Selling out or going public? A real options signaling approach

We examine a dynamic model in which a firm chooses between selling out and going public under asymmetric information. Suppose that the firm prefers to sell out under symmetric information. Under asymmetric information, we have a separating equilibrium in which the high-growth firm goes public earlier while the low-growth firm follows the first-best sales policy because the high-growth firm signals to market investors by doing an IPO. This result is consistent with the empirical evidence. The model also yields implications about the effects of asymmetric information and cash flow volatility on the decisions.