Divestment, Entrepreneurial Incentives and the Decision to go Public
AbstractThis paper develops a theory of the life cycle of the firm based on incentive constraints.The optimal sale of the firm is restricted by entrepreneurial moral hazard and a lack of commitment regarding future divestment.This leads to a dynamic inefficiency that causes the entrepreneur to delay and to stagger the sale of the firm.The analysis provides a common explanation for a range of empirical phenomena related to initial public offerings (IPO's), such as the waiting time until firms go public, lock-up periods, operating underperformance of IPO's and post-IPO divestment.The equilibrium divestment process is shown to be (constrained) inefficient: entrepreneurs sell too late and too much of the firm.Recommendations for financial regulation that restore efficiency are derived.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-47.
Date of creation: 2002
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