All in the Family or Public? Law and Appropriative Costs as Determinants of Ownership Structure

We examine how the legal protection of outside shareholders and the appropriative costs that they induce in‡uence the incentives for private …rms to go public. A higher degree of protection of shareholders can increase the appropriative costs associated with the con‡ict between managers and shareholders. To counteract this e¤ect the managers/owners increase the share of the …rm they retain so that, overall, higher protection of outsiders increases the likelihood of going public. In addition, we examine how the share of funds raised used to …nance the …rm a¤ects both appropriative costs and the decision to sell. * California State University, Los Angeles ** Department of Economics, University of California, Irvine, email: [email protected] For helpful comments we thank participants at the conference on Corporate Governance at UC Irvine (February 2002), seminar participants at the Athens University of Economics and Business, and worskshop participants on the NewOrganization of Labour at the 2002 CESifo summer Institute in Venice. Skaperdas gratefully acknowledges support from a grant for Research andWriting from the John D. and Catherine T. MacArthur Foundation.