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Divestment, entrepreneurial incentives and the decision to go public

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Author Info
Wagner, W. (Tilburg University, Center for Economic Research)

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Abstract

This 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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 47.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200247

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Keywords: IPO;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Chemmanur, Thomas J & Fulghieri, Paolo, 1999. "A Theory of the Going-Public Decision," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(2), pages 249-79.
  2. Chemmanur, Thomas J, 1993. " The Pricing of Initial Public Offerings: A Dynamic Model with Information Production," Journal of Finance, American Finance Association, vol. 48(1), pages 285-304, March. [Downloadable!] (restricted)
  3. Mikkelson, Wayne H. & Partch, M. Megan & Shah, Kshitij, 1997. "Ownership and operating performance of companies that go public," Journal of Financial Economics, Elsevier, vol. 44(3), pages 281-307, June. [Downloadable!] (restricted)
  4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
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  5. Pagano, Marco & Panetta, Fabio & Zingales, Luigi, 1996. "Why Do Companies Go Public? An Empirical Analysis," CEPR Discussion Papers 1332, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Blackwell Publishing, vol. 62(3), pages 425-48, July. [Downloadable!] (restricted)
  7. Mello, Antonio S. & Parsons, John E., 1998. "Going public and the ownership structure of the firm," Journal of Financial Economics, Elsevier, vol. 49(1), pages 79-109, July. [Downloadable!] (restricted)
  8. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, vol. 42(1), pages 133-156, September. [Downloadable!] (restricted)
  9. Ellingsen, Tore & Rydqvist, Kristian, 1997. "The Stock Market as a Screening Device and the Decision to Go Public," Working Paper Series in Economics and Finance 174, Stockholm School of Economics. [Downloadable!]
  10. Holthausen, Robert W. & Larcker, David F., 1996. "The financial performance of reverse leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 42(3), pages 293-332, November. [Downloadable!] (restricted)
  11. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-49, June. [Downloadable!] (restricted)
  12. Maksimovic, Vojislav & Pichler, Pegaret, 2001. "Technological Innovation and Initial Public Offerings," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(2), pages 459-94.
  13. Michael Magill & Martine Quinzii, . "Incentives And Risk Sharing In A Stock Market Equilibrium," Department of Economics 96-12, California Davis - Department of Economics. [Downloadable!]
  14. Roell, Ailsa, 1996. "The decision to go public: An overview," European Economic Review, Elsevier, vol. 40(3-5), pages 1071-1081, April. [Downloadable!] (restricted)
  15. Jain, Bharat A & Kini, Omesh, 1994. " The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December. [Downloadable!] (restricted)
  16. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June. [Downloadable!] (restricted)
  17. Downes, David H & Heinkel, Robert, 1982. " Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March. [Downloadable!] (restricted)
  18. Magill, Michael & Quinzii, Martine, 2002. "Capital market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 149-190, September. [Downloadable!] (restricted)
  19. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Calcagno, R. & Wagner, W., 2003. "The inefficiency of the stock market equilibrium under moral hazard," Discussion Paper 107, Tilburg University, Center for Economic Research. [Downloadable!]
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