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Public Companies Lag Private Firms When It Comes to Investing

By John Asker, Associate Professor of Economics, Alexander Ljungqvist, Ira Rennert Professor of Finance and Entrepreneurship and Research Director, Berkley Center and Joan Farre-Mensa

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Listed firms invest less and are less responsive to changes in investment opportunities compared to matched private firms, especially in industries in which stock prices are particularly sensitive to earnings news. --John Asker

Are public companies myopic or just cautious? New research shows that when it comes to investing in market opportunities, privately held firms—which comprise 99 percent of US companies—are more nimble and more willing to commit their money.

Private firms on average invest nearly 10 percent of assets each year, compared with 4 percent for public companies, and they’re 3.4 times more responsive to changes in investment opportunities, according to “Comparing the Investment Behavior of Public and Private Firms,” a working paper for the National Bureau of Economic Research co-authored by NYU Stern’s John Asker, associate professor of economics, and Alexander Ljungqvist, Ira Rennert Professor of finance and entrepreneurship, and Harvard Business School assistant professor Joan Farre-Mensa.

“Listed firms invest less and are less responsive to changes in investment opportunities compared to matched private firms, especially in industries in which stock prices are particularly sensitive to earnings news,” Asker says.

Most prior research on corporate investing is based on public companies, but Ljungqvist points out that of the six million firms in the US, public firms number only a few thousand, or less than 1 percent. The authors worked from a data set of private US firms covering around 250,000 firm-years from 2001 to 2007.

The contrast in investing behavior does not appear to be due to unobserved differences between public and private firms, how investment opportunities were measured, lifecycle differences, or the authors’ matching criteria.

Their conclusion: public firms’ investment decisions are affected by “managerial short-termism,” which leads public firms to under-invest compared to private firms.