Abstract
This paper examines the decision to go public in the presence of large and dispersed shareholders. The decision to go public and the shape of the ownership structure itself depend on the particular combination of concentrated and dispersed ownership that maximizes the initial owners’ wealth. Owners/managers and large shareholders exert costly efforts to increase their share of the value of the public firm. The respective shares and the listing decision are affected by the efficiency of the judiciary and law enforcement system.
Highlights
Economists since Adam Smith have warned that a separation between ownership and management opens the possibility of insider abuse (Enron and WorldCom scandals are recent examples of insider abuse)
In our analysis we will examine the decision to go public in the presence of both large and dispersed shareholders and we will focus on the agency costs that are incurred due to 1) the monitoring costs incurred by large shareholder’s in trying to keep managers’ objectives aligned with their own in maximizing the value of the firm and 2) managers’ furthering their own interest rather than maximizing the value of the firm
Dispersed shareholders exert no effort in protecting their investment in the public firm but rather they free ride on the efforts of large shareholders in monitoring the managers
Summary
Economists since Adam Smith have warned that a separation between ownership and management opens the possibility of insider abuse (Enron and WorldCom scandals are recent examples of insider abuse). Castillo and Skaperdas [2] examine how the legal protection of outside shareholders and the appropriative costs that they induce influence the incentives for private firms to go public They model the conflict between the owners/managers and outside shareholders as a contest to the secure part of the value of the public firm.
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