The dynamics of going public

This paper develops a signaling game in which the decision to raise public equity is a real option of the \u85rm. Firms may use multiple signals to reveal their type: the timing of the IPO, the fraction of shares issued and the underpricing of shares. The model predicts that IPO activity, underpricing, the fraction of shares issued and the pool of issuing rms depend on macroeconomic conditions. In periods where adverse selection is more relevant (cold markets), there is low IPO volume, \u85 rms with better investment prospects accelerate their IPO, issue a lower fraction of shares and underprice more their shares with respect to worse \u85rms to avoid imitation. In periods where adverse selection is less relevant (hot markets), all types of \u85rms issue simultaneously and there is high IPO volume, IPO initial returns are more volatile, and \u85rms on average are younger and issue a lower fraction of shares. The paper provides supporting empirical evidence that \u85rms go public younger during hot markets, and that better ranked \u85rms issue earlier and underprice more than other issuers during cold markets