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

40 Pages Posted: 23 Mar 2007 Last revised: 12 Oct 2009

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

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Date Written: December 24, 2006

Abstract

We analyze a publicly-traded firm's decision to stay public or go private, focusing on the stochastic nature of investor participation in the public market. The liquidity of public ownership is both a blessing and a curse: it facilitates trading and lowers the cost of capital, but it also introduces volatility in a firm's shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their intervention in management decisions, consequently affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, thereby providing a link between investor participation and firm participation in public markets.

Keywords: Going Private, Public vs Private Ownership, Corporate Governance, Investor Participation

JEL Classification: G30, G32

Suggested Citation

Boot, Arnoud W. A. and Gopalan, Radhakrishnan and Thakor, Anjan V., Market Liquidity, Investor Participation and Managerial Autonomy: Why Do Firms Go Private? (December 24, 2006). Journal of Finance 63-4, August 2008, 2013-2059, Available at SSRN: https://ssrn.com/abstract=971840 or http://dx.doi.org/10.2139/ssrn.971840

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Financial Theory Group ( email )

United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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