Liquidity and control: A dynamic theory of corporate ownership structure

The paper develops a theory of ownership structure based on the notion that corporate control and secondary market liquidity are not perfectly compatible with each other. We analyze the tradeoff between these two objectives for two different ownership structures: the privately held firm, which is characterized by restricted trading opportunities for owners and non-anonymous trading, and the publicly traded firm where trading opportunities are unrestricted and trading is anonymous. We develop pricing formulas for each structure, compare these with each other, and derive predictions for optimal ownership design, depending on the institutional structure of the capital market.