Going Public without Governance: Managerial Reputation Effects


  • Armando Gomes

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    • The Wharton School, University of Pennsylvania. Financial support from CAPES, Brazil, is gratefully acknowledged. I wish to thank Andrei Shleifer and Oliver Hart for their many invaluable suggestions and encouragement in pursuing this work. I am also grateful for helpful comments from the editor and two anonymous referees. I also thank Franklin Allen, Drew Fudenberg, Martin Hellwig, Ronen Israel, George Mailath, Eric Maskin, Ernst Maug, Walter Novaes, Tomas Sjostrom, E. Somanathan, Jeremy Stein, and S. Viswanathan. All errors remain my own responsibility. This paper circulated under other titles since its first draft in November 1996.


This paper addresses the agency problem between controlling shareholders and minority shareholders. This problem is common among public firms in many countries where the legal system does not effectively protect minority shareholders against oppression by controlling shareholders. We show that even without any explicit corporate governance mechanisms protecting minority shareholders, controlling shareholders can implicitly commit not to expropriate them. Stock prices of such companies are significantly higher and firms are more likely go public because of this reputation effect. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard.