The Entrepreneur's Choice between Private and Public Ownership

TLDR

Entrepreneurs balance the desire for managerial autonomy against the higher cost of capital, with public markets offering liquidity but imposing governance that limits autonomy, while private ownership provides a calibrated trade‑off at the expense of liquidity. The study analyzes an entrepreneur/manager's choice between private and public ownership. Exploring this tension generates new predictions.

Abstract

ABSTRACT We analyze an entrepreneur/manager's choice between private and public ownership. The manager needs decision‐making autonomy to optimally manage the firm and thus trades off an endogenized control preference against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that imposes generic exogenous controls, so the manager may not attain the desired trade‐off between autonomy and the cost of capital. In contrast, private ownership provides the desired trade‐off through precisely calibrated contracting, but creates illiquid ownership. Exploring this tension generates new predictions.