The complexity in decisions relating to the financing aspect of a corporation can be gauged from the available number of sources, instruments and methods of financing.
Academic literature in finance too has moved in tandem with the practice of finance. Many of the theories that form the foundation of finance literature have their link to the financing aspects of the firm, be it the capital structure theories of Durand (1952), and Modigliani and Miller (1958), signaling theories of Leland and Pyle (1977), and Myers and Mujluf (1984), agency theory of Jensen and Mecling (1976), pecking order theory of Myers (1984) or the asset pricing models proposed by Sharpe-Lintner (1964) and Fama-French (1993).
Equity issues as a subset of financing aspect have got their own importance from the academic community.
A firm may choose to go public either through an Initial Public Offering (IPO) of its shares to retail investors or through mergers and acquisitions, in which the firm will sell itself to an existing listed firm.
In the case of a merger, the future investments of the firm is left to the discretion of its new owners who would have made the payment based on strategic fit and synergy estimations.
Firms with higher growth rate that face capital constraints will go for equity issue (Poulson and Stegemoller, 2006). These firms would be characterized by limited credit capacity, which they compensate by compromising on ownership.
Ownership dilution has two different options; equity issues through a public offering for sale of shares or through private placement.
Chemmanur and Fulghieri (1999) provided a model that considers(a) the level of information asymmetry; (b) how outsiders evaluate the firm; (c) involvement of Venture Capitalist (VC); and (d) investor strategy in the new issue marketas variables while deciding between private placement and public offer.
Private placement has attractive advantages over the public market like lower cost of raising fund, the practice of dealing with one or a set of investors rather than a big group of small investors, etc. Still the public market has many reasons for being chosen as the preferred mode.
Though the ownership has been diluted, the control has not been lost to that extent, as the investors of a public offering are diverse. Most often the public market valuation of a company's stock is considered to be appropriate and higher than the negotiated deals with one or a few buyers and so the issuer may maximize the proceeds through IPO.
The article is arranged as follows: the first part discusses the issues related to ownership and control which need to be sorted out before going for an IPO. It is followed by a discussion on the selection of intermediaries and the involvement of venture capitalists in the IPO process.
Then comes a survey on studies on pricing and valuation. The next part brings out works on managing information and the problems related to asymmetric information.
Studies on the impact of external/uncontrollable factors are also discussed . The concluding part summarizes the review by providing a framework for a successful IPO which is followed by the conclusion.