Market liquidity, investor participation and managerial autonomy: why do firms go private

We focus on public-market investor participation to analyze the firm’s decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm’s shareholder base, exposing management to uncertainty regarding shareholder intervention in manage-ment decisions, thereby affecting the manager’s perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor par-ticipation affects stock price level and volatility and the public firm’s incentives to go private, providing a link between investor participation and firm participation in public markets. “Hotshot executives are fleeing the scrutiny of public companies for the mad money of the private-equity boom,” Business Week, February 27, 2006, p. 52. WHEN SHOULD A PUBLICLY TRADED FIRM decide to go private? This question, which we address in this paper, is of central importance in the theory of the firm, and has been brought into sharper focus by recent events. During the 1990s, scores of companies went public, many quite young. However, since the precipitous decline of the stock market, the “going-public ” wave appears to have been re-placed by a delisting surge. The number of U.S. companies delisting was 83 i