Market Liquidity, Investor Participation and Managerial Autonomy: Why do Firms go Private?

We analyze a publicly-traded firm's decision to stay public or go private, focusing on the stochastic nature of investor participation in the public market. The liquidity of public ownership is both a blessing and a curse: it facilitates trading and lowers the cost of capital, but it also introduces volatility in a firm's shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their intervention in management decisions, consequently affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, thereby providing a link between investor participation and firm participation in public markets.