Going Public and the Ownership Structure of the Firm
Posted: 17 May 1998
Date Written: Undated
"Going public" involves raising capital from a large number of dispersed, small and passive investors, and sometimes involves a transfer of a controlling stake to a large, active entrepreneurial investor. We model a firm's initial public offering, recognizing this inherent heterogeneity among potential investors and incorporating the dynamics of a subsequent secondary market for the firm's shares. Our model captures the tradeoff between allocating shares to small investors or selling them as a controlling bloc. This enables us to rank alternative methods for selling the firm's shares in terms of the revenue raised. Our model is dynamic, incorporating multiple periods and a secondary market in shares. We show that it is generally optimal to go public in a series of stages, selling first to passive investors only a fraction of the planned number of shares to be issued, and possibly transferring a controlling stake at a later stage. We also show that it is optimal to favor the active investor in any sale, for example, by selling shares to the active investor at a lower price.
JEL Classification: G32
Suggested Citation: Suggested Citation