IPO vs. Back-door-listing : Which is a Better Signal?

How a firm goes public and trades its stock in the market is an important issue in corporate finance. Although numerous prior studies investigate the initial public offering (IPO), not many studies paid attention to back-door-listing(BDL). In a signaling game model, both IPO and BDL are the actions that a firm can take for going public. Investors do not know the quality of the firm (a good or a bad type) and can only observe its action (IPO or BDL) as a message. Under this information asymmetry, we find equilibrium strategy of the firm. Interestingly, the results show that as the type revelation ability of BDL strengthens, both a good type and a bad type firm are likely to take the BDL strategy in equilibrium. It means that BDLs with proper systematic complements help good unlisted firms access the external capital market. This paper provides a theoretical basis for the positive aspect of BDL.