CONFLICTING INTERESTS: GOING PUBLIC IN DETERIORATING MARKET CONDITIONS

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Pengda Fan ORCID logo, Lin Wang ORCID logo, Thanh Nguyen Thi Phuong

DOI:10.22495/cocv16i3art12

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Abstract

The purpose of this paper is to analyze whether the conflicting interest between issuing firms and CEOs (venture capitalists) affect the going-public decision. Going public in deteriorating market conditions is costly for issuing firms in terms of low offering price and high probability of withdrawal. If agency costs exist, agents pursuing their own interests may bring firms public even in poor market conditions, which has been largely ignored in the previous literature.
To examine our hypotheses, we collect 1246 Japanese firms going public from 2001 to 2016 and conduct logit regressions, propensity score matching (PSM) as well as a probit model with sample selection. Consistent with our conjecture, we find a positive relation between the going-public decision and secondary shares offered by CEOs. Additionally, we also find an inverse U-shaped relationship between CEOs’ retained ownership and the going-public decision, indicating that in addition to liquidity needs, private benefits of control is another potential source of conflicting interests. Furthermore, secondary shares offered by VCs are also positively associated with the going-public decision, suggesting that when VCs attempt to exit as rapidly as possible, they are more likely to bring firms public even in deteriorating markets. These findings suggest that conflicting interests among parties affect the timing and costs of IPOs.

Keywords: Agency Cost, Deteriorating Market Conditions, IPOs

Acknowledgment: This work was supported by Ritsumeikan Asia Pacific University Academic Research subsidy. We are also grateful for the financial support provided by Young Innovative Talents Project of Guangdong Provincial Education Department, Grant Number (2017WQNCX047).

JEL Classification: G20, G24, G30

Received: 05.04.2019

Accepted: 04.06.2019

Published online: 05.06.2019

How to cite this paper: Fan, P., Wang, L., & Nguyen Thi Phuong, T. (2019).
Conflicting interests: Going public in deteriorating market conditions. Corporate Ownership & Control, 16(3), 143-158. http://doi.org/10.22495/cocv16i3art12