Pre-IPO Operational and Financial Decisions

Many owners of growing privately-held firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: “What is the right time to make an IPO?” and “How should operational and financial decisions be coordinated to increase the likelihood of a successful IPO?” Financial and operational decisions in this problem are linked because adequate financial capital is crucial for operational decisions to be feasible and operational decisions affect the firm’s access to financial resources. The IPO event is treated as a stopping time in an infinite-horizon discounted Markov decision process. Unlike traditional stopping time models, at every stage the model includes other decisions such as production, sales and loan size. The results include (1) characterization of an optimal capacityexpansion policy, (2) sufficient conditions for a monotone threshold rule to yield an optimal IPO decision, and (3) algorithmic implications of results in (1) and (2). †Industrial and Operations Engineering Department, University of Michigan, Ann Arbor, Michigan, 48109. E-mail: [email protected]. ‡Department of Operations, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio, 44106. E-mail: [email protected].