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http://ssrn.com/abstract=1568268
 
 

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Incentives to Innovate and the Decision to Go Public or Private


Daniel Ferreira


London School of Economics & Political Science (LSE) - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Gustavo Manso


University of California, Berkeley - Haas School of Business

Andre C. Silva


Universidade Nova de Lisboa

May 7, 2012

Review of Financial Studies, Forthcoming.
ECGI - Finance Working Paper No. 279/2010
AFA 2011 Denver Meetings Paper
MIT Sloan Research Paper No. 4799-10

Abstract:     
We model the impact of public and private ownership structures on firms' incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early.

Number of Pages in PDF File: 58

Keywords: Innovation, Going Private, Going Public

JEL Classification: G2, G3, O3

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Date posted: March 11, 2010 ; Last revised: December 20, 2013

Suggested Citation

Ferreira, Daniel and Manso, Gustavo and Silva, Andre C., Incentives to Innovate and the Decision to Go Public or Private (May 7, 2012). Review of Financial Studies, Forthcoming.; ECGI - Finance Working Paper No. 279/2010; AFA 2011 Denver Meetings Paper; MIT Sloan Research Paper No. 4799-10. Available at SSRN: http://ssrn.com/abstract=1568268

Contact Information

Daniel Ferreira (Contact Author)
London School of Economics & Political Science (LSE) - Department of Finance ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
(+44) 20 7955 7544 (Phone)
HOME PAGE: http://personal.lse.ac.uk/FERREIRD/
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Gustavo Manso
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
Andre C. Silva
Universidade Nova de Lisboa ( email )
Campus de Campolide
Lisboa, 1099-032
Portugal
HOME PAGE: http://docentes.fe.unl.pt/~acsilva/
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