To be a public company or not to be?
In this paper we analyze a publicly-traded firm's decision to stay public or go private in a setting in which managerial autonomy from shareholder intervention affects the supply of productive inputs by management. With public ownership, the shareholder base of the firm is subject to stochastic shocks as market liquidity facilitates active trading. With heterogeneity among shareholders, this exposes management to uncertainty regarding the extent of shareholder intervention in future management decisions and consequently curtails managerial incentives to supply privately-costly inputs. By contrast, private ownership provides a stable shareholder base and improves these input-provision incentives. Thus, capital market liquidity has a surprising "dark side" that discourages public ownership. This means our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the degree of investor participation and the heterogeneity among shareholders are both stochastic in the public market. This allows us to draw predictions about the effects of investor participation and stock price volatility on the public firm's incentives to go private. We thus provide a link between investor participation and firm participation in public markets.
Year of publication: |
2004
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Authors: | Boot, A.W.A. ; Gopalan, R. ; Thakor, A.V. |
Publisher: |
University of Amsterdam |
Saved in:
freely available
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