Using data from U.S. corporate tax returns, which provide a sample representative of the universe of U.S. corporations, we investigate the differential investment propensities of public and private firms. Re-weighting the data to generate observationally comparable sets of public and private firms, we find robust evidence that public firms invest more overall, particularly in R&D. Exploiting within-firm variation in public status, we find that firms dedicate more of their investment to R&D following IPO, and reduce these investments upon going private. Our findings suggest that public stock markets facilitate greater investment, on average, particularly in risky, uncollateralized investments. JEL Codes: G31, G34.
Keywords: Investment, public firms, corporate governance.
In the United States, large and liquid stock markets play an important role in channeling capital from savers to firms. This market-based system facilitates the financing of large, risky investments by distributing risks among many smaller investors, but may also have significant costs.¹ For example, small, dispersed shareholders may have little incentive to monitor and discipline a firm’s managers when they stand to capture only a small share of the potential benefits, preferring to free-ride on the efforts of others (Stiglitz 1985). Stock market liquidity may also discourage shareholder monitoring by making it easier to simply exit by selling shares (Bhide 1993). Finally, in equilibrium, there may be too little monitoring, and managers may pursue objectives other than maximizing shareholder returns, such as consuming excessive perks (Jensen and Meckling 1976), building unnecessarily large empires (Jensen 1986), or merely living a quiet life (Bertrand and Mullainathan 2003).