IPO determinants of Brazilian companies/Fatores determinantes para a realizacao de ofertas iniciais de acoes (IPO) de empresas brasileiras.

Autorde Oliveira, Bruno Cals
CargoArt
  1. Introduction

    The decision whether a company should go public is one of the most important in a company's life cycle. For the purposes of this study, a company is considered a listed company once it sells a share to the public for the first time with the expectation that a liquid secondary market will be created after the issuance of such shares (Ritter, 1998).

    The decision to go public involves several factors, among which we highlight the following:raising funds to adjust the company's capital structure (Kim & Weisbach, 2005), raising funds to develop new projects and make investments in research and development (Kim & Weisbach, 2008), raising funds for the acquisition of other companies (Celikyurt etal. , 2010), reducing risks related to the information asymmetry between potential investors and current shareholders (Chemmanaur & Fulghieri, 1999), going public based on the level of prices in the industry in which the company operates, because companies go public when the market-to-book indicator of their industry is high (Pagano etal. , 1998), going public based on the size of the capital market and the possibility of accessing resources and investors (Roel, 1996), and diversifying the investment portfolio of the controlling shareholders (Bodnaruk et al. , 2008).

    The vast majority of studies focus on the institutional aspects of the decision to become a publicly traded company, assuming that an IPO is a stage in companies' growth cycle. In fact, becoming a public company can be part of companies' growth cycle, but if this was the only factor that influenced the decision to go public, all major companies would be listed on the stock exchange; however, this does not occur in Brazil because even in a country with millions of enterprises, only 374 companies were listed on the Sao Paulo Stock Exchange at the end of June 2011 (BM&FBOVESPA, 2011c).

    The determining factors for a company to become a listed enterprise are related to the company's structural aspects before the IPO and the consequences of such an action on the company's investments and financing policy. Because information on privately held companies is very restricted, researchers either investigate the consequences of going public or, when studying the pre-IPO characteristics of listed companies, their results are biased because only the companies that actually went public are studied.

    Many IPO papers have been published in the Brazilian finance literature, including studies that examine initial returns, such as Leal (1994), Carvalho & Pinheiro (2010), Rossi Junior & Marotta (2010), Tolentino & Carvalho (2010), Pinheiro & Carvalho (2011). None of those papers attempted to study the decision to go public. Thus, the purpose of this study is fill the gap in the Brazilian financial literature and identify the determining factors for the IPOs of Brazilian companies based on accounting indicators, market indicators and the business characteristics of private and publicly traded companies.

    In addition to this introduction, the study is divided into four other sections. The second section contains a theoretical review of a company's decision to become a listed firm. The third section explains the methodology used to analyze the data. Then, the research results are presented, and, finally, the final considerations are discussed.

  2. Literature Review

    The decision to go public is an important strategy for companies. Between 2004 and 2010 in Brazil, there were approximately 130 IPOs (BM&FBOVESPA, 2011a), which was much more than in previous decades, when there were few IPOs due to the few incentives because of the country's macroeconomic situation (high inflation and high interest rates), a low level of corporate governance and low liquidity in the domestic market, among other factors. However, despite the large number of companies that recently went public, many companies still have the potential to undertake an IPO, especially if we compare the number of publicly traded companies in Brazil with those in developed countries.

    Several authors have studied the reasons why businesspeople choose to turn their companies into publicly held enterprises through an IPO (Pagano etal. , 1998, Chemmanaur & Fulghieri, 1999, Fischer, 2000, Kim & Weisbach, 2005, Bodnaruk etal. , 2008, Celikyurt etal. , 2010). There are various lines of study, ranging from informational issues, the structure of industries and companies and their capital structures.

    Information and the Initial Public Offering

    The ideal time to undertake an IPO varies from country to country and from industry to industry. A company must consider the influence of several variables before making this decision. One of these variables is information. When a company goes public, it must divulge its financial and operational data to the market to meet the requirements of legislation (CVM 2003) as well as the demands of investors who will require the disclosure of significant amounts of information before allocating their capital to a particular company to carry out evaluations and decide whether to invest. Companies must disclose the information that investors need to carry out their evaluations, but they also must be careful to not disclose strategic information that competitors can use to compete in the market.

    Thus, aninside business person has information about a company that external investors do not have. However, because external investors do not have all of the information, the company's valuation becomes more uncertain. The external investor requires a lower price to compensate for the risk of the investment. Therefore, the ideal time to go public is when there is a balance in the relationship between the "evaluation uncertainty" cost and the decrease in risk required by investors (Chemmanaur & Fulghieri, 1999).

    A company should go public when information can be used by investors outside the organization for a correct valuation of the company's assets, reducing the risk premium and the possible existence of significant underpricing (large appreciation in the share price when the company's stock begins to be traded, i. e. , the pricing of the IPO is below its market value).

    Maug (2001) developed a model considering the possibility of a business owner's decision to turn a company into a publicly traded enterprise. The decision to continue as a privately traded company can be temporarily beneficial for a company's owner and for those who have specific information within the company. However, when an organization advances in its life cycle, this benefit no longer exists. Therefore, going public becomes more advantageous. This perspective provides a link between the underpricing phenomenon and the decision to become a publicly traded company.

    An IPO will be beneficial to a company if the offering provides incentives to buy the stock and analyze the information used to evaluate the company. The fact that such information is available may reduce the monitoring cost to be borne by shareholders after the IPO and reduce the costs resulting from the underpricing of the offering. Lowry & Schwert (2002) concluded in their study that most companies undertake their IPOs after periods of high underpricing in offerings because significant amounts of information were released during the previous IPOs and there has been a decrease in uncertainty as to new market entrants.

    Industry and Company Structure

    The decision to become a publicly traded company can also be influenced by the industry in which the company operates. The fact that one or more companies have undertaken an IPO within a specific industry causes the market to learn more about it, which can lead to a new wave of IPOs within the industry.

    Companies that are the first to undertake an IPO in a given industry may be at a competitive advantage because the funds raised in the offering can be used for new projects or even to acquire other companies.

    Pagano et al. (1998) conducted an extensive study to understand the reasons why Italian firms undertake IPOs. The sample was based on data from 2,181 public and private companies, including 89% of the companies that undertook an IPO between 1982 and 1992 in that country. The authors found that the likelihood of a company undertaking an IPO is linked to an evaluation of the company's industry in the stock market as well as the size and age of the company; that is, Italian companies go public when they are older and bigger, as expected.

    According to Pagano et al. (1998), the probability of a company undertaking an IPO is positively related to the relationship between the market value and the equity value of the companies in its industry because IPOs occur in clusters, i. e. , sometimes there is a large number of IPOs, and sometimes there are few or no offerings.

    Additionally, the authors found that a company's size and age significantly affect the results of an IPO because Italian companies tend to become large firms before undertaking an IPO, and they only go public after they have operated in the market for some time. A company's size is important for an IPO both because the operation is costly and because of the implied cost of the visibility that an IPO brings to government authorities, particularly those that oversee the payment of taxes and contributions. With respect to market timing, the authors stated that a possible reason for their result was the lack of protection of minority shareholders (corporate governance) at the time the study was conducted. Because there was little protection, investors tended to rely more on companies that had already been in the market for a long time and had demonstrated more credibility and reliability in their financial results.

    Capital Structure of a Company

    A company's capital structure is also an important factor in the decision to become a publicly traded company. In a study of 984 CFOs of U. S. companies that undertook an IPO, 44. 4% of them said that one benefit of...

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