Privately held or publicly owned? The role of debt financing

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Amjad Toukan

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This paper examines the decision to go public under the issuance of both debt and equity financing. The decision to go public, the debt ratio and the shape of the ownership structure depend on the combination of debt and ownership structures that maximizes the initial owners’ wealth. Our model is based on a contest in which owners/managers and shareholders exert costly efforts to increase their probability of winning part of the value of the public firm where the outcome of the contest and the listing decision are affected by the cost of debt. We differ from previous research in that we model the interaction between shareholders, debtholders, and managers as a contest. Our results are largely consistent with previous research in the field where we show that in industries displaying decreasing returns to scale (or slower growth industries) it is always preferred to raise funds through the issuance of debt rather than equity while in industries displaying increasing returns to scale (or high growth industries) a positive relationship obtains between the interest rate and the issuance of equity.

Keywords: Ownership Structure, Corporate Governance, Agency Costs, Monitoring, Managerial Conflict, Legal Protection, Investor Protection

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: D23, D73, D74, G32, G34, K22

Received: 30.10.2020
Accepted: 22.01.2021
Published online: 25.01.2021

How to cite this paper: Toukan, A. (2021). Privately held or publicly owned? The role of debt financing. Corporate Ownership & Control, 18(2), 124-130.