The First Life Cycle Theory

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2.1.2 Life Cycle
The first life cycle theory appeared in Zingales (1995). It suggested that take-over targets are easier for potential buyers to spot when they are public. Furthermore it is easier for potential buyers to pressure the targets for concessions on price than it is to pressure external investors. Thus in theory an IPO facilitates the acquisition of their company at a higher price than an outright sale. However, although the potential price may be higher with an IPO, IPOs are also often costly to perform with their fees, listing requirements and underpricing. Secondly as Black and Gilson (1998) argue, the IPO is often not an exit strategy for entrepreneurs; but for venture capitalists. This is supported by lock up periods that exist for the entrepreneurs and that typically when the firm sells equity in the IPO it belongs to non-executive officers (Brennan and Franks 1997).
The theory that IPOs allow for a greater dispersion of ownership was developed in Chemmanur and Fulghieri (1999). It suggests that venture capitalists will not pay as high a price as the market as their portfolio would be undiversified. Meanwhile as mentioned before going public has costs, thus it only becomes optimal to go public when the firm is sufficiently large. An additional cost of going public is that if there is a high market price; then it may attract competition to the industry Maksimovic and Pichler (2001), though this must only apply to industries with low barriers to entry. The
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