IPOs and product quality

Given recent public attention paid to high-flying Internet IPOs such as Yah oo and Amazon.com, we explore a product market motive for going public. We develop a model where consumers discern product quality from the stock pric e. The model predicts that only better-quality firms will go public. Effect s of IPO announcements on rival firms' stock prices are related to inferenc es about market size and market share. The model also predicts that the lik elihood of "hot issue" markets depends on the distribution of market size u ncertainty and the degree of network externalities present in consumer pref erences.