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Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. They show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. They test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing.
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