Public or Private? Determining the Optimal Ownership Structure

Abstract

We contend that the decision between public and private ownership can be understood in a cost-benefit framework where firms trade-off the governance benefits of private ownership with the potentially lower capital costs of public ownership. Consequently, ownership structure can be understood by examining the governance model that maximizes firm value. We discuss the conditions under which firms maximally benefit from private ownership, and argue that the “governance engineering” by private equity sponsors can ultimately explain the continued rise of private markets to the detriment of public markets.

Keywords: Private Equity, Agency Costs, Buyout, Corporate Governance, Initial Public Offering, Shrinking Public Markets

JEL Classification: G10, G11