem
firms first raise internal funds, then debt, and equity


Holmstrom and Tirole (1993) MS – capital raising firms agree more about the reduction in cost of capital
– Cheap financing from capital markets reduces cost of capital (mean = 0.55 vs. − 0.20); Corr: finance investments and reduce cost
(0.48)∗∗

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g. External Monitoring and Better Corporate Governance SS: 70% CFOs agree; Across Europe: no difference;
Theory and Evidence USA: No Support, 70% CFOs view public scrutiny as a cost (BRD, (2006))1
Jensen and Meckling (1976) SS – primarily among large firms (mean = 1.06 vs. 0.54)
– Market scrutiny facilitates better cooperate governance when – high technology firms agree less (mean = 0.32 vs. 0.95)
separation of ownership and control
– Analyst scrutiny discipline managers for performance MS – 60% agree, stock option plans, a major benefit
– Allows firms to devise managerial incentive plans MS – Corr: monitoring and disengage (0.23) – monitoring and employee
stock options (0.25)
h. Windows-of-Opportunity MS to LS: 40% agree that they benefit from favorable market conditions;
(Managers time their IPO and listing decisions) Across Europe: no difference; USA: SS – 83% agree, market conditions
important for IPO decision (BRD, (2006))1
Theory and Evidence
Ritter (2003) LS – mostly among high-tech IPOs that list on foreign exchanges
Why Do European Firms Go Public?

– Clustering of IPOs during strong industry and market – high-tech IPOs agree more that trading at better P/E is important for
conditions foreign listing (mean = 1.33 vs. 0.0)
– firms listing on foreign exchanges agree more that they follow industry
peers compared to listing on home exchanges(mean = 0.55 vs. −0.57).
883


884

Appendix 2
Continued.

Survey evidence
Theory or concept (Strong Support – SS; Moderate Support – MS; Low Support – LS)
i. Stock Liquidity MS: 75% agree but few mention in open-ended question;

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Theory and Evidence Across Europe: English system firms value more; USA: SS 83% agree
(BRD,
Amihud and Mendelson (1986) MS – value of stock liquidity varies across firms; non-family controlled
– Stock liquidity enhances firm value firms value liquidity more (mean = 0.82 vs. 0.24), and old firms value
more (mean = 0.91 vs. 0.18) for listing
Maug (1998) SS – Corr: benefits, consistent with predictions
– Stock liquidity is valuable for managerial incentive schemes – external monitoring and liquidity (0.64)∗∗
– Positive correlation between liquidity and external monitoring – managerial compensation and liquidity (0.43)∗∗
B. Costs
Theory and Evidence SS: 42% agree, IPO cost is not a major issue; Across Europe: no major
differences; USA: SS, costs matter; most CFOs agree indirect cost, such
as external scrutiny is important, and about 60% agree underwriting or
reporting fees (BRD, (2006))1
Franck Bancel and Usha R. Mittoo

a. Direct Costs – underwriting costs, and other professional fees SS – 62% cited direct cost is important in the open-ended question
Ritter (2003)
b. Indirect Costs – asymmetric info., loss of confidentiality, etc. LS – few agree, asymmetric information and disclosure are a major costs
Chemmanur and Fulgheri (1999), Maksimovic and Pichler (2001)
C. Net benefit SS: 77% agree significantly positive;
Across Europe: no difference; USA: N/A
1. BF – Brau and Fawcett (2006); BRD – Brau et al. (2006)