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. 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. Copyright 1995 by The Review of Economic Studies Limited.