Investment Efficiency of Private and Public Firms

58 Pages Posted: 10 Oct 2023

See all articles by Pantelis Kazakis

Pantelis Kazakis

University of Glasgow

Woon Sau Leung

University of Southampton - Southampton Business School

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Date Written: October 9, 2023

Abstract

We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Mediation tests show that the more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization.

Keywords: Investment Efficiency; Public Firms; Private Firms; Information Asymmetry; Agency Costs; Compliance Costs; Uncertainty

JEL Classification: D25; G30; G32; G38; L11

Suggested Citation

Kazakis, Pantelis and Leung, Woon Sau and Ongena, Steven R. G., Investment Efficiency of Private and Public Firms (October 9, 2023). Swiss Finance Institute Research Paper No. 23-89, Available at SSRN: https://ssrn.com/abstract=4596489 or http://dx.doi.org/10.2139/ssrn.4596489

Pantelis Kazakis

University of Glasgow ( email )

Adam Smith Business School
2 Discovery Place
Glasgow, Scotland G11 6EY
United Kingdom

HOME PAGE: http://sites.google.com/site/panteliskazakis/home

Woon Sau Leung

University of Southampton - Southampton Business School ( email )

Highfield
University Road
Southampton, SO17 1BJ
United Kingdom

Steven R. G. Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
191
Abstract Views
590
Rank
282,508
PlumX Metrics