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Incentives to Innovate and the Decision to Go Public or Private

58 Pages Posted: 11 Mar 2010 Last revised: 20 Dec 2013

Daniel Ferreira

London School of Economics - 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

Nova School of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 7, 2012

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.

Keywords: Innovation, Going Private, Going Public

JEL Classification: G2, G3, O3

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: https://ssrn.com/abstract=1568268

Daniel Ferreira (Contact Author)

London School of Economics - 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, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Andre C. Silva

Nova School of Business and Economics ( email )

Campus de Campolide
Lisboa, 1099-032
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~acsilva/

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