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

Journal

Journal of Accounting and Economics

Subject

Accounting

Authors / Editors

Kim J;Olbert M

Biographies

Publication Year

2022

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

Available on ECCH

No


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