DP5821 Ex Ante Effects of Ex Post Managerial Ownership

Author(s): Francesca Cornelli, David Daokui Li
Publication Date: September 2006
Keyword(s): management buy-outs, managers incentives, privatizations
JEL(s): G34, J33, P34
Programme Areas: Financial Economics, Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5821

This paper highlights the trade-off between the need to restructure a company and the need to provide managers with appropriate incentives to run it after the restructuring. In order to provide incentives, it is optimal to let managers acquire equity in the firm. However, the expectations to be able to buy shares in the future may create ex-ante incentives to delay restructuring. This effect is particularly important for events where managers can acquire a substantial number of shares, such as privatizations or MBOs. In equilibrium, the shares are not underpriced, but the delay in restructuring which took place in the period before reduces the value of the company. We report empirical evidence on MBOs and privatizations consistent with the model in this paper.