Essays on initial public offerings, venture capital, and leveraged-buyouts

Initial public offering (IPO) activity is closely tied to stock market conditions. The current literature has focused on the fact that aggregate IPO activity exhibits waves that are negatively correlated with the market price of risk. The market price of risk, however, is not sufficient to account for the cross-sectional variation in IPO activity. An example of this was the surge of IPOs in the internet industry in the late 1990's, which was unaccompanied by similar waves in other industries. Chapter One of the dissertation studies the timing and growth pattern of IPO firms across industries. Using a newly compiled dataset, I demonstrate three empirical facts that highlight the importance of cross-sectional variation in IPO activity: (1) Industry IPO activity exhibits heterogeneity in timing and volatility; (2) the age distribution of IPO firms is skewed to the right and varies over IPO waves; (3) IPO firms exhibit a hump-shaped growth pattern that peaks at the IPO date. These facts suggest that the market price of risk not only drives the IPO waves across industries, but also determines the type of firms that go public. The interplay of the ownership structure between privately-held and publicly-traded ones would imply that the leveraged-buyout activities are also driven by the time-varying market risk. I provide preliminary evidence that the buyout activities are positively correlated with the market price of risk.;In Chapter Two of the dissertation, I provide a stochastic dynamic model to explain the above documented facts. I consider a model environment in which a privately-held firm (owned by a risk-averse entrepreneur) faces both idiosyncratic and aggregate shocks. The aggregate shock drives the market price of risk, while the idiosyncratic shock affects firm-level productivity. Going public allows the entrepreneur to diversify his/her holdings and unload the idiosyncratic production risk to the market investors, but at a fixed cost. This implicitly creates a gap in the firm valuation: the entrepreneur will price both aggregate and idiosyncratic risks in the firm valuation, while the market investors price only the aggregate shock in their valuation. The valuation gap varies according to both the market risk, firm's exposure to the risk, and the firm characteristics. To quantitatively assess how the model delivers the empirical facts, I calibrate it with the estimated market price of risk and cross-sectional parameters for the productivity shocks. The simulation results match the key features of the empirical facts, but with varying degree of success in delivering quantitatively the results as in the data. It matches well the waves and age distribution of IPO firms and account for over 60% of the industry variation in IPOs. Regarding the growth pattern, the simulation results deliver the hump-shaped growth patterns across all industries, but on average only account for about half of the actual growth at the IPO dates.;Chapter Three of the dissertation addresses the corporate control issue during the IPO transition. When a firm goes public, the joint ownership of the firm is dismantled asynchronously, as some initial owners (for example, the venture capitalists) are able to sell their shares soon after an IPO while the entrepreneur usually stays in the management for a longer period. This paper captures this empirical fact by introducing a model of the IPO decision that explicitly considers the interaction of different block-holders of the firm at the time of an IPO. We focus on the case of a venture capitalist and a single entrepreneur. We find that in our model the privately optimal size of the IPO depends on the pre-IPO ownership structure. We characterize the nature of this dependence in a structural model and perform an empirical analysis for the U.S. IPO market for the period 1994-2005. The data confirm that the unsynchronized dismantlement of a joint venture affects the size of an IPO in a way consistent with our model. Our empirical results suggest that the decision of what fraction of the firm to sell is distorted in the direction generally favored by the venture capitalist.