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Market Liquidity, Investor Participation, and Managerial Autonomy:

This study explores how investor participation impacts firms' decisions to remain public or go private. Public ownership offers liquidity but also introduces volatility, affecting managerial autonomy. The analysis suggests that factors like stock price level, volatility, and investor participation influence a firm's likelihood to go private. The model examines the impact of growth opportunities, disagreement, liquidity costs, and managerial autonomy on ownership choices. Extensions explore mechanisms for investor stability, managerial ownership levels, and firm age. Practical implications and empirical predictions are discussed.

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Market Liquidity, Investor Participation, and Managerial Autonomy:

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  1. Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private? Yuki 17720965

  2. ABSTRACT: We focus on public-market investor participation to analyze the firms decision to staypublic 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 management decisions, thereby affecting the managers perceived decision-making autonomyand curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firms incentives to go private, providing a link between investor participation and firm participation in public markets.

  3. HYPOTHESIS: ◆the likelihood of a publicly traded firm going private is decreasing in the level of its stock price and increasing in the volatility of its stock price. ◆when a public firm goes private, it experiences an increase in value. ◆an increase in investor participation in the public equity market leads to an increase in the attractiveness of public ownership by elevating the firm’s stock price, decreasing its price volatility, and increasing the autonomy of its manager. ◆ public firms will go private only at substantial premia above the pre-transaction stock prices.4 ◆ a decrease in public-market investor participation encourages younger firms to go private.

  4. I. Model Description Our analysis starts out with an all-equity public firm that may go private or stay public in anticipation of the arrival of a growth opportunity. A. Growth Opportunity and Disagreement B. Investor Participation in the Market C. Liquidity Cost D. Managerial Autonomy E. Summary of Sequence of Events

  5. II. Analysis We begin the analysis by consolidating all our key assumptions related to restrictions on the exogenous parameters. We establish this through a numerical example that shows a wide range of exogenous parameter values for which Assumptions 1 and 2 are satisfied and the optimal choice can be either private or public ownership.

  6. III. Model Extensions and Empirical Predictions In this section, we first discuss whether mechanisms could be designed for greater investor stability in the public capital market. Subsequently we examine the robustness of our analysis to alternative managerial ownership levels and incentive contracts, and also extend the model to analyze how firm agecould affect the extent of agreement between the manager and the investors and hence a firm’s optimal ownership choice. We close the section with a discussion of the main empirical predictions of the analysis. A. Lock-up Agreements and Investor Stability in the Public Market B. The Impact of Managerial Ownership and Alternative Incentive Contracts C. Firm Age, Investor Participation, and Optimal Ownership Choice D. Empirical Predictions

  7. IV. Conclusion ◆ the firm’s ownership mode determines the three key factors—corporate governance, liquidity, and stability of the firm’s shareholder base—that influence the firm’s decision of whether to be public or private. ◆ greater public-market investor participation strengthens the incentives for firms to stay public.

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