Ownership Structure as a Signal of Managerial Ability

This paper develops a signalling model of an entrepreneur's decision to go public when he continues as a manager. The intrepreneur takes his firm public in order to cash in on his initial investment. Assuming that the entrepreneur can design the ownerhsip structure when going public, we show that the ownership structure can be used to signal the entrepreneur's ability to outside investors. The presence of asymmetric information is shown to have the following consequences: ownership structure will be more concentrated, ex-post the manager will show less initiative in his search for new projects, and the equity value of the company will be higher.