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

69 Pages Posted: 24 Jun 2021

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

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Date Written: April 1, 2021

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 public equity, we find that a one standard deviation 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 13% to 16% or by $206 million to $253 million in dollar terms. 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 staggered openings of the Bureau van Dijk database offices in each investee country as a plausibly exogenous shock to private firm disclosures, 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 (April 1, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 53, Available at SSRN: https://ssrn.com/abstract=3864850 or http://dx.doi.org/10.2139/ssrn.3864850

Jinhwan Kim

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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Marcel Olbert (Contact Author)

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

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