Going Public with Asymmetric Information, Agency Costs and Dynamic Trading

Abstract

We study the problem of going public in the presence of moral hazard, adverse selection and multiple trading periods. In the multi-period game managers strategically choose the level of extraction of private benefits and can develop a good reputation for expropriating low levels of private benefits. The costs of going public can be significantly reduced because of this reputation effect, and this can be an important factor in sustaining emerging stock markets that offer weak protection to minority shareholders. Also, allowing controlling managers to issue non-voting shares can increase the stock market efficiency, because the reputation effect is stronger when managers can divest more without losing control.

JEL Classification: G32, G12, D82