In quest for equity partners: the determinants of the willingness to go public or to find a venture capital partner

The paper presents a theoretical analysis of the determinants affecting the controlling shareholders choice between going public and looking for a venture capital partner when they are in need of external equity financiers. In the model the two choices are strictly connected as controlling shareholders profits under the going public choice represent their outside options in case of failure of reaching an agreement in the bargaining process with the venture capital partner. We show that the relative profitability of the going public choice is inversely related to monitoring costs of new stock exchange shareholders, investment size and directly related to the presence of informational asymmetries between manager and controlling shareholders. In addition, we find that for high values of their ex ante property right share, controlling shareholders prefer the venture capital to the going public financing solution even if the first is socially inefficient. The paper also shows how stock market volatility, competition in the real and financial sector and a more efficient market for corporate control affect the going-public-venture capital choice. Our results are consistent with empirical findings on firm revealed preferences between the two financing choices.