Question

2. Discuss the reasons why firms engage in IPOs. Why the number of IPOs varies by periods? What factors would make firms less likely to engage in an IPO?

Answer 1

IPO (Initial Public Offering), is a step, firms take while transitioning from a privately held company to a publicly held company. Before launching an IPO, the firm is a privately held company, while now, a part of the stake is offered to the public and the firm now transforms out of a private entity.

Also, firms engage in IPOs when they have feasible expansion plans but their debt capacity is already utilised and they cannot raise more debt from the market. IPOs allows the firm to take advantage of the favourable market and business conditions.

IPO, allows the firm to raise money from the public by selling the stakes in the company.

the number of IPOs varies by periods and this is attributed majorly to the changes in the level of investor optimism, which effects the cost fluctuations of issuing equity. With high optimistic levels, the investor is willing to buy the equity at a higher price than what it actually is. Thus, the IPO volume becomes high.

Factors that make firms less likely to engage in an IPO are

- unfavourable market conditions, such that the market growth outlook is not good

- future expansion plans are not feasible under the economic conditions

- macro-economic factors of the industry in which the business operates are not conducive.