The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public

Marco Pagano and Ailsa Röell

The Quarterly Journal of Economics, 1998, vol. 113, issue 1, 187-225

Abstract: From the viewpoint of a company's controlling shareholder, the optimal ownership structure generally involves some measure of dispersion, to avoid excessive monitoring by other shareholders. The optimal dispersion of share ownership can be achieved by going public, but this choice also entails some costs (the cost of listing and the loss of control over the shareholder register). If the controlling shareholder sells shares privately instead, he avoids the costs of going public but must tolerate large external shareholders who may monitor him too closely. Thus, the owner faces a trade-off between the cost of providing a liquid market and overmonitoring. The incentive to go public is stronger, the larger the amount of external funding required. The listing decision is also affected by the strictness of disclosure rules for public relative to private firms, and the legal limits on bribes aimed at dissuading monitoring by shareholders.

Date: 1998
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