The Entrepreneur's Choice between Private and Public Ownership

Abstract

We analyze an entrepreneur/manager's choice between private and public ownership. The manager needs decision-making autonomy to optimally manage the firm and thus has an endogenized control preference that is traded off against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that imposes generic exogenous controls, so the manager may not attain the desired trade off between autonomy and the cost of capital. By contrast, private ownership provides the desired trade off through precisely-calibrated contracting, but creates illiquid ownership. Exploring this tension generates new predictions.

Keywords: Ownership structure, control, corporate governance, private and public ownership

JEL Classification: G30, G32