Private versus Public Ownership: Investment, Ownership Distribution, and Optimality

Abstract

Examined in this paper is the choice between private and public incorporation of an asset for an entrepreneur (asset owner) who hires a manager and with superior information about the asset's return distribution. Public sale of equity is shown to be the preferred alternative when (a) capital market issue costs are low or (b) the asset's idiosyncratic risk is high and the owner is either sufficiently risk averse or sufficiently 'optimistic' about the asset's expected return. Thus, those assets deemed most valuable by their owners will tend to be publicly incorporated. The paper also explores the impact of incorporation mode--private versus public--and information structure on the firm's investment policy and ownership distribution.