INSIDER OWNERSHIP AND THE DECISION TO GO PUBLIC

This paper focuses on the role of an initial public offering (IPO) in maximizing the proceeds an initial owner obtains in selling his company. In deciding whether to undertake an IPO, and what fraction of ownership to retain, the initial owner must balance two factors. By selling to dispersed shareholders, he maximizes his proceeds from the sale of cash flow rights. However, by directly bargaining with a potential buyer, he maximizes his proceeds from the sale of control rights. Whether a company should be private or public, as well as the insider's ownership in public companies, depends on the particular combination of majority control and dispersed ownership which maximizes the incumbent's wealth. The model provides implications on the strategy to be followed in selling a company as well as on the timing of IPOs and going-private transactions.