The current economic scenario is characterized by extreme dynamism, where companies arise and disappear continuously. To survive and thrive in this highly competitive market, companies need to be flexible and innovative (Jacobi, 2014). However, it is not always easy to have access to the required amount of resources to pursue innovation, and many firms decide to go public to obtain extra capital from external investors. One of the most common ways to go public and gaining capital is by an initial public offering (IPO). Going public offers a series of certain advantages besides the raising of resources, but some shortcomings should also be taken into consideration. This paper will analyze some benefits and disadvantages of going public.
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The decision of taking a company public can arise for different reasons. In the current market, it usually stems from the necessity of raising funds to overcome competitors: the high level of competition pushes companies to pursue competitive advantages by searching product innovation, process innovation, position and paradigm innovation (Akgun, Keskin, Ayar, & Etlioglu, 2017).
However, the yearly revenue is not always adequate to afford the costs of research and implementation of the projects, and going public through an IPO is the easiest and quickest way to generate capital. IPOs play a key role in the current economic environment, as they allow companies to raise equity finance and investors to have a tradeable asset (Jenkinson, Jones, & Suntheim, 2016). IPO refers to the first stock sale of a company, and the accumulation of capital, arguably the most immediately evident advantage in going public.
Besides financial benefits, taking a company public brings other advantages, including a strong effort toward innovation, and increased reputation. Considering that the need for improvement within the organization is often a motivation for going public, it does not surprise that the new capitals allow a company to develop innovative strategies to compete in the market successfully. Also, increased reputation is a logical consequence: diversified investors and transparency of the business enhance the firm reputation (Bernstein, 2014). Reputation means credibility and visibility, hence, the ability to attract public interest and capitals.
Innovation and reputation offer the opportunity to analyze two disadvantages of going public. The first relates to a consistent decrease in the innovation drive after the initial phase. Following the transition from the private to the public sphere, companies experience a diaspora of skilled innovators (Bernstein, 2014). The reasons stem from a changing of the market positioning strategies of companies, that tend to reduce uncertainty factors and to favor stability.
While increased steadiness might be a management decision, it leads to a loss of credibility among those investors attracted by the innovation drive of the company. Similarly, going public can undermine reputation in certain circumstances, where the nature of the public investments might lead to bias complaints. A recent example concerns Moody’s, whose reliability of impartiality has decreased after going public (Kedia, Rajgopal, & Zhou, 2014). Evidence shows that Moody’s ratings are more favorable to issuers after going public, rising suspect for conflict of interest.
The need for substantial growth is often the motivation that urges a company to go public, and creating an IPO is the usual way to gain the initial capital. Going public offers a series of advantages, including a consistent flow of money, strong drive for innovation, and increased reputation. However, some weaknesses have also been included, such as decreased credibility once the initial innovative wave subsides, and the possible rise of conflict of interests.
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Bernstein, S. (2014). Does going public affect innovation? The Journal of Finance, 70(4), 1365-1403. Web.
Jacobi, Y. (2014). The going public process and the IPO decision. Master Thesis Finance, Tilburg School of Economics and Management, 2014. Tilburg School of Economics and Management.
Jenkinson, T., Jones, H., & Suntheim, F., (2016). Quid pro quo? What factors influence IPO allocations to investors? The Journal of Finance, 73(5), 2303-2341. Web.
Kedia, S., Rajgopal, S., & Zhou, X. (2014). Did going public impair Moody׳s credit ratings? Journal of Financial Economics, 114(2), 293-315. Web.