Does Capital Market Myopia Affect Plant Productivity? Evidence from Going Private Transactions

Abstract:     
One influential criticism of the stock market oriented U.S. financial system is that its excessive focus on short term quarterly earnings forces public firms to behave in a myopic manner. We hypothesize that if capital markets pressure listed firms to be myopic in a way that impacts efficiency, then going private (when myopia is eliminated) should cause U.S. firms to improve their establishment level productivity relative to a peer control groups of firms. We find no evidence that this is the case. Our key finding is that while there is evidence for substantial within-establishment increases in productivity after going private, there is little evidence of difference-in-differences efficiency gains relative to peer groups of establishments constructed to control for industry, age, size at the time of going private, and the endogeneity of the going private decision effects. Also, we do not find evidence that myopic markets lead to under-investment at the establishment level. On the contrary, we find that after going private, firms shrink capital and employment, and close plants more quickly, relative to peer groups. Our findings cast doubt on the view that public markets cause listed firms to make sub-optimal, productivity-decreasing choices, or under-invest at the establishment level.

Number of Pages in PDF File: 53

Keywords: Going private, delisting, productivity, efficiency, firm performance, investment

JEL Classification: G34, G14, G32, D24, D22

working papers series