DP4219 Go Public or Stay Private: A Theory of Entrepreneurial Choice

Author(s): Arnoud W A Boot, Radhakrishnan Gopalan, Anjan Thakor
Publication Date: February 2004
Keyword(s): ownership structures, stockmarket listing
JEL(s): D83, G30, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4219

In this Paper we analyse an entrepreneur/manager?s choice between private and public ownership in a setting in which management needs some ?elbow room? or autonomy to manage the firm optimally. In public capital markets, the corporate governance regime in place exposes the firm to exogenous controls, so that management may lack the autonomy it desires. By contrast, private ownership can provide management with the desired autonomy due to the possibility of precisely-calibrated private contracting. The disadvantage of private ownership (relative to public ownership) is that it imposes a cost of illiquidity on those who provide financing. We explore this trade-off between managerial autonomy and the cost of capital in a simple setting and draw a number of new testable implications.