Going Public and the Ownership Structure of the Firm

Posted: 17 May 1998

See all articles by Antonio S. Mello

Antonio S. Mello

University of Wisconsin - Madison - Department of Finance, Investment and Banking

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: Undated

Abstract

"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

Mello, Antonio S. and Parsons, John E., Going Public and the Ownership Structure of the Firm (Undated). Available at SSRN: https://ssrn.com/abstract=7353

Antonio S. Mello (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3423 (Phone)
608-265-4195 (Fax)

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~jparsons/

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