Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm
24 Pages Posted: 21 Apr 2004
Date Written: January 2007
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: Suggested Citation