Why are Most Firms Privately Held?

Abstract:     
Even among large U.S. firms, most choose to remain private rather than listing on a stock market. I show that an important reason for this choice is public firms’ inability to disclose information selectively. This leads to a ‘two-audiences’ problem: Disclosure reduces information asymmetries among investors but also potentially benefits product-market competitors. Being public involves a trade-off between this disclosure cost and the benefit of a lower cost of capital due to the greater liquidity with which shares can be traded on a stock market. Using a rich new dataset on private U.S. firms, I show that firms in industries with high disclosure costs and high information asymmetry are more likely to remain private while firms in industries that require a large scale to operate efficiently are more likely to be public. I then establish a new stylized fact: Public firms hold more cash than private firms, particularly when they operate in industries in which disclosing information to competitors is most costly. This fact is robust to several ways of addressing the endogeneity of the going-public decision, including matching, exploiting within-firm variation, and instrumental variables. Consistent with my model, I find that public firms hoard cash in order to mitigate the disclosure costs associated with raising capital.

Number of Pages in PDF File: 65

Keywords: Private companies, IPOs, Cash, Liquidity management, Disclosure costs, Regulation Fair Disclosure

JEL Classification: D21, D22, G32, G38, L26

working papers series