Market Liquidity, Investor Participation and Managerial Autonomy: Why Do Firms Go Private?

Anjan Thakor (), Arnoud Boot and Radhakrishnan Gopalan

No 5510, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze a publicly-traded firm?s decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in the liquidity of public ownership. While the liquidity of public ownership lets shareholders trade easily and supply capital at a lower cost, the liquidity-engendered trading also results in stochastic shocks to a firm?s shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their extent of intervention in management decisions and in turn curtails managerial incentives. By contrast, because of its illiquidity, private ownership provides a stable shareholder base and improves these input provision incentives but results in a higher cost of capital. Thus, capital market liquidity, while being a principal advantage of public ownership, also has a surprising 'dark side' that discourages public ownership. Our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the firm?s shareholder base, namely the extent of investor participation, is stochastic in the public market. This allows us to extract predictions about the effects of investor participation on the stock price level and volatility and on the public firm?s incentives to go private, thereby providing a link between investor participation and firm participation in public markets. Lesser investor participation induces lower and more volatile stock prices, encouraging public firms to go private, whereas greater investor participation encourages younger firms to go public. Moreover, IPO underpricing is optimal because it is shown to lead to a higher and less volatile post-IPO stock price, greater autonomy for the manager and a higher supply of privately-costly managerial inputs.

Keywords: Corporate; finance (search for similar items in EconPapers)
JEL-codes: G10 G24 G32 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-bec, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP5510 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private? (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5510

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5510

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().