The Entrepreneur's Choice between Private and Public Ownership





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    • Boot is from the University of Amsterdam and CEPR, Gopalan is from the Stephen M. Ross School of Business at the University of Michigan, and Thakor is from the Olin School of Business, Washington University in St. Louis. We thank Mike Burkart, Jerry Caprio, Giovanni Dell' Ariccia, Julian Franks, Patrick Honohan, Andrew Powell, Inessa Love, Luc Laeven, Asli Demirguc-Kunt, Matej Marinc, Jun Yang, Venky Panchapagesan, Ailsa Roell, Fenghua Song, and seminar participants at Washington University in St. Louis, the World Bank, Oxford University, the University of Amsterdam, the University of Michigan, Wissenschaftliche Hochschule fur Unternehmensfuhrung (WHU) (Koblenz), the January 2004 INSEAD Conference on “The Evolution of Corporate Governance and the Family Firm,” and the May 2004 Financial Intermediation Research Society conference in Capri (including our discussant, Utpal Bhattacharya) for helpful comments. We are particularly indebted to an anonymous referee for extremely useful comments.


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.