The Perks Of Public Ownership

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The Perks of Public Ownership ‘The theories of why firms go public provide insight into why firms go private because they examine many of the costs and benefits of being a public firm’ (Bharath; p6, 2009). Firms turn to listing for a number of different reasons. The motivations for an IPO tend to differ across firms and countries, but in general, going public allows for enhanced external monitoring, ability to raise capital for growth and acquisitions, increase in investor recognition, as well as allowing a company to strengthen its bargaining power with creditors. Access to Capital One of the main reasons that firms choose to list on public markets is so they can gain access to equity capital. As Roell** puts forward, access to new…show more content…
Alongside this, Kim & Weisbach** analysed numerous IPOs from over 38 countries, it was found that almost all the firms they studied had raised substantial amounts of new capital from their IPOs (2008). The cost of capital plays a large factor in this phenomenon. By listing themselves on the public markets, the visibility of a firm increases, by using this status firms can create competition between suppliers of finance, allowing the firm to negotiate private capital at more competitive rates, thereby creating cheaper finance. Pagano** found that Italian firms executing an IPO would experience a 0.3% reduction in their cost of credit after they became public (2008). To highlight the point even further, we can bring forward the situation of a single financing source that, as put forward by Chemmanur et al, ‘will be less than fully diversified, and will have considerably more bargaining power relative to the entrepreneur’ (p269, 1999). Finally, this is supported by the Bancel et al study, ‘over half of the CFOs agree that the IPO has reinforced the firm’s balance of power with bankers and creditors’ (p863, 2009). Investor Recognition and Visibility As mentioned briefly in the prior paragraph, the visibility of firms is elevated post-listing, and this is another main factor as to why firms go public. Not only does this act to lower the cost of capital, but as Stoughton et al** mention, by going public the firm has
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