We model the impact of public and private ownership structures on firms' incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early.

We provide new evidence on the role of real money balances in terms of explaining equity risk premia by using a rich cross-section of average stock returns (associated with 11 major CAPM anomalies). By estimating Euler equations associated with a cash-in-advance (CIA) model, we find that such model produces substantially smaller pricing errors than the baseline consumption model, while still generating lower estimates of the risk aversion coefficient. The estimates of the parameter governing the share of cash goods are highly significant and plausible in economic terms. A transaction-costs model and a money-in-the-utility model perform considerably worse than the CIA model, both in terms of statistical fit and in terms of the plausibility of the structural parameter estimates. Moreover, a linear version of the CIA model also largely underperforms the corresponding non-linear model.

We model the impact of public and private ownership structures on firms' incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early.