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

Jinhwan Kim and Marcel Olbert
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Jinhwan Kim: Stanford Graduate School of Business
Marcel Olbert: London Business School

Research Papers from Stanford University, Graduate School of Business

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.

JEL-codes: F21 F30 G15 G30 M16 M40 M41 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn, nep-fdg and nep-ifn
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https://dx.doi.org/10.2139/ssrn.3837658

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3957

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