Going Public with Asymmetric Information, Gency Costs, and Dynamic Trading.

We study the problem of a firm that is controlled by a large shareholder and is going public in the presence of agency problems, asymmetric information, and trading of shares over time. In this multiperiod signalling game, a shareholder-manager can develop a reputation for expropriating low levels of private benefits, and this effect causes a significant increase in the stock price and in the likelihood that the firm will go public. Also, this reputation effect is unrelated to the firm's needs to raise external financing in the future. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard. We argue that this model of outside equity is empirically relevant and can be important in understanding the workings of emerging stock markets.