FIN-01-004

The Choice of Outside Equity: An Exploratory Analysis of Privately Held Firms

April 11, 2001

Ekkehart Boehmer, and Alexander Ljungqvist

ABSTRACT

We analyze the choice between public and private equity financing of a unique, hand-collected sample of privately held firms that have indicated their willingness to raise outside equity. We document that these firms are remarkably similar at the time of the announcement, yet 71% complete an IPO, 18% sell equity privately, and the remaining firms do not raise capital at all. To understand what determines the ultimate outcome, we follow these firms over time and record what they might learn up to their final decision. We identify the marginal conditions that favor raising outside equity, and those that determine the choice between public and private equity. Our results show that firms react systematically to changes in market conditions, such as equity returns and the cost of capital, that occur after the announcement, controlling for capital constraints, ownership structure, and the motivation for raising outside capital.

Subject: Corporate Finance/Capital Structure and Dividend Policy
Classification: Empirical

Alexander Ljungqvist
Institution: Stern School of Business, New York University
Email: aljungqv@stern.nyu.edu
Phone: (212) 998-0304
Home Page: http://www.stern.nyu.edu/~aljungqv/

Ekkehart Boehmer
Institution: Heisenberg Fellow
Email: BoehmerE@ekki.org

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