How does private firm disclosure affect demand for public firm equity? Evidence from the global equity market

Jinhwan Kim and Marcel Olbert

Journal of Accounting and Economics, 2022, vol. 74, issue 2

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 (search for similar items in EconPapers)
JEL-codes: F21 F30 G15 G30 M16 M40 M41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:74:y:2022:i:2:s0165410122000684

DOI: 10.1016/j.jacceco.2022.101545

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