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Private versus Public Ownership: Investment, Ownership Distribution, and Optimality

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Author Info
Salman Shah (University of Toronto)
Anjan V. Thakor (Washington University in St. Louis)

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Abstract

Examined in this paper is the choice between private and public incorporation of an asset for an entrepreneur (asset owner) who hires a manager and with superior information about the asset's return distribution. Public sale of equity is shown to be the preferred alternative when (a) capital market issue costs are low or (b) the asset's idiosyncratic risk is high and the owner is either sufficiently risk averse or sufficiently 'optimistic' about the asset's expected return. Thus, those assets deemed most valuable by their owners will tend to be publicly incorporated. The paper also explores the impact of incorporation mode--private versus public--and information structure on the firm's investment policy and ownership distribution.

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Paper provided by EconWPA in its series Finance with number 0411026.

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Length: 20 pages
Date of creation: 11 Nov 2004
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Handle: RePEc:wpa:wuwpfi:0411026

Note: Type of Document - pdf; pages: 20
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G - Financial Economics

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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.:
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  3. 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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  4. Campbell, Tim S., 1979. "Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(05), pages 913-924, December. [Downloadable!]
  5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
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  8. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September. [Downloadable!] (restricted)
  9. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September. [Downloadable!] (restricted)
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  16. Roll, Richard, 1978. "Ambiguity when Performance is Measured by the Securities Market Line," Journal of Finance, American Finance Association, vol. 33(4), pages 1051-69, September. [Downloadable!] (restricted)
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  1. Arnoud W.A. Boot & Radhakrishnan Gopalan & Anjan V. Thakor, 2003. "Go Public or Stay Private: A Theory of Entrepreneurial Choice," Tinbergen Institute Discussion Papers 03-096/2, Tinbergen Institute. [Downloadable!]
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  2. Fernandez-Olmos, M. & Rosell-Martinez, J. & Espitia-Escuer, M., 2008. "Double Sided Moral Hazard and Share Contracts in agriculture," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43863, European Association of Agricultural Economists. [Downloadable!]
  3. Arnoud W.A. Boot & Radhakrishnan Gopaian & Anjan V. Thakor, 2006. "Market Liquidity, Investor Participation and Managerial Autonomy: Why do Firms go Private?," Tinbergen Institute Discussion Papers 06-011/2, Tinbergen Institute. [Downloadable!]
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