Analysis On The Coporate IPO Decision

With the development of stock market, IPO (Initial Public Offering) has become one of the strategic campaigns of many corporations, and consequently the decision-making on IPO has turned into an important decision with strategic significance. Since Reform & Opening Up, the stock market in China and the activities of IPO performed by Chinese corporations have been going on for more than twenty years, but there have been few academic dissertations making integrate and systemic discussion concerning corporate decision on IPO or making comprehensive presentation and summarization about the relative conclusions from theoretical and empirical researches of foreign scholars. Therefore, on the base of reading multitudinous domestic and foreign academic literature, this paper, through the approaches of theoretical and case research, intends to summarize various theories, discuss some correlative problems and bring forward some appropriate suggestions on IPO decision from the point of corporate finance. In virtue of this paper, the author looks forward to making some contributions in the region of researches on corporate IPO decision as possible as she can.Focusing on the key problem of corporate IPO decision, this paper constructs its main content with five sections.The first section composes three segments. In the first segment, the definition of IPO and its function and effect are indicated. In the second segment, IPO decision and going public decision are compared. The latter has more contents than the former and the former is the most important part in the latter. In academic literature, it usually means IPO when to refer to going public decision. In the last segment, the relation between the corporate life cycle and IPO decision is discussed. There are four periods, the initial period, the growing period, the maturity period and the declining period, in a corporation's life cycle, and IPO decision is fit to be adopted in the second and third period. However, the objectives of IPO in these two periods are different. The objective in the former is mainly to make equity financing, but it is often intended to improve the liquidity of the equity in the latter.The second section illuminates six factors affecting the corporate IPO decision. These factors include variety of financing choices, corporate governance, capital budgeting, capital structure, information disclosure and issuing cost. IPO helps a corporation to get access to a larger fund pool widening its financing choices.Control rights, external supervision, and equity liquidity, which are contained in the corporate governance, have a strong relativity with IPO. In one hand, IPO contributes to increasing the investment approach choices of a corporation, and on the other hand, the long and short return rates of investment programs influence the feasibility of IPO. The capital structure of a company has effect on its competitive conditions, and thereby affects its IPO decision. Information disclosure and issuing expenses are compulsory costs of IPO for a corporation engaged in it.The third section expounds the IPO decision mechanism including exterior financing opportunities, pricing, underwriter selection and IPO issuing procedure. A corporation should catch hold of transitory "window of opportunity", i.e. exterior financing opportunities, to make IPO decision. Discounting Cash Flows (DCF), Comparable Multiples (CM) and Economic Value Added (EVA) are three prevalent methods in IPO pricing at present (a case regarding the IPO pricing of PetroChina in Stock Exchange of Hong Kong is quoted here). An underwriter, whose reputation has a strong effect on IPO, takes an important role in the process of IPO as an "information producer" and an "authentication agency". In the IPO issuing process, a corporation has to go through the procedure of submitting application documents, performing "road show" and setting issuing price.The fourth section discusses the problem of appraisement of IPO decision, which contains two aspects. One is the going of a corporation's stock price in market and the return rate of the stock after its IPO, and the other is a corporation's operation performance after its IPO. Further more, the appraisement in the first aspect can divide into short appraisement and long appraisement, or say, the problem of IPO underpricing and the long-run performance in market after IPO.The fifth section put forwards two suggestions about the corporate IPO decision in China. The first suggestion is to build up reasonable financing notion, which can be deduced from the case of Mengniu Company, who began with private financing but ended with successful IPO, and the second suggestion is to apply IPO decision to improve corporate governance, which is especially against the Chinese corporations, most of whom have a preference of the financing function of IPO.