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Investment efficiency of private and public firms

Investment efficiency of private and public firms
Investment efficiency of private and public firms
We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Mediation tests show that the more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization.
Investment Efficiency, Public Firms, Private Firms, Information Asymmetry, Agency Costs, Compliance Costs, Uncertainty
Pantelis, Kazakis
bad8787f-df31-41b5-b84f-929d6496ae78
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Ongena, Steven
d3e3c7b9-66db-479f-a136-75e13fab2fc1
Pantelis, Kazakis
bad8787f-df31-41b5-b84f-929d6496ae78
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Ongena, Steven
d3e3c7b9-66db-479f-a136-75e13fab2fc1

Pantelis, Kazakis, Leung, Woon Sau and Ongena, Steven (2023) Investment efficiency of private and public firms (doi:10.2139/ssrn.4596489).

Record type: Monograph (Working Paper)

Abstract

We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Mediation tests show that the more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization.

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More information

In preparation date: October 2023
Keywords: Investment Efficiency, Public Firms, Private Firms, Information Asymmetry, Agency Costs, Compliance Costs, Uncertainty

Identifiers

Local EPrints ID: 485601
URI: http://eprints.soton.ac.uk/id/eprint/485601
PURE UUID: 0b893f9d-8809-4d0e-b59d-86ed233740cd
ORCID for Woon Sau Leung: ORCID iD orcid.org/0000-0002-0389-2126

Catalogue record

Date deposited: 12 Dec 2023 17:32
Last modified: 18 Mar 2024 04:17

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Contributors

Author: Kazakis Pantelis
Author: Woon Sau Leung ORCID iD
Author: Steven Ongena

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