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In Quest For Equity Partners: The Determinants Of The Willingness To Go Public Or To Find A Venture Capital Partner

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Author Info
Michele Bagella
Leonardo Becchetti
Laura Cavallo

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Abstract

The paper presents a theoretical analysis of the determinants affecting the controlling shareholders choice between going public and looking for a venture capital partner when they are in need of external equity financiers. In the model the two choices are strictly connected as controlling shareholders profits under the going public choice represent their outside options in case of failure of reaching an agreement in the bargaining process with the venture capital partner.We show that the relative profitability of the going public choice is inversely related to monitoring costs of new stock exchange shareholders, investment size and directly related to the presence of informational asymmetries between manager and controlling shareholders. In addition, we find that for high values of their ex ante property right share, controlling shareholders prefer the venture capital to the going public financing solution even if the first is socially inefficient. The paper also shows how stock market volatility, competition in the real and financial sector and a more efficient market for corporate control affect the going-public-venture capital choice. Our results are consistent with empirical findings on firm revealed preferences between the two financing choices.

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Paper provided by Tor Vergata University, CEIS in its series Departmental Working Papers with number 123.

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Date of creation: Jul 1999
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Handle: RePEc:rtv:ceiswp:123

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  1. Sutton, John, 1986. "Non-cooperative Bargaining Theory: An Introduction," Review of Economic Studies, Blackwell Publishing, vol. 53(5), pages 709-24, October. [Downloadable!] (restricted)
  2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
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  4. Marco Pagano & Ailsa Röell, 1998. "The Choice Of Stock Ownership Structure: Agency Costs, Monitoring, And The Decision To Go Public," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 187-225, February. [Downloadable!] (restricted)
  5. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer. [Downloadable!] (restricted)
  6. Pagano, Marco & Panetta, Fabio & Zingales, Luigi, 1996. "The stock market as a source of capital: Some lessons from initial public offerings in Italy," European Economic Review, Elsevier, vol. 40(3-5), pages 1057-1069, April. [Downloadable!] (restricted)
  7. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June. [Downloadable!] (restricted)
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  8. Layard, R. & Nickell, S., . "Layard-Nickell," Instructional Stata datasets for econometrics layardnickell, Boston College Department of Economics. [Downloadable!]
  9. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December. [Downloadable!] (restricted)
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