The Choice between Public and Private Equity Financing

Leming Lin
2012 Social Science Research Network  
This paper provides a simple model of entrepreneurial firms' exit choices between IPOs and selling off to private equity firms. The entrepreneur trades off the benefits of private control, which are lost when the firm is sold to private equity firms, and the cost of going public. Investors in the economy can invest either in public stock market or in a private equity firm. Their tradeoff is between the cost of illiquidity of investing in the private equity firm, and the gains from the private
more » ... from the private equity firm's ability to borrow from the bank at lower costs. Our model highlights the impacts of credit market conditions and going public costs on equilibrium number of firms going public versus selling off to the private equity firm. Our model predicts that in the absence of the compliance cost of the Sarbanes Oxley Act of 2002 and the explosion of liquidity in the credit market between 2003 and 2007, the number of IPOs in the last decade could have increased by as much as two thirds.
doi:10.2139/ssrn.2132003 fatcat:kzz7shs33bdsjphyvmgg7wt6xe