Abstract - Market liquidity, managerial autonomy and the push for privacy: why do publicly listed firms delist? (joint work with R. Gopalan and A. V. Thakor)
This paper analyzes a publicly-traded firm's decision to stay public or go private in a setting in which managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in the liquidity of public ownership. With public ownership, shareholders can trade in a liquid market and hence supply capital to the firm at a lower cost than that associated with illiquid private ownership. But the shareholder base of a public firm is subject to stochastic shocks as market liquidity facilitates active trading. This exposes management to uncertainty regarding who the future shareholders will be and how much they will intervene in future management decisions, which curtails managerial incentives to supply privately-costly inputs. By contrast, because of its illiquidity, private ownership provides a stable shareholder base and improves these input-provision incentives. Thus, capital market liquidity, while being a principal advantage of public ownership, also has a surprising "dark side" that discourages public ownership. Our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the firm's shareholder base (i.e., extent of investor participation) is stochastic in the public market ...
University of Amsterdam