THE DETERMINANTS OF THE GOING PUBLIC DECISION: EVIDENCE FROM THAILAND

Abstract

The objective of this research is to investigate the determinants of the going public decision of companies in Thailand, using 1,210 companies operating during the period 2000 - 2005. Our probit model includes a business group variable. To mitigate asymmetric information problems and imperfect capital markets, business groups are important in emerging economies. They are considered as an internal capital market for member firms, which have difficulty in accessing to external finance. However, business groups may cause an inefficient resource allocation among member firms, unproductive investments, and agency problems between major shareholders and minority shareholders of listed companies in the group. Our results show that group firms are more likely to go public than non-group firms so that they could allocate external funds obtained from other shareholders to member firms. In addition, larger companies are more likely to go public because they have lower asymmetric information problems, compared to smaller firms. Nevertheless, firm age and profitability are negatively related to the probability of an IPO. Younger firms tend to have adverse selection problems, resulting in a limited access to other external finance. Consistent with the pecking order theory, firms with higher profitability are less likely to go public because they have sufficient internal fund from retained earnings. Our findings provide several implications. First, although the high probability to go public of group firms is beneficial for the capital market development, relevant authorities should strengthen mechanisms in prohibiting potential expropriation of minority shareholders. Second, the capital market should promote long-established firms to list in the stock market because these firms have better reputation and creditability, thus attracting more investors. Last, in order to support the growth of young companies, financial institutions should provide them an easier access to external sources of funds. This, in turn, helps improve the country’s economic development.