Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm

24 Pages Posted: 21 Apr 2004

See all articles by Wolf Wagner

Wolf Wagner

Erasmus University Rotterdam (EUR)

Date Written: January 2007

Abstract

An entrepreneur who wants to divest his firm suffers a well-known time-inconsistency problem: divesting a stake creates an incentive to divest further since he does not internalize the arising agency costs for the stake already sold. This paper shows that this can in result in substantial inefficiencies in an entrepreneur's divestment path. We argue that these inefficiencies provide a common explanation for several stylized facts of entrepreneurial divestment, such as that i) many firms remain private despite the presence of large potential gains from going public, ii) firms wait a long time before going public, iii) substantial stakes are sold post-IPO, iv) initial stakes are often sold to venture capitalists.

Keywords: divestment, moral hazard, going public

JEL Classification: G32

Suggested Citation

Wagner, Wolf, Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm (January 2007). Available at SSRN: https://ssrn.com/abstract=534085 or http://dx.doi.org/10.2139/ssrn.534085

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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