Proprietary Costs and Privately Held Firms' Financing Choice between Public Offerings and Private Placements

Abstract

This paper examines whether proprietary costs influence privately held firms' financing choice between private placements and public offerings. The financing choice determines whether proprietary information revealed to investors is also available to competitors. Using hand-collected information about privately held firms, I find both cross-sectional and time-series evidence that firms with higher proprietary costs are more likely to choose private placements instead of public offerings. First, in the cross-section, at the industry level, firms operating in more competitive product markets are more likely to choose private placements. Second, at the firm level, firms operating in multiple lines of business and more profitable firms are more likely to choose private placements. Third, in the time-series, an increase in product market competition is associated with an increase in the proportion of private placements by privately held firms. Finally, firms are more likely to choose private placements under the new segment reporting regime SFAS 131.

Keywords: proprietary cost, private placements, public offerings, mandatory disclosure, segment reporting, corporate financing

JEL Classification: M41, M45, G38, G24, M21, G12