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Going-Public vs. Private Sales: A Two-Tiered Agency Approach

This paper models a situation where an entrepreneur with assets in place and uncertain development opportunities decides whether to sell the business to public capital markets or to place it privately to a conglomerate. It finds that the two-tiered managerial hierarchy of a conglomerate is likely to cause more adverse effects of agency problem. Thus, going-public dominates private sales in motivating the entrepreneur to acquire more information about investment opportunities and in the profit performance of the business. The entrepreneur obtains less wealth if he sells the business privately at a price representing its profit potential when the entrepreneur and the manager of the conglomerate have the same managerial interests.