Going-Public vs. Private Sales: A Two-Tiered Agency Approach
25 Pages Posted: 13 Mar 2001
Date Written: January 2001
This paper models a situation that an entrepreneur with assets in place and uncertain development opportunities decides whether to sell his business to public capital markets or to place it privately to a conglomerate. It finds that going-public is more profit enhancive, in most circumstances, than private sales because the two-tiered managerial hierarchy of the conglomerate causes more adverse effects of agency problem. However, the better profit performance of going-public cannot definitely ensure the entrepreneur to avoid private sales. When the public market's valuation of the business is equal to conglomerate headquarter manager's valuation, the entrepreneur will sell the business to the conglomerate.
Keywords: Going-public, Initial public offering, Private sales, Agency problem, Two-tier managerial hierarchy
JEL Classification: G32, G34
Suggested Citation: Suggested Citation