Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?

Authors

  • ARNOUD W. A. BOOT,

  • RADHAKRISHNAN GOPALAN,

  • ANJAN V. THAKOR

    Search for more papers by this author
    • Boot is from the University of Amsterdam and CEPR; Gopalan and Thakor are from the Olin Business School, Washington University in St. Louis. We thank Yakov Amihud, Patrick Bolton, Kose John, Marco Pagano, Rafael Repullo, Ernst-Ludwig von Thadden, seminar participants at the 2005 ACLE/JFI Conference on “The Ownership of the Modern Corporation: Economic and Legal Perspectives on Private versus Publicly Listed Corporations” in Amsterdam, and seminar participants at University of Amsterdam, BI Norwegian School of Management Oslo, Frankfurt, Georgetown, and New York University for useful comments.


ABSTRACT

We focus on public-market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.

Ancillary