Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm

24 Pages Posted: 21 Apr 2004

See all articles by Wolf Wagner

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

An entrepreneur who wants to divest his firm suffers a well-known time-inconsistency problem: divesting a stake creates an incentive to divest further since he does not internalize the arising agency costs for the stake already sold. This paper shows that this can in result in substantial inefficiencies in an entrepreneur's divestment path. We argue that these inefficiencies provide a common explanation for several stylized facts of entrepreneurial divestment, such as that i) many firms remain private despite the presence of large potential gains from going public, ii) firms wait a long time before going public, iii) substantial stakes are sold post-IPO, iv) initial stakes are often sold to venture capitalists.

Keywords: divestment, moral hazard, going public

JEL Classification: G32

Suggested Citation

Wagner, Wolf, Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm (January 2007). Available at SSRN: https://ssrn.com/abstract=534085 or http://dx.doi.org/10.2139/ssrn.534085

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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