Going-Public and the Inﬂuence of Disclosure
TEYE MARRA firstname.lastname@example.org
Faculty of Economics, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands
JEROEN SUIJS* email@example.com
Department of Accounting and Accountancy, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The
Abstract. This paper analyzes how diﬀerences in disclosure environments aﬀect the ﬁrm’s choice between
private and public capital. Disclosure requirements prescribe to what extent the ﬁrm has to release private
information that may lead to the ﬁrm incurring proprietary costs. We examine which ﬁrm types go public
in equilibrium, and how the equilibrium outcomes change with changes in the disclosure environments.
Our ﬁndings show that in a partial ﬁnancing equilibrium, should such an equilibrium exist, good ﬁrms
ﬁnance privately. This result is robust to changes in the disclosure environment.
Keywords: going-public decision, disclosure environments, proprietary cost
JEL Classiﬁcation: G32, M49
Information asymmetries hamper capital markets in allocating capital across the
most pro-ductive investment opportunities. Firms in demand for capital need to
inform potential capital market investors of the prospects of their investment
opportunities. However, in doing so they may simultaneously inform third parties
with countervailing interests (e.g. product market competitors) which may result in
actions that harm the ﬁrm. The detrimental eﬀect of enhanced disclosure is well
established in the voluntary disclosure literature. It is not common, however, in the
literature on a ﬁrm’s capital market choice. If private and public capital markets
diﬀer in their disclosure requirements, then the capital market choice aﬀects the
ﬁrm’s disclosure requirements. For example, a ﬁrm has a choice to enter a public
capital market or remain private and raise capital from a venture capitalist or bank.
Raising capital through a private placement enables the ﬁrm to inform its investors
without informing its competitors, whereas a public ﬁrm can only reach its investors
via public disclosures. Clearly, going public reduces the ﬁrm’s ability to protect its
In this paper, we analyze the relationship between the
disclosure problem of revealing proprietary information and the decision to go
public. Our results have implications for a ﬁrm’s ﬁnancing strategy.
Our analysis focuses on private ﬁrms that meet the requirements for public listing,
are faced with an (positive net present value) investment opportunity, and do not have
suﬃcient funds to ﬁnance internally. The ﬁrm can ﬁnance its investment opportunity
Review of Accounting Studies, 9, 465–493, 2004
Ó 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.