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

  • Shah, Salman
  • Thakor, Anjan V

The authors examine the choice between private and public incorporation of an asset for an entrep reneur who hires a manager with superior information about the asset' s return. Public incorporation is shown to be preferred when (1) capi tal market issue costs are low, or (2) the asset's idiosyncratic risk is high and the owner is either sufficiently risk averse or sufficie ntly "optimistic" about the asset's expected return. Thus, those as sets deemed most valuable by their owners will be be publicly incorpo rated. The authors also explore the impact of incorporation mode-priv ate versus public-and information structure on the firm's investment policy and ownership distribution. Copyright 1988 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 43 (1988)
Issue (Month): 1 (March)
Pages: 41-59

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Handle: RePEc:bla:jfinan:v:43:y:1988:i:1:p:41-59
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  1. 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.
  2. Shanken, Jay, 1982. " The Arbitrage Pricing Theory: Is It Testable?," Journal of Finance, American Finance Association, vol. 37(5), pages 1129-40, December.
  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.
  4. Trueman, Brett, 1983. " Optimality of the Disclosure of Private Information in a Production-Exchange Economy," Journal of Finance, American Finance Association, vol. 38(3), pages 913-24, June.
  5. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  6. 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.
  7. Bhattacharya, Sudipto & Ritter, Jay R, 1983. "Innovation and Communication: Signalling with Partial Disclosure," Review of Economic Studies, Wiley Blackwell, vol. 50(2), pages 331-46, April.
  8. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  10. Joseph E. Stiglitz, 1973. "The Theory of 'Screening', Education, and the Distribution of Income," Cowles Foundation Discussion Papers 354, Cowles Foundation for Research in Economics, Yale University.
  11. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September.
  12. Holmstrom, Bengt R & Weiss, Laurence, 1985. "Managerial Incentives, Investment, and Aggregate Implications: Scale Effects," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 403-25, July.
  13. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  14. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
  15. 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.
  16. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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