We model the employee incentive problem jointly with a firm’s exit decision. Our model predicts that firms in industries where human capital is important are more likely to go public and use high-powered, stock-based compensation. We also show that the higher the management quality, the more likely a firm is to go public than to be acquired. Regarding life cycle, a firm with high capital intensity and/or high management quality will choose to go public at a younger age.

We use a large sample of transaction-level institutional trading data to analyze, for the first time in the literature, the role of institutional investors as producers of information around corporate spin-offs. Our results may be summarized as follows. First, there is a significant imbalance in post-spin-off institutional trading between the equity of new parent firms versus subsidiaries, suggesting that spin-offs increase institutional investors' welfare by relaxing a trading constraint. This imbalance in institutional trading is driven by differences in information asymmetry across the two spun-off firm divisions. Second, institutional trading around spin-offs has significant predictive power for the announcement effect of a spin-off and for post-spin-off long-run stock returns. Third, institutional investors are able to realize significant abnormal profits by trading in the subsidiary firm equity in the first quarter post-spin-off. Overall, we show that spin-offs enhance information production by institutional investors, who profit from this enhanced information production.

Do institutional investors possess private information about seasoned equity offerings (SEOs)? If so, do they use this private information to trade in a direction opposite to this information (a manipulative trading role) or in the same direction (an information production role)? We use a large sample of transaction-level institutional trading data to distinguish between these two roles of institutional investors. We explicitly identify institutional SEO allocations for the first time in the literature. We analyze the consequences of the private information possessed by institutional investors for SEO share allocation, institutional trading before and after the SEO and realized trading profitability, and the SEO discount. We find that institutions are able to identify and obtain more allocations in SEOs with better long-run stock returns, they trade in the same direction as their private information, and their post-SEO trading significantly outperforms a naive buy-and-hold trading strategy. Further, more pre-offer institutional net buying and larger institutional SEO allocations are associated with a smaller SEO discount. Overall, our results are consistent with institutions possessing private information about SEOs and with an information production instead of a manipulative trading role for institutional investors in SEOs.

Using unique U.S. Census data sets, we analyze how entrepreneurial firms’ product market characteristics affect their choice between going public, being acquired, or remaining private. Size, total factor productivity (TFP), sales growth, capital expenditure, market share, access to private funding, and human capital intensiveness significantly increase a private firm’s likelihood of an initial public offering (IPO) relative to an acquisition. Firms in industries with less information asymmetry and higher stock liquidity are more likely to choose an IPO over an acquisition. While TFP peaks around either form of exit, the rate of increase in TFP prior to acquisitions and the subsequent decrease is smaller than that around IPOs.