1CorporateGovernance,MonitoringandtheOwnershipStructureoftheFirm:anOverviewPaoloPasquarielloNewYorkUniversity-SternSchoolofBusinessAbstractThispaperprovidesanoverviewofthemostrecentattemptsbytheliteraturetoexplaintherelationshipbetweenCorporateControlconsiderations,monitoringcostsandtheownershipstructureresultingfromapublicoffering.Theempiricalevidencecurrentlyavailableisanalyzed.Twomaintheoreticalparadigmasareidentifiedanddescribed.The“normative”approachtriestospecifythemarketmechanismbywhichapreviouslyprivatelyheldcompanybecomespublicasthedevicetocopewithheterogeneityofinvestors,market-segmentationandtherelationshipbetweeninformedanduninformedtrading,departingfromthemoregeneralcompetitiveWalrasian-typeofferingprocess.The“monitoring”approach,whilemaintainingthemoretraditionalcompetitivestructureforthecapitalmarkets,facesmoreexplicitlytheissueofcorporatecontrol,andthetrade-offbetweenmonitoring,liquidityandrisk-sharingasthemaindeterminantofalargeinvestor’sdecisionaboutwhetherto“raid”acompanyornot.Themainresultsoftheliteratureareexploredanddirectionsforfutureresearcharesuggested.1.IntroductionAwaveofprivatizationsinWesternandEasternEuropeinthelastfewyearsstimulatedanewandintenseeffortinFinanceandEconomicsintheattempttoenhancetheunderstandingofthemechanismsandthedynamicsbywhichentrepreneurs,venturecapitalists,maturefirmsandgovernmentalinstitutionsandcompaniesbecomepublic.Doesthesellermaximizehis/herrevenues?Doestheselectedmarketmechanismandownershipstructuremaximizetheex-antevalueofthefirm?Istheresultingamountofmonitoringexercisedovermanagementtraditionallynotfullyalignedwiththeinterestsoftheexistingshareholdersof2thefirmsufficienttoreduceoreliminatethesocialandindividuallossderivingfromsub-optimaldecisionmakingandperquisites’consumption?ThemostrecentliteratureontherelationshipbetweenCorporateGovernanceconsiderationsandtheprocessbywhichacorporation,adivisionorsub-unitofit,eventuallygoespublictriestoanswertheseandothercompellingquestionsarisingfromthestillscarceandsometimesanecdotalempiricalevidenceonpublicandprivateplacements.Thispaperrepresentsanattempttoidentifyaunifiedframeworktoevaluatethemaincontributionstoourknowledgeofthesephenomena,todescribecommonpillarsandcontrastingassumptions,andtosuggestpotentialextensionstothecurrentresearchmainstream.Thefollowingsectiondescribesthemostsignificantempiricalfactsavailableonpublicofferingsandprivateplacementsofprivatelyheldfirms.Section4extendstheanalysistothemajortheoreticalconstructsoriginatingfromthepioneeringworksofGrossmanandHart(1980)andKyleandVila(1991).Thelastsectionsummarizesthefindingsandsuggestsseveraldirectionsforfutureresearch.2.TheempiricalfactsTheinitialpublicoffering(IPO)isusuallythelargestequityissueacompanyevermakes.EveryyearIPOsaccountforaboutone-thirdofallthefundsraisedinthemarketplacethroughcommonequity.Theprocessofgoingpublicisalsooneofthechannelsthroughwhichanentrepreneurorventurecapitalistcashesintherewardsforhis/herinitialeffortsinsettingtheenterpriseandmakingitsuccessful.Asaconsequence,untilthebeginningofthe1980’s,thedecisionto“gopublic”wasalmostunanimouslyconsideredastageofthemorecomplexevolutionaryprocessofacorporation.Thefinancialshakeoutsthatfollowedmadethisinterpretationnolongersustainable.Bytheendof1989,theU.Sshareintheworldmarketcapitalizationshrankfrom53.3%to29.9%1.Thecountryhadexperi...
