Going Public or Staying Private: The Cost of Mandated Transparency
38 Pages Posted: 17 Oct 2019 Last revised: 12 Nov 2019
Date Written: October 7, 2019
Public markets are transparent institutions, where disclosure is mandatory and order flow observable. We show that transparency can lead to insufficient information acquisition and inefficient investment. Our model links a firm's preference for public markets to the quality of disclosure metrics. When short-term signals diverge from the long-run value of a project, entrepreneurs prefer opaque private markets where investors can bargain over the costs of acquiring information. Imperfect communication is a mechanism by which mandatory disclosure may destroy value, leading firms to remain private.
Keywords: private market, public market, disclosure
JEL Classification: G14, G18, G24, G38
Suggested Citation: Suggested Citation