How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

73 Pages Posted: 5 May 2021 Last revised: 3 May 2022

See all articles by Jinhwan Kim

Jinhwan Kim

Stanford Graduate School of Business

Marcel Olbert

London Business School - Department of Accounting; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2022

Abstract

We investigate the relationship between private firms’ disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of portfolio investments in public equity, we find that a 10% increase in private firm disclosure transparency – proxied by the number of disclosed private firms’ financial statement line items – reduces global investors’ demand for public equity by 4.3% or $358 million per investee country-industry. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms – and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using a simulated instruments approach and the staggered implementations of electronic business registers in investee countries in Europe as plausibly exogenous shocks to private firm transparency, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.

Keywords: Private firm disclosures, global capital, disclosure externalities, pecuniary externalities

JEL Classification: F21, F30, G15, G30, M16, M40, M41

Suggested Citation

Kim, Jinhwan and Olbert, Marcel, How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market (May 1, 2022). Stanford University Graduate School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3837658 or http://dx.doi.org/10.2139/ssrn.3837658

Jinhwan Kim (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Marcel Olbert

London Business School - Department of Accounting ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
438
Abstract Views
1,349
rank
63,380
PlumX Metrics